In its proxy statement filed recently, Coca-Cola discloses that it went back and forth with the Corp Fin Staff over whether to disclose performance targets under its Performance Incentive Plan based on a competitive harm argument. It seems that the Staff didn’t buy the argument and required Coke to disclose the targets for its business units.
In response, Coke changed direction and instead gave up their performance-based plan and switched to discretionary awards. I hope fear of disclosure doesn’t become a trend that drives companies to design pay arrangements with boundless borders – but I understand companies other than Coke had already taken this approach before Coke. So I’m not singling out Coke as there are a number of companies in this category.
Below is the relevant disclosure from pages 38-39 of the Coke proxy statement:
“Typically, the annual incentive to all employees is paid under the Performance Incentive Plan using a formula, as described in the Company’s 2008 Proxy Statement, based on objectively determinable business results. The Company has never disclosed the exact business targets or their interrelationships used under the formula to determine the annual incentive because doing so would result in competitive harm to the Company. In addition, the Company does not believe that such disclosure would be material to shareowners’ understanding of the plan. In May 2008, the Company received a comment letter from the SEC requesting that we disclose the exact performance targets used for the Performance Incentive Plan. The Company did not believe such disclosure was required. After extensive discussions with the SEC over a number of months, the SEC then requested that we disclose the range of business performance targets and the personal performance factors for each Named Executive Officer. The Company believed that disclosing the ranges would allow a competitor to recreate the matrix of business performance targets and use this information to determine our business strategy.
Therefore, the Compensation Committee decided to approve discretionary bonuses for the Named Executive Officers for 2008 rather than base incentives on those confidential business performance targets. This means that the incentives paid to Messrs. Isdell, Kent, Finan and Cummings (the U.S. based Named Executive Officers other than the Chief Financial Officer) will not be deductible for tax purposes for 2008 pursuant to Section 162(m) of the Tax Code. The Compensation Committee weighed the additional tax cost versus the competitive harm in disclosing the plan targets and determined that the potential competitive harm significantly outweighed the additional tax cost, which was not material.”
We just sent the March-April issue of The Corporate Executive to the printer. This issue includes pieces on:
– Grant Guidelines and Declining Stock Prices
– Excessive Windfalls in Compensation Once Stock Prices Recover
– Two Fundamental—and Very Relevant—Considerations for High Level Executives
– Executives Surrendering Underwater “Mega” Grants
– Important, Timely Guidance on the Accounting Treatment of Acceleration of Vesting—Including Ramifications for Underwater Options
– Important, Timely Suggestions from a Respected CEO
To have this issue rushed to you, try a no-risk trial to The Corporate Executive today.
As we are reminded by this recent note from the “The Race to the Bottom” Blog – and this DealBook piece on how Verizon is ending free plane use for ex-CEOs ahead of next week’s shareholders meeting – personal use of corporate aircraft continues to be a controversial issue. But what about when outside directors get flown to – and/or from – board meetings? How do companies deal with that?
“4th Annual Proxy Disclosure Conference”: Early Bird Follow-Up
The early bird offer that expired Friday resulted in great momentum, with a record number of members signed up so far for the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”) – that will be held in San Francisco and via Live Nationwide Video Webcast on November 9-10th.
Our New “Early Bird” Rates – Expires May 22nd: Still recognizing the hard economic times we face—and in response to requests from members who were not able to submit their registrations by the deadline—we are offering a reduced rate for the Conferences through May 22nd.
For example, you can attend in San Fran for only $995 if you register by May 22nd (reg. rate is $1295) – and it’s only $495 if you also attend the “17th Annual NASPP Conference” (which starts right after the Proxy Disclosure Conference). Here is the Conference registration form – and here is the agenda.
With Congress poised to consider legislation mandating say-on-pay (expected to be introduced by Sen. Schumer soon) – and SEC Chair Schapiro recently stating that there will be new proposals to change the executive compensation rules in the near future – this year’s Conferences are a “must.” Register now and take advantage of these favorable rates.
Restoring confidence in executive compensation programs is critical to preserving the talent and incentives necessary to drive business results that will, in turn, restore confidence in the nation’s economy and financial markets. What’s at stake in the current crisis reaches far beyond shareholder value and touches all key stakeholders in our collective success – creditors, suppliers, customers, employees and communities.
As we see it, what’s required is leadership – not from Washington, but from shareholders’ elected representatives on corporate Boards of Directors. Whereas a politician’s perspective only allows for reactionary policies for all companies based on ideology, the Board’s perspective allows for proactive solutions for each company based on unique circumstances. It is the Board’s perspective that promotes a diversity of responsible and effective pay practices, instead of regulatory and legislative mandates that are generally less effective and lead to unintended negative consequences for companies and their shareholders.
We believe based on personal experience that Directors can provide the leadership needed to address the current crisis. They are up to the challenge of providing the vision to pinpoint a destination, judgment to choose the best road forward, and courage to persevere. But time is short: immediate action is required to avert the threat of suffocating government intervention and to breathe life into the economy.
In this memo, we provide the immediate steps Boards must take to restore confidence in our executive compensation system in a way that preserves its ability to attract, motivate, and retain the best talent to manage through these challenging times.
With the hammering that many stocks took last fall, and the intensifying scrutiny and criticism of executive pay in financial services and other industries, it’s probably not surprising that the number of compensation-related shareholder proposals appears to be up this proxy season. While it’s far too soon to predict the outcome of this season’s voting, early votes suggest that these proposals may garner as much, if not greater, support in today’s contentious shareholder environment than in past years. How companies respond to this year’s voting also remains to be seen, although it’s likely that many boards will be paying even closer attention to shareholder views than in the recent past as a result of changes in several RiskMetrics Group policies related to executive pay.
This article reviews the shareholder proposals filed to date and votes thus far on compensation-related proposals in the current proxy season, along with a look at how RMG policy changes are influencing the shareholder engagement dynamic this year on compensation matters in general.
According to this WSJ article from Saturday, Sen. Schumer intends to introduce legislation this week that would overhaul a number of governance areas. This is the legislation that we all have been expecting since the financial crisis broke – and, with a few exceptions, its components should come as no surprise since most of them have been proposed before in one form or another before.
According to the article – whose authors saw a draft of the legislation – it will include these significant provisions (bear in mind that actual proposals could change from the draft):
1. Say-on-Pay – require companies to give shareholders an annual nonbinding vote on executive pay practices
2. Say-on-Severance – give shareholders a nonbinding vote on severance packages for executives following mergers or acquisitions
3. Proxy Access – buttress potential SEC rules that would make it easier and cheaper for investors to nominate their own directors (article says SEC is considering a number of “proxy access” techniques and could issue a proposal in mid-May)
4. No More Classified Boards – require companies to hold annual director elections rather than putting only a portion of the board up to vote each year
5. Majority Vote Standard for Director Elections- require directors to resign if they don’t win a majority of shares voted
6. Independent Board Chairs – require board chair to be independent
7. Risk Management Board Committees – require boards to appoint special committees to oversee risk management
The article says that House Financial Services Committee Chair Barney Frank is working on say-on-pay legislation as well. And we already have seen SEC Chair Schapiro’s ambitious agenda for governance rulemaking that will take place in the near term.
This is all quite notable, particularly when combined with the high likelihood that the SEC will approve the NYSE’s proposal to eliminate broker non-votes in director elections which, according to this WSJ article, may come as soon as this week!
It will be interesting to see how hard corporate lobbying groups will fight the pay components of Schumer’s bill. There are numerous examples that reflect little change in executive compensation practices. For example, see today’s Bud Crystal note on Six Flags.
And speaking of Sen. Schumer, he and Sen. Shelby introduced an amendment to an existing anti-fraud bill last week that would increase the SEC’s budget by $20 million to allow it to hire 60 additional Enforcement Staffers and upgrade its technology.
We were happy to see this week’s Wall Street Journal article – entitled “Firms End Key Benefit for Executives” – which describes the growing practice of killing off “gross-ups.” In the article, it is noted that “43 companies in Standard & Poor’s 500-stock index will stop paying certain taxes for their top brass this year, according to a review of 2009 regulatory filings for The Wall Street Journal by compensation-research firm Equilar.”
In the article, one of the key speakers for our upcoming “6th Annual Executive Compensation Conference,” Ira Kay, head of executive-compensation consulting for Watson Wyatt Worldwide, advises his clients to scrap all tax reimbursements. Gross-ups for golden parachutes are “very expensive for the shareholders,” he says, and tax payments for perks draw unnecessary attention to pay plans.
Last Day for Early Bird Rates: “4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference”
You need to register by the end of today to obtain the very reasonable Early Bird rates our popular conferences – “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference” – that will be held in San Francisco on November 9-10th (and via Live Nationwide Video Webcast). Warning: These reasonable rates will NOT be extended beyond today!
Here is the Conference registration form – and here is the agenda. These Conferences have been accredited by RiskMetrics for director education.
Recently, the SEIU Master Trust – the pension funds managed on behalf of the SEIU – sent letters to the boards at 29 major financial services companies, demanding that they investigate more than $5 billion in compensation to their NEOs that may have been tied to derivatives and other instruments that are now worthless. The SEIU argues that if the payments – including cash and equity – are shown to be based on false economic metrics, they may be subject to clawbacks. They further demand that the boards overhaul their executive compensation practices so that the NEOs don’t reap bonuses and other incentivized pay regardless of corporate performance. A list of the 29 companies is at the bottom of this press release.
We can expect litigation over executive pay practices to continue. Recently, Kevin LaCroix provided an excellent overview of the latest developments in executive compensation litigation in the “D & O Diary Blog.” Among other recently filed lawsuits involving executive compensation is the derivative complaint filed on April 1st in California (Los Angeles County) Superior Court against AIG CEO Edward Liddy and several other AIG directors and officers. The complaint alleges that ‘there was no rational business purpose or justification for these lucrative additional payments, particularly given AIG’s deteriorating financial condition and dismal financial performance,’ and describes Liddy’s explanation of the bonus payments as ‘outrageous on its face’ and ‘absurd.’ The complaint seeks to recover damages for corporate waste, breach of fiduciary duty, abuse of control and unjust enrichment.
The bonuses paid to Merrill Lynch employees at year-end just prior to the consummation of the company’s merger with Bank of America also features prominently in the shareholders’ litigation filed against Bank of America earlier this year, following the revelation of Merrill’s massive and previously unreported losses. The D&O Diary Blog also notes the outcome in the recent Citigroup case in Delaware involving Charles Prince’s $68 million exit package, discussed in my blog on the topic from last month.
SEC’s Enforcement to Ramp Up Exec Pay Investigations?
Dave Lynn notes: While shareholder-initiated litigation is taking off in the current anger-fueled environment, it seems that now may be the time when we will also see more focus on executive compensation by the SEC’s Enforcement Division. The “honeymoon” with the 2006 compensation rules is long over, and thus now may be the time when we will start to see Enforcement bring some high profile cases to demonstrate attention to the issue.
A couple of roadblocks that could stand in the Enforcement Division’s way in bringing these sorts of cases is that the principles-based aspects of the rules might make it more difficult, in some circumstances, to bring fraud or reporting violation cases, given that the lack of bright lines gives companies a significant degree of latitude in deciding what is and is not material. Further, the heightened sensitivity to compensation issues, more engagement by compensation committees, and the voluminous disclosure that is now required may reduce the ability to hide or mischaracterize compensation that could give rise to Enforcement’s interest. Unlike shareholders, the SEC is limited to disclosure violations and can’t pursue claims such as corporate waste.
– Ted Allen, RiskMetrics’ Director of Publications
The AFL-CIO has launched its 2009 Executive PayWatch that highlights what the labor federation views as the 10 “worst” corporate pay practices. “Americans are rightly angered by CEOs who haven’t learned their lesson,” AFL-CIO Secretary-Treasurer Richard Trumka, said in an April 14th press release. “After driving the economy into the ground and gambling with the nation’s retirement savings, these same corporations are giving out huge bonuses for bad behavior.”
Among the pay practices criticized by the AFL-CIO are:
– A proposed grant of $7.7 million in stock options to CEO James Wells at SunTrust Banks, which has received $4.9 billion in federal support from the Troubled Asset Relief Program.
– The more than $500 million in salaries and retention payments paid by American International Group to senior employees since the company was rescued by the federal government, which has spent $170 billion to keep the insurance company operating.
– The changing of performance goalposts, such as the steps taken by homebuilder Toll Brothers after it became clear that CEO Robert Toll would not receive a bonus under the old standards. According to the AFL-CIO, the company now ties the CEO’s bonus to a percentage of its income before taxes and bonus, as well as “squishy” factors, such as “management enhancement and efficiencies, and financial market visibility and access.”
– “Lavish” perquisites, such as the $400,000 in tax preparation and financial planning services provided to Ray Irani, the chief executive of Occidental Petroleum.
– “Golden coffin” benefits, such as the more than $40 million in stock, life insurance, and other benefits that the heirs of Shaw Group CEO James Bernhard would receive if he dies.
-“Golden parachute” benefits, such as the $14 million exit package that Richard L. Bond was to collect after stepping down as chief executive of Tyson Foods in January.
In addition, the AFL-CIO has filed 17 proposals this year that seek advisory votes on compensation, investor votes on death benefits, more disclosure on compensation consultants, hold-through retirement rules for equity grants, and other pay reforms, according to RiskMetrics data.
You need to register by this Friday, April 24th, to obtain the very reasonable Early Bird rates our popular conferences – “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference” – that will be held in San Francisco on November 9-10th (and via Live Nationwide Video Webcast). Warning: These reasonable rates will NOT be extended beyond this Friday!
We know that many of you are hurting in ways that we all never dreamed of – and going to a Conference is the last thing on your mind. But with huge changes afoot for executive compensation and the related disclosures, we are doing our part to help you address all these critical changes—and avoid costly pitfalls—by offering a “half-off” early bird discount rate for those that attend in San Francisco and nearly half-off for those that attend via the Web (both of the Conferences are bundled together with a single price). Here is the Conference registration form – and here is the agenda.
The Latest TARP Oversight Report: Concerns Over Fraud – and Commentary on Executive Pay
As we all know too well, where there is money – there is bound to be fraud. Yesterday, Neil Barofsky, TARP’s Special Inspector General sent a 247-page quarterly report to Congress detailing a long list of concerns about government efforts, including the lack of safeguards in handing out the money. Unlike the Congressional Oversight Panel led by Harvard Professor Elizabeth Warren, Barofsky’s office is focusing on criminal and civil wrongdoing in addition to more general recommendations and audits.
As this Washington Post article notes, the report states that Treasury Department lawyers have determined that companies participating in a $1 trillion program to relieve banks of toxic assets could be subject to limits on executive compensation (see page 110 of the report), contradicting the Obama Administration’s public position. It will be interesting to see what Treasury Geithner says about the report this morning when he testifies before TARP’s Congressional Oversight Panel (this letter was sent to the Panel ahead of the hearing).
Man, this report was hard to find. Treasury makes a big splash announcing its new “FinancialStability.gov” site – but it doesn’t bother to timely post its own reports. Rather, I found it on the SIGTARP site.