Yesterday, Special Master Kenneth Feinberg revealed the details of the long and contentious negotiations over the pay levels for the top 25 paid executives at five financial institutions and two automakers that received TARP money. Although Feinberg’s plan itself hasn’t yet been made public (but will be later today or within the next day or so), the details of the plan are fully reported in numerous articles in the papers today.
It appears that the key components of this pay reform include:
– About a 50% overall compensation cut
– Salary cuts of about 90%
– Some of the reduced salaries replaced with restricted stock, vesting immediately but paid out in one-third per year installments after a two-year waiting period
– Limits on perks, with anyone receiving more than $25k having to seek special permission
Here are articles from today’s newspapers describing this story:
The discussion about the value of holding an advisory say-on-pay vote has grown enormously since the seeds were first planted in the United States through a small number of AFSCME sponsored shareholder resolutions several years ago. Investor support rapidly escalated with 2009 resolutions urging this reform averaging 46-47% and 22 receiving over 50% votes to date. In addition to the over 300 companies receiving TARP funds that are required to hold an advisory vote, 27 companies have stepped forward and agreed to implement the vote themselves, in their 2009 or 2010 proxies. Other companies, especially those with high votes are deliberating when they will institute SOP.
And Congress has been actively pursuing SOP with the strong support of the Treasury, SEC and the President, leaving most observers to expect that legislation will empower the SEC to adopt rules resulting in all large cap companies being required to have annual Advisory Votes by their 2011 proxies. Thus, it is curious to see, in this 11th hour, the alternative of having an Advisory Vote every three years emerging. This variation on the theme surfaced when the Carpenters Union, led by Ed Durkin, filed 20 or so resolutions seeking both a triennial vote and expanded communications between investors and management and the Board.
This last point urging expanded investor communications is a welcome echo of the appeals of proponents for SOP. Indeed a vote without communications to help interpret the message sent has very real limits. It is wise and timely to stress that the two go together. However, it is curious that the Carpenters now emerge as a supporter of any form at all of advisory voting since during the last 3 years they are frequently quoted criticizing the idea. Now, as it seems to be on the verge of being institutionalized, they propose a variation on the theme. And unfortunately they seem interested in enlisting allies among corporate secretaries to water down any SOP legislation before Congress.
However, this testing of the triennial waters has real drawbacks that make it a mistake to consider as a public policy alternative. First companies with pay for “non-performance,” questionable perks such as Golden Coffins or Gross-ups, spiraling pay or a host of other compensation problems would love to avoid annual accountability and only face their shareowners every three years. Perhaps we could call this a proposal for “occasional accountability.” Yet with the problems with pay still front and center and covered daily in the media, it seems like this is not the time to propose weaker measures.
On a parallel issue a majority of investors vote regularly for annual elections of directors and not staggered boards with elections every three years. And likewise, they wish to vote annually to ratify the auditors. Accountability on these issues should be an annual exercise they reason.
Recently, Microsoft announced that they would implement a management sponsored advisory vote for their upcoming annual meeting. They made a number of supportive comments about the utility of the vote twinned with expanded investor communication. The Calvert Group and Walden Asset Management had sponsored the resolution on this topic and were pleased to withdraw our resolution in response. Microsoft in its blog announcing the decision stated its preference for a triennial vote. As investors we reasoned that the Senate would act to institute an annual vote thus rendering the triennial approach moot so gladly accepted this vote of confidence in shareowners being able to send a message on compensation via SOP.
One argument raised supporting the triennial vote is that is protects investors from a deluge of work every year when voting their proxies. Indeed an additional annual vote does add a new voting discipline. However many institutional investors have voted for exactly this reform providing a clear mandate for action. They acted similarly over the last years supporting majority votes for directors, a reform launched by the Carpenters Union. This helped spark rapid market reform as companies moved with dispatch to adopt majority voting policies.
And investors generally feel comfortable with processing an annual vote. Of course, extra work is involved – but intelligent investors will set up a system whereby urgent comp issues are put on the top of the pile for review and action just as we look at election of board members selectively when we vote. They will get priority attention as needed. And of course many votes on comp will be routine just as voting on directors and auditors or option plans often may be run of the mill.
Thus, a proposal for a triennial vote on pay is not necessary to protect investors and certainly is a step backwards in corporate accountability on compensation.
As I recently blogged, as the S&P 500 index tumbled more than 37% in 2008, CEO compensation barely fell, according to our recent report co-authored by Greg Ruel and myself. Median total annual compensation for the companies included in the study declined by 0.08% in 2008, suggesting that the link between CEO pay and firm performance remains very weak. The report includes data from more than 2,700 public companies, more than any other CEO pay study released so far this year.
Other key findings from the report include:
– The median decrease in total realized compensation was 6.38%, which is still well out of line with the economic downturn. (Total realized compensation includes the value realized on vesting of shares, option value realized, pension/non-qualified deferred compensation earnings and pension pay in the last year.)
– Approximately 75% of CEOs included in the study received a base salary increase in 2008, up from 73% in 2007.
– More CEOs saw declines in realized compensation in 2008 than in 2007 (just over 56% and 40%, respectively).
– Oracle CEO Lawrence Ellison is the only CEO to appear in The Corporate Library’s list of the top ten highest paid CEOs in both 2007 and 2008, having earned approximately $750 million in realized compensation over the period.
While these findings are historic, in that we have never seen a decline in CEO compensation since we began this series of surveys in 2002, if there were ever an argument that pay is fatally divorced from performance then this is surely it. The pay study was previewed in a webinar – “Big Pay, Poor Performance” – which is still available as a free download; it includes an analysis (not available in the report) of the CEO pay packages of five companies where the pay/performance link was most starkly broken in 2008.
Last Thursday, Goldman Sachs reported that it was putting aside $23 billion from this year’s bonus pool. And the anger was palpable. Here is Paul Hodgson’s take from “The Corporate Library” Blog. And here are some scathing thoughts from Rob Shapiro, as posted on the Huffington Post. This NY Times article explains Goldman’s public relations bind – and this Washington Post article notes how Obama Administration officials bashed banker pay over the weekend.
None of these responses are surprising. What is surprising is the speed by which a shareholder proposal was submitted to Goldman. Within hours of the news breaking on Thursday, this “pay disparity” proposal was submitted by the co-sponsors of Benedictine Sisters of Mt. Angel and The Nathan Cummings Foundation (here is the related press release). I think we can expect continued anger over executive pay throughout this upcoming proxy season. I think it’s an issue that’s not going to fade away as it has in the past…
Due to unprecedented demand and limited space at our conference hotel for the “17th Annual NASPP Conference,” we are forced to end San Fran Conference Registrations at the end of today, Friday, October 16th for those attending live in San Francisco. This includes attending the pre-conference – the “4th Annual Proxy Disclosure Conference” – in San Francisco. After today, attendance in San Fran will be “sold out”!
You Can Still Attend Via Video Webcast: In the alternative, you can still attend the “6th Annual Executive Compensation Conference” (held on 11/10) – which is paired with the “4th Annual Proxy Disclosure Conference” (11/9) – by video webcast. You automatically get to attend both Conferences for the price of one. Here is the agenda for both Conferences.
Order Audio from NASPP Conference: In addition, you can still hear each – and any – of the 36 panels you wish from the NASPP Conference by ordering the downloadable audio and course materials.
Recently, I blogged about how Microsoft became the first company to take a triennial approach to say-on-pay. Yesterday, Prudential adopted a biennial model – starting with its 2010 annual shareholders’ meeting, the company will have a non-binding say-on-pay on its ballot every other year.
One of the biggest concerns we have – and we imagine boards (and their advisors) caught in this spot also are worried as well – is that many companies reloaded on options and other incentive awards this past Spring when the stock market was at its depths. Now that we’ve seen a 58% market rebound in six months, how are those proxy disclosures gonna look to shareholders, journalists, regulators and the general public? Clearly, this windfall will not be due to long-term performance.
In his latest article, Bud Crystal provides some examples of what we might be seeing on a widespread basis. Definitely worth a read.
Those of you attending our upcoming “4th Annual Proxy Disclosure Conference” – either in San Francisco or by video webcast – will not only receive practical guidance about how to deal with drafting disclosures to try to rein in a potentially messy shareholders relations issue, you will also guidance from the companion conference – the “6th Annual Executive Compensation Conference” – about how to fix this problem. Register for the Conference now.
It is widely reported that Bank of America’s board decided on Friday to reverse course and waive its attorney-client privilege so that the SEC, Andrew Cuomo and others will soon know the details regarding “who advised what” when it came to BofA deciding not to disclose the circumstances regarding bonuses paid to Merrill Lynch employees. According to this NY Times article:
The board reached a tipping point after bank executives held conversations over the last two weeks with the office of New York’s attorney general, said the people briefed on the matter. Mr. Cuomo’s office threatened to charge individual bank executives, including Mr. Lewis, with wrongdoing, these people said. The bank also faced a deadline this week to provide a log of its private legal documents to a House committee.
The bank notified Mr. Cuomo’s office of its decision on Monday, and will do the same in a separate case pending against it by the Securities and Exchange Commission. The bank will also provide documents to investigators in Congress, Ohio and North Carolina, where the bank is headquartered.
SEC (and BofA) Requests a Jury Trial: Is That Normal?
Last week, both the SEC and Bank of America filed a notice in the US District Court-SDNY seeking a jury trial. I searched the SEC website and confirmed my hunch that it is not at all uncommon for the SEC to ask for a jury trial, particularly when the circumstances indicate that their action will be contested. There looked to be at least a dozen complaints filed already in 2009 with demands for jury trials.
Bear in mind that most cases are filed as settled cases, so there would never by a jury trial demand in any of those. For example, in this case, the SEC didn’t initially file a demand for a jury trial because BofA settled (and then Judge Rakoff didn’t accept the settlement).
Ohio Attorney General Files Class Action Lawsuit against Bank of America
It’s not just New York Attorney General Andrew Cuomo and the SEC going after BofA (and a horde of private plaintiffs; this Bloomberg article notes Delaware VC Strine refused to dismiss a case against BofA yesterday). On September 28th, the Washington Post article noted the Ohio Attorney General has filed a class action lawsuit against Bank of America and its executives over the bank’s alleged failure to disclose losses and bonuses prior to its acquisition of Merrill Lynch.
In his “Proxy Disclosure” Blog, Mark Borges has already blogged three times about the challenges of determining how much money recently “resigned” CEO Ken Lewis will walk away with from Bank of America. As Marked noted in his first blog: “All it took was one hour, two college degrees, and over 20 years’ experience in the executive compensation area to come up with this “ball park” figure. Does anyone still think that we don’t need a “walk-away” number as part of the executive compensation disclosure?”
We have been touting the need for better transparency in the severance and change-in-control contexts for quite some time – pushing the need for companies to disclose their “walk-away numbers.” This is not even about responsible pay practices – this is squarely in the hands of lawyers who draft for a living. This is about better transparency. It’s time for you to make a difference.
Those of you attending our upcoming “4th Annual Proxy Disclosure Conference” – either in San Francisco or by video webcast – will not only receive practical guidance about how to craft such a disclosure, you will also get a pro-forma example of what this looks like…register for the Conference now.