– Dave Lynn, CompensationStandards.com and Morrison & Foerster
A recent article in the WSJ discussed two new academic studies that have focused on benchmarking practices at public companies. While the article tends to sensationalize the issue a bit, it does note how the studies highlight one of the principal failings of benchmarking, which is the way in which peer groups are selected. In particular, the studies appear to demonstrate a bias toward selection of peer companies with better paid CEOs, compounded by a trend noted in one of the studies that approximately 40% of the companies reviewed indicated that they paid their CEOs more than the median level of comparable pay.
In the article, the typical competitiveness arguments are noted in support of benchmarking. The article observes that these studies were made possible by the 2006 amendments to the executive compensation disclosure rules, which require disclosure of the list of peer companies when benchmarking is used.
Obviously this is not any breaking news; rather, what is noteworthy is that there is now some empirical support (which, of course, should always be taken for what it is worth and in consideration of its limitations) for some of the claims about benchmarking. It certainly helps to confirm what then-Corp Fin Director Alan Beller so eloquently said at our conference back in 2004:
“Too many boards have apparently operated on the principle that compensation must be in the top half or even the top quartile of some benchmark group (the basis of selection of which is often not disclosed) for the company to be competitive in attracting executive talent. (This principle apparently operates without regard to whether performance is commensurate to compensation). This approach produces what I have called the Lake Wobegon effect, where everyone is above average. Boards of directors ought to be able to do better than this.”
What can be done now, in light of this new evidence of the obvious? I think that one place to start is the useful guidance provided in the Obama Administration’s broad compensation principles announced in June, which call for developing an improved pay for performance paradigm that is less focused on external competitive positioning and more focused on relative performance of the company, achieved through a diversified set of performance criteria having an emphasis on long-term value creation.
On August 28th, Treasury issued these FAQs on the Interim Final Rule on TARP that it released back on June 15th. This memo sets forth our analysis of the effect of the FAQs, informed by informal conversations with Treasury, on a TARP recipient that repays its obligation prior to the deadline for forming a compensation committee.
By the way, check out our new “Say-on-Pay Resource Center,” which is intended as a convenient one-stop location for our client alerts, as well as legislative, regulatory and other materials on the topic. Thanks to the executive compensation team at Cleary Gottlieb – Brick Susko, Janet Fisher, Mary Alcock and Katie Sykes – for helping to man this fort!
On TheCorporateCounsel.net, we recently wrapped up our Quick Survey on “Corporate Airplane Use by Outside Directors.” Below are our results:
1. At our company, when it comes to allowing non-employee directors to use the company’s plane to travel to – and from – board meetings:
– Yes, we allow – but we disclose the aggregate incremental costs associated with such use as director perks in the Director Compensation Table – 1.0%
– Yes, we allow – but we believe such travel is for a business purpose and thus do not disclose it in the proxy statement – 60.8%
– Yes, we allow – but we believe such travel is for a business purpose and therefore only disclose that such travel is permitted in the narrative portion of the proxy statement – 12.4%
– Yes, we allow – but only a percentage of the amounts associated with such use is considered for a business purpose – so some of the cost is disclosed in the Director Compensation Table – 0.0%
– No, we don’t allow non-employee directors to fly on the company plane to our board meetings – 7.2%
– No, as a result of a recent change in our travel policy, we no longer allow non-employee directors to fly on the company plane to board meetings – 1.0%
– We don’t have a company plane – 17.5%
We just sent out the July-August 2009 issue of The Corporate Executive, along with a Special Supplement. This issue is devoted to in-depth analysis and practical guidance on the SEC’s proposed changes to the executive compensation disclosure rules, including:
– The SEC’s Proposed Changes – And their Effects
– The Relationship of Compensation and Risk
– A Broader Scope to the CD&A (But Only When Material)
– Revisiting Equity Award Disclosure – Some Welcome Relief
– A Troublesome Result – And a Fix
– Compensation Consultant Disclosure: An Interim Step?
– Other Important Areas Where Comment is Solicited – And Our Comments
– Walk-Away Disclosure and Analysis – A Heads Up
– Are You Recognizing Too Much Expense for Your ESPP?
– Limits Reduce Employee Returns
– Accounting Considerations
– Proxy Disclosure Updates – Full Walkaway Model CD&A
– Treasury’s Mark Iwry to Speak at 6th Annual Executive Compensation Conference
Subscribing to The Corporate Executive is now more important than ever, particularly given all of the changes contemplated with executive compensation and SEC disclosure requirements. In recognition of the need we are serving this year (and in view of the tight economic times), we are extending a special offer for new subscribers which will enable anyone to receive The Corporate Executive at no risk. If you sign-up now for 2010, you can get the July-August 2009 issue on a complimentary basis and the rest of 2009 for free.
– Dave Lynn, CompensationStandards.com and Morrison & Foerster
At the risk of saying anything about health care reform (lest I be attacked by an angry Town Hall-roving mob), I had not really considered the connection that may exist between the debate over health care and the debate over executive compensation until I saw these letters sent out last week by Representative Henry Waxman (D-CA) and Representative Bart Stupak (D-MI). Representative Waxman is, of course, the Chairman of the House Committee on Energy and Commerce, and Representative Stupak is the Chairman of that Committee’s Subcommittee on Oversight and Investigations.
The letters request that 52 health insurers provide five years of essentially Summary Compensation Table data for each employee or officer who was compensated more than $500,000 in any one of those years, as well as five years of compensation data for the board of directors. The letters also seek, among other things, information about company-paid outside conferences, retreats or events, company financial performance, documents used by the compensation committee in developing or applying compensation plans, and details about the companies’ health care insurance products. Some of the information must be provided by September 4 and some by September 14.
A number of the insurers are public, while others are not (including, e.g., a number of Blue Cross/Blue Shield systems), but in any event developing the compensation data and the other requested information will likely be quite a chore. The letters from Waxman and Stupak follow a letter from Representative John Dingell (D-MI) and Representative Sander Levin (D-MI) to Blue Cross Blue Shield of Michigan asking about executive compensation and a series of rate hikes.
It is not yet clear how the compensation and other information will be used by the Committee in the course of its deliberations on health care policy, or whether this is just a political move designed to demonize the insurance industry through the perennial hot button issue, compensation. I think that I will keep my thoughts on that topic to myself.
New Treasury and SEC Regulations and the ARRA: Executive Compensation Restrictions
We have posted the transcript from our recent webcast: “New Treasury and SEC Regulations and the ARRA: Executive Compensation Restrictions.”
Back from vacation and I see that things have heated up in the case where US District Court Judge Jed Rakoff’s decision to not approve a $33 million settlement between the SEC and Bank of America over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed. When I left a few weeks ago, the Judge was about to hold a hearing to discuss the issues involved. At the hearing, he asked for briefs from both parties by August 24th.
On the 24th, the SEC and Bank of America submitted the briefs as requested by the Judge. Here is the brief submitted by the SEC, including the controversial Disclosure Schedule that was not included in the proxy materials as Exhibit A. Here is Bank of America’s brief that asserts that obligation to pay bonuses was disclosed.
As noted in this NY Times article, Judge Rakoff’s request for documentation regarding who was responsible for the decision not to disclose Merrill’s bonuses resulted in both parties blaming the lawyers in their briefs. Although as Tom Gorman notes, “The briefs read as if they were filed in two different cases.”
On August 25th, Judge Rakoff – apparently not very happy with the briefs – issued this order. As noted by Barbara Black in the “Securities Law Prof Blog“:
Judge Rakoff still isn’t satisfied with the explanations given to him by the SEC and the Bank of America about the settlement involving the disclosure (or lack thereof) of Merrill bonuses in the BofA proxy statement. He instructed the SEC to provide more explanation about why it didn’t follow SEC policy and seek penalties from individual defendants. He also didn’t accept the agency’s explanation that its hands were tied because the corporation asserted reliance on advice of counsel as a defense and would not waive the attorney client privilege and give the SEC the documents. How could the corporation base a defense on attorneys’ advice without disclosing the advice? The judge asked for further submissions due September 9th.
The Judge could hold a second hearing on the settlement – or he could approve or reject it after receiving this new rounds of briefs.
Here are a number of commentaries on what has transpired so far:
Back from a record-length vacation (two weeks without email!) and the papers over there are filled with stories about banker bonuses and how the French have gotten their bankers to agree to some restrictions. French President Sarkozy pushed hard for these restrictions and he intends to make it a big point at the upcoming G-20 summit so that French bankers don’t seek employment elsewhere. Here is a WSJ article from yesterday describing these developments.
On a lighter note, I thought I would share a few vaca videos that may interest you:
1. “Wall Street” English
One of my favorite moments in Paris was spotting a billboard on the subway promoting the Wall Street Institute, which promises to teach you how to speak “Wall Street” English and more. Maybe talking the talk in Paris is all it takes to be an i-banker? Here is the billboard:
2. Public Company Offerings in The Hague
While walking down the street in The Hague, I spotted a storefront which had a host of securities law and compliance books – unbelievable, eh? – including one entitled “Prospectus for the Public Offering of Securities in Europe.” See if you can spot it:
3. Dancing Along the Seine River
One of the nicer sights in Paris wasn’t in the guide books. We first spotted it during one of the river boat rides in the Seine – folks of all ages swing dancing along the banks (and many more just eating cheese and drinking wine). The second video below is a closer look as I went in to investigate. Like a storybook come true:
Recently, we wrapped up this study of director pay that found that total remuneration has halted its steady climb, actually falling back by 2.4% over the last year to $245,000 among the Top 200 companies.
In ’03, full-value stock awards represented only about 29% of the total received by directors vs. 41.5% in ’08. The use of options dropped in half – from 63% prevalence in ’03 to 31% in ’08. Cash retainers now comprise almost 29% of the total package. Board meeting fees and stock option awards are far less prevalent director pay elements in ’08 as compared to ’03.
I’m nearly back from vaca – here is another blog that I tee’d up to be posted in my absence. This one relates to a question that I received from a reporter: “When did the concept of ‘pay-for-performance’ first begin to be used?”
Now this was a hard one to answer with precision since the true answer is the beginning of time. The only reason that anyone would pay anyone else is to receive some form of performance (or in legal terms, in exchange for “consideration.) But the reporter was referring to the movement in the executive pay world where plan design is more sophisticated. And since I am a relative newcomer to this area, I leaned on an old-timer for his input. Here is what I gleaned:
Pay for performance goes much farther back than 1994. Recall that one of the reasons for Section 162(m) was to ensure pay for performance ( and avoid taxpayer subsidies in the event pay was not performance based), so it had been an issue well before then.
So I would say either 1982 (the beginning of the bull market) or 1977 (when Peter Drucker submitted an op-ed to the Wall Street Journal arguing that management pay not exceed 25x’s the pay of the average employee).
With so much going on in the executive pay area, we continue to post numerous memos in all our Practice Areas, including a number of interesting one in our collection of memos about what to do about pay design in a down market. For example, check out this memo by Melissa Means of Pearl Meyer & Partners entitled “Dynamic Pay Modeling – A Holistic Approach to Execuitve Pay.”