The GAO’s report, “Private Pensions: Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 million in Compensation Shortly Before Termination,” found that 40 executives for 10 companies received approximately $350 million in pay and other compensation in the years leading up to the termination of their companies’ underfunded pension plans. GAO identified salaries, bonuses, and benefits provided to small groups of high-ranking executives at these companies during the 5 years leading up to the termination of their pension plans. For example, beyond the tens of millions in base salaries received, GAO found that executives also received millions of dollars in stock awards, income tax reimbursements, retention bonuses, severance packages, and supplemental executive-only retirement plans.
Now it would seem to me that any company with even a partially underfunded pension plan for its workers should immediately freeze any executive pension benefits until the plan is in the black, but that sounds like a really effective way to incentivize executives to fiddle the books in a massive way, so the oversight of such legislation would have to be incredibly effective.
On the other hand, most executive retirement packages – certainly defined benefit ones – are a complete waste of shareholder resources because once you are in a position to be eligible for such a plan, you are also in a position to be eligible for enough stock awards to fund your retirement without a pension.
Why do companies bother to keep SERPs? Bebchuk & Fried’s “Pay without Performance” pointed out that while qualified pension plans (exempt from taxation) are limited to about $200,000 a year, supplemental executive retirement plans, known as SERPs are neither exempt nor limited. Yes, they are an inefficient way to compensate CEOs but they come with one great benefit – camouflage. “Neither the increase in value of the SERP plan before retirement nor the amount of payments after retirement appears in the compensation tables, the existence of SERPs, and the formulas under which payouts are made must be disclosed in the firm’s SEC filings.”
While CEOs want to keep their owned defined benefit plans, they frequently want to outlaw them for public employees. As The Corporate Library points out, when the pension plans for their own employees go south, CEOs tend to ensure they still get theirs. Fat cats apparently have no shame. Neither shareowners or the public are really mobilized around the issue, even though many seem to have pitchforks at the ready.
Our firm recently completed its 3rd annual study of stock option valuation assumptions and results under FAS 123(R).1 From 2007 to 2008, the percentage of companies disclosing option fair values decreased from 73% to 72%. The median percentage increase in stock compensation expense from 2007 to 2008 was 2.4%. There are a bunch of charts, etc. that provide more analysis in the study.
Last week, the SEC filed a second complaint in the US District Court – SDNY against Bank of America concerning an alleged lack of disclosure over extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies (here’s the SEC’s litigation release). Last year, the SEC filed a “lack of disclosure” complaint against BofA over a bonus plan related to its merger with Merrill Lynch that became headline news after Judge Rakoff had earlier refused to approve a settlement between BofA and the SEC.
A second complaint was filed by the SEC rather than amending the existing complaint because the court had denied the SEC’s motion to amend. Note that in the SEC’s litigation release announcing its intention to seek leave to amend, the SEC specifically noted that it does not allege that any individual bank executive or counsel acted with scienter and does not name as defendants, any individual. Trial is set for March 1st…
Dominic Jones notes that Judge Rakoff recently ruled that BofA cannot present expert testimony asserting that media reports should have alerted shareholders to the bonuses it planned to pay Merrill Lynch executives after the 2008 merger.
As Mike Melbinger detailed in his blog yesterday, the FDIC and the Obama Administration have combined for a historic one-two punch that would have made Muhammad Ali blink to batter financial institutions doing business in the US. Here are Paul Hodgson’s thoughts on the FDIC’s actions.
But it’s not just the government acting against banks. As noted in this BusinessWeek article, Goldman Sachs has been sued by a shareholder – in Ken Brown v. Goldman Sachs, NY Supreme Ct (1/5/10) – over its bonus payouts. The bottom line is that citizens all over this country are extremely mad that things are tough for them but rosy for bailed out banks – and until boards and senior managers understand this, the consequences will continue to get worse. Just adopting a plan to give a percentage of earnings to charity won’t dent this anger.
I’m firmly in the camp that many of these regulatory responses don’t make sense – or may even make things worse. And I also have blogged that problems with executive pay practices are a different animal than issues related to paying bankers generally. But boards and senior managers of Wall Street firms need to understand the circumstances that they are living in. I still think they don’t “get it” – and it reminds me of Gilbert Arenas spending the day with enforcement authorities and the NBA and then later that night, playfully pretending to shoot his teammates. Gil was just fooling – but most basketball fans didn’t see it that way…
On Tuesday, after a sharply divided vote of 3-2, the FDIC Board voted to request public comment on whether compensation policies should be incorporated as a factor in the risk-based insurance premiums charged to insured depository institutions. The premise is that compensation systems that encourage excessively risky behavior pose a risk to the depository institution and its stakeholders, including the Deposit Insurance Fund, and the FDIC’s goal is to provide incentives for depository institutions to align employee and other stakeholders’ interests.
The FDIC joins a crowded field of regulators in this area. For example, the Federal Reserve announced in October 2009 a new regulatory framework intended to address risky incentive compensation practices at financial institutions. Additionally, just last month, the SEC finalized its rule to require all public companies to disclose more information about how they compensate their employees, including disclosure on how risks arising from a company’s compensation arrangements are reasonably likely to have a material adverse effect on the company.
The two FDIC Board members that opposed the proposal were the Comptroller of the Currency John Dugan and OTS acting director John Bowman. They voted against the proposal stating, among other things, that the FDIC is acting prematurely because other regulatory or legislative bodies, including the Federal Reserve and Congress, were looking to address banker compensation using different standards. The FDIC indicated that its proposal would not be inconsistent with other proposals being considered because it is meant to incentivize good behavior, such as good risk management practices, and not set limits on compensation.
While there is nothing in the rulemaking process that establishes a specific timeline for the final rule, there is speculation in the press that it will take the FDIC until the end of this year to put the final rule in place. Ultimately the timing will be up to the FDIC; however, issuing an advance notice of proposed rulemaking is an uncommon preliminary step available to the regulators which usually reflects an agency’s view that more information is necessary in order to issue a proposed rule. This indicates that the FDIC is not ready to issue a rule on this matter anytime soon.
As an example of how the criteria would be used in practice, the FDIC suggested that if a depository institution could attest that its compensation program contained the features below, it would pay a lower risk based assessment rate than a firm that could not make such an attestation. The compensation program features being considered are the following:
– A significant portion of compensation for employees, including senior managers, whose business activities present significant risk to the institution and who also receive a portion of their compensation based on performance goals, should be comprised of restricted, non-discounted company stock.
– Restricted, non-discounted company stock that becomes available to the employee at intervals over a period of years should be subject to a look-back mechanism (e.g., clawback). Additionally, the stock would initially be awarded at the closing price in effect on the day of the award.
– The compensation program should be administered by a committee of the Board composed of independent directors with input from independent compensation professionals.
Request for Comments
The FDIC has requested comment on all aspects of the proposal, including comments on the FDIC’s stated goals and the features of compensation programs that could meet such goals. For example, the FDIC invites comment on:
– Whether the size or types of activities of a depository institution should be taken into account in applying the criteria or whether compensation should be used as a criteria to decrease or increase deposit insurance fees across all types of institutions;
– How large of an adjustment to the initial risk-based assessment rate would be required to influence the practices of a depository institution;
Whether compensation systems of holding companies or affiliates should be considered as well; and
– Any other alternatives that would be effective in aligning the interests of employees with the firm’s stakeholders.
The release is subject to a 30-day comment period beginning upon its publication in the Federal Register. There are alternatives for the submission of comments in this advance notice of proposed rulemaking.
We have posted the transcript to the popular webcast: “The Latest Developments: Your Upcoming Compensation Disclosures – What You Need to Do Now!” As we do every year, we have updated our “SEC Rules” Practice Area – including posting these memos & checklists that raise considerations for this proxy season.
We have also posted a new sample D&O questionnaire – anonymously donated by a NYSE company member – updated for the new rules in our ” “D&O Questionnaires” Practice Area. To make sure you haven’t missed anything, you will still want to review the sample model D&O items that Dave Lynn and Mark Borges wrote as part of the Winter 2010 issue of “Proxy Disclosure Updates.”
As noted in this WSJ article from yesterday, a number of companies are moving away from using advisors from the larger multiservice consultants in the boardroom for advice on executive pay packages. This has been spurred by the SEC’s new disclosure requirements about conflicts (although some of these new requirements are still a little ambiguous), possible Congressional action in this area and pressure from some shareholders.
Over the past few years, key compensation consultants have left these larger consulting firms to form their own small shops. The most recent is Ira Kay, who has left the newly combined Towers Watson. It may be a matter of time before the Mercers and Towers Watsons of the world stick to general HR consultancy (ie. actuarial and other non-exec comp services) and don’t handle the much smaller practice of executive compensation consulting.
If your company is struggling with what to do in this area and is trying to decide whether to go with an “independent” consultant, please let me know and I will keep it confidential. I know other companies in the same situation who want to confer with like-situated companies.
As was recently written in The Corporate Library Blog, the spread of clawback policies is progressing at a snail’s pace, according to our new report. While the number of companies with such policies has increased slightly over the past two years, the overall level of adoption remains low for all the indices studied.
For example, the incidence of clawback provisions in the S&P 500 rose by just over three percentage points. Forty-four companies had clawback policies in 2008, compared to 66 in 2009.
We’ve been collecting data for our annual ownership guidelines report and we found a number of interesting trends. One such trend was the significant jump in the number of hardship provisions disclosed. Recently, we released a short article in our Executive Compensation Trends newsletter titled “Decline in Equity Values have more Companies Disclosing Hardship Provisions” and found:
– 82.1% of Fortune 250 companies disclosed that they have ownership guidelines.
– 32 companies stated that they had executives that did not achieve the required ownership level, which is the same amount of companies as the previous year.
– Since ownership guidelines are typically tied to a requirement to hold a certain value in shares, many executives had equity values that were pinched in the declining market. Rather than having to comply immediately with the ownership guidelines, many companies triggered hardship provisions. In fact, there was a significant jump of nearly 75% year-over-year in companies disclosing hardship provisions. These provisions typically allow for more time or amended ownership requirements in order to meet those guidelines.
I recently posted the latest annual update of Alan Kailer’s chapter regarding preparation of the executive compensation tables.
Renew Today: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew today, you will be unable to access this webcast. Renew now for ’10! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
Don’t forget yesterday’s TheCorporateCounsel.net webcast – “How to Implement the SEC’s New Rules for This Proxy Season” – during which Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn provided practical guidance on how to handle the new SEC rules that don’t deal with compensation issues. The audio archive is already up.