– 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.
Hay Group recently partnered with The Wall Street Journal to conduct its annual CEO study, examining CEO compensation at companies with more than $5 billion in annual revenue that had filed their proxies by the end of March. Not surprisingly, for the first time in many years, CEO compensation levels declined. Here are a few of the findings:
– Salaries were up 4.5% at the median
– Bonuses were down nearly 11%
– Cash compensation fell 8.5%
– Long-term incentive values were unchanged (median $5.3 million)
– Total direct compensation (which includes the value of LTI grants) fell 3.4% to a median of $7.6 million
– One year median TSR (total shareholder return) was -31.8%
For the second year in a row, performance-based LTI plans are the most prevalent long-term incentive vehicle (73% of companies have them vs. 72% using stock options). The use of a portfolio of equity vehicles continues to be very common – 71% of companies used more than one LTI vehicle and 24% used a mix of stock options, performance-based awards, and restricted stock.
The financial markets have been in meltdown for months. Many stocks, including those of high tech companies in Silicon Valley, are down 50% – or more. Stock options are materially underwater. Should companies grant new equity to key employees? New options? New restricted stock units (RSUs)? What tax and accounting issues must be addressed? How will shareholders and gatekeepers (e.g., ISS/RiskMetrics) react? These were the topics of discussion on last month as the Silicon Valley Chapter of the National Association of Corporate Directors met. Here are notes from that panel discussion.
We just announced that our popular conferences – “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference” – will take place at the Hilton San Francisco on November 9-10th (and via Live Nationwide Video Webcast). Here is the Conference registration form – and here is the agenda.
To make your reservations at the Hilton, register for the hotel online or call 800.445.8667. When you register for the hotel, it is important to mention the National Association of Stock Plan Professionals Conference, Executive Compensation Conference or the Proxy Disclosure Conference (or just mention the Group Code of “SPP”) to receive the discounted rate.
Special Early Bird Rates: Only One Week Left – Act by April 24th: 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).
You need to register by next Friday, April 24th, to obtain these reasonable rates.
Last week, at the same Council of Institutional Investors meeting where Chair Schapiro laid out the SEC’s new regulatory agenda, Goldman Sachs CEO Lloyd Blankfein called for changes to the compensation model on Wall Street. As noted in this story appearing in the LA Times, Blankfein faced some angry protestors while delivering his address – certainly a sign of these times of extraordinary public anger.
Blankfein noted that compensation decisions must be made in the context a multi-year evaluation of risk to get a full picture of an individual’s decisions, and that performance should not be judged in isolation. Among the specific guidelines that he suggested are:
1. Compensation should include salary and deferred compensation, which is “appropriately discretionary” because it is based on performance over the year.
2. The proportion of equity comprising and individual’s compensation should increase significantly as total compensation increases.
3. Senior employees should get most of their compensation in deferred equity, while junior people should get most of their compensation in cash.
4. Individual performance should be evaluated over time to avoid excessive risk taking and to allow for a clawback effect.
5. Equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.
6. Senior executive officers should retain the bulk of their equity until they retire, and equity should not be accelerated once someone leaves the firm.
Recently, Moody’s issued a report entitled “Executive Compensation: What to Watch in 2009.” The report is not earth-shattering and finds the following:
– Pay-related changes will put new incentives in place for management and affect employee recruitment and retention efforts that could have significant future implications for bondholders.
– Analysts expect pay-related scrutiny to be focused most heavily on firms most closely associated with the credit crisis, including those receiving government assistance, those who have exhibited poor pay practices in prior years, or both.
– Expected key compensation changes include: a reduction or elimination of 2008 bonuses; changes to performance targets and metrics used in both short and long-term incentive plans; modifications to equity-based incentive plans; and other changes resulting primarily from shareholder pressure.
– Given the focus on pay, the pressures on various pay elements – in particular on variable compensation, which represents roughly 85% of typical CEO pay – and the reduced likelihood of near-term stock market recovery, we expect median CEO total pay to decline for the 2008 fiscal year and possibly again in 2009.
– There are both benefits and potential risks stemming from the pay changes, including those applicable to TARP firms under the Stimulus Act; potential credit implications are unknown at this time since pay is very much contextual and must be analyzed on a case-by-case basis.
Compensation Arrangements in a Down Market
We have posted the transcript from our recent webcast: “Compensation Arrangements in a Down Market.”
We haven’t heard much about backdated options lately. That’s why I found Bud Crystal’s recent report so interesting, given that he contends that “Opportunistically-Timed Options Are Alive and Well.”
Here is a recent report from Frederic W. Cook & Co. entitled “The 2008 Top 250 Report Prevalence of Long-Term and Stock-Based Grant Practices for Executives at the 250 Largest Companies.” Key findings from the report include the following:
– Stock option usage continues to decline, although options remain the single most common long-term incentive vehicle.
– Stock options are being replaced primarily by full-value shares that are earned by continued service and achievement of performance contingencies (performance shares).
– Full value shares with performance contingencies (performance shares) are now as common as full-value shares that vest by continued service alone (restricted stock).
– Long-term performance awards (performance shares and performance units) are now almost as common as stock options and represent nearly as much of CEO’s total long-term incentive values as stock options.
– Imposing performance requirements on the vesting of stock options increased in 2007, although most other stock option design variations (reloads, discounts, and tandem grants) disappeared in practice.
– Median CEO long-term incentive values continued to increase, but 75th percentile values leveled off.
– The prevalence of stock ownership guidelines for executives continues to increase with approaches combining mandatory share ownership and retention ratios showing the fastest growth.
Here is a follow-up on Broc’s recent blog. In thinking about these issues, I think you also have to look at the composition of boards. Most companies, rightly, want to have CEOs, COOs, Presidents, etc. on their boards who can bring real world experience to deal with business issues – strategic planning, evolving markets, business restructurings, etc.
The issue that creates from a compensation point-of-view is obvious. And while compensation is important, clearly some of these other factors have an exponentially larger impact on value creation/loss for shareholders. One suggestion might be to require essentially a separate “board” to deal with compensation that draws on a broader universe of participants (and also includes some of the directors from the “real” board to provide the required insight vis-a-vis the other factors).