With no fanfare, RiskMetrics recently issued this new paper – “Evaluating U.S. Company Management Say-on-Pay Proposals” – which lays out the four steps that RMG uses to analyze a proposal (including nine questions that it will ask itself) placed on the ballot by management. This is an important document considering RiskMetrics’ role in the voting process. We have posted it in our “Say-on-Pay” Practice Area.
This is not an April Fool’s joke. Yesterday, the Chicago Tribune ran this article about a lawsuit brought against McDonald’s by a former Senior Director of Compensation who balked against signing a subcertification related to the company’s disclosure of executive compensation. The company denies the allegations. I’m pretty sure this is the first whistleblower suit related to executive compensation disclosure.
The complaint was filed in US District Court for Northern Illinois – and includes allegations of (as noted in this blog):
– Setting up a reimbursement/repayment scheme to avoid disclosing golf club memberships for the regional President stationed in Hong Kong;
– Mislabeling the outgoing CEO as a “transitional officer” so he could keep his health and other benefits, and so the millions paid to him after his last day of work for McDonald’s could be called salary and incentive pay, rather than severance; and
– Implementing a shareholder-mandated 2.99X cap on executive severance agreements with loopholes large enough to render the cap meaningless.
We’ll be closely following this development since the topic is “near and dear” to many of our members…
We just posted the registration form for our popular conferences – “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference” – to be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference (we’ll be posting the agenda for the Executive Compensation Conference in the near future).
Special “Half-Off” Early Bird Rates – 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 so that you can attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 24th to obtain 50% off.
“Books & Records” Being Used to Check Compensation Committees
As noted in this NY Times’ article from Sunday, the Louisiana Municipal Police Employee Retirement System is using a books & records demand at Chesapeake Energy to determine whether the board met its fiduciary duties in approving a $75 million bonus, as part of a renegotiated employment contract with the CEO.
The CEO had lost 94% of his holdings in the company due to a margin call (when the company’s stock dropped 60%) – and he had an existing 5-year contract struck in ’07 that had not yet run its course when this new one was renegotiated. The books & records demand was the first step used in the Disney case a few years back.
A few weeks ago, the UK’s regulator – the Financial Services Authority – published a draft “Code of Practice on Remuneration Policies.” It is proposed that the Code will be relevant to all FSA-regulated firms, not just banks, and will relate to the remuneration of all employees. It would therefore apply to the UK FSA-authorised entities of non-UK firms operating in the UK.
The Code comprises one general principle and 10 specific principles and develops ideas first set out in a “Dear CEO” letter sent last year by the FSA to the CEOs of many banks. Although it is not clear when the final Code will formally become part of FSA regulation, it is expected to be in the near term.
Learn more in our “International” Practice Area about this development.
French Parliament Toughens Tax/Social Security Treatment of Golden Parachutes
This recent Latham & Watkins memo explains the new French changes to the social security treatment of indemnities, including golden parachutes, paid to a manager due to the forced termination of duties, as well as the new tax treatment of certain golden parachutes at the level of the paying company.
Fueled by the anger over the AIG bonuses, the focus now is on bonuses generally. As we all know, a focus on a single pay element doesn’t really make sense as the totality of the pay package is what really matters. But the public (and most of the media, Congress, etc.) isn’t used to dissecting complex executive pay packages.
Anyways, companies may now be moved to rename their “bonuses” as something else due to their stigma, as noted in this NY Times article yesterday. And the concept of retention bonuses may need to be reconsidered, as there clearly have been some abuses in this area. I agree that retention bonuses make sense in particular circumstances – and can even be critical to save a company from imploding. But – like everything in life – sometimes there are mistakes and even purely abusive situations.
Occasionally, it’s also hard to make retention bonuses sound “right” to the masses, even though it makes sense for the company. Perhaps some of the AIG bonuses fall into that category as I read this resignation letter from one of the AIG Financial Product Unit executives. Notice the letter has over 900 reader comments.
As a sidenote, the reality is that the economic downturn has forced many companies to cut executive bonuses, as noted in this Watson Wyatt report.
With say-on-pay being implemented by many more companies this proxy season – courtesy of TARP – and shareholders supporting these proposals in greater numbers (eg. Hain Celestial Group’s proposal recently received a 62% vote), I thought it would be useful to explore the different approaches to say-on-pay that companies can take in a series of blogs.
Narrow Retrospective Model – The Blockbuster Model
In 2007, shareholders of Blockbuster succeeded in having the following resolution included in its annual proxy statement:
“Resolved, that shareholders of Blockbuster, Inc. urge the Board of Directors to adopt a policy that Blockbuster shareholders be given the opportunity at each annual meeting of shareholders to vote on an advisory resolution, to be proposed by Blockbuster’s management, to ratify the compensation of the named executive officers set forth in the proxy statement’s Summary Compensation Table (SCT) and the accompanying narrative disclosure of material factors provided to understand the SCT (but not the Compensation Discussion and Analysis).”
The resolution was supported by 57.8% of shareholders who voted and led Blockbuster to adopt a say-on-pay policy starting with the company’s 2009 annual meeting. Before the deluge of TARP companies, shareholders at least 14 US companies passed say-on-pay resolutions similar to Blockbusters’ and seven public companies have either officially adopted say-on-pay policies or committed to so. Among those that have adopted policies are Apple, Tech Data, Par Pharmaceutical and Verizon. None of these companies have yet submitted executive compensation to a shareholder vote. Nevertheless, the Blockbuster resolution indicates how a say-on-pay vote might be implemented.
The resolution seeks shareholder approval of only the Summary Compensation Table and the narrative disclosure of material factors accompanying the SCT. The SCT provides only historical information about the amount of compensation paid or payable in respect of the prior three years. As a result, this shareholder vote relates only to the amount of compensation and not the policies underlying it. Compensation in the SCT is broken down into a number of categories: salary, bonus, stock awards, options, non-equity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings, and a catchall, all other compensation (which includes perquisites).
– Ira Kay and Terri Shuman, Watson Wyatt Worldwide
Last week, we published a survey entitled “Effect of the Economy on Executive Compensation Programs,” which shows companies are making more dramatic changes to their executive pay programs in recognition of the recession and financial markets’ decline. The results reflect that companies continue to re-evaluate the long-term implications of their executive pay policies, but it is still not clear that the changes boards have made are aggressive enough to placate shareholders.
This update to our December, 2008 survey found:
– Fifty-five percent of respondents have frozen salaries – 34 percentage points higher than reported in the December 2008 survey.
– Twenty percent of respondents have reduced or are considering reducing salaries versus only 8 percent in the December 2008 survey.
– Approximately half (48 percent) of respondents plan to decrease this year’s bonus pool, with the decrease to average about 40 percent.
– Thirty-eight percent are making changes to their annual incentive plan performance measures and 30 percent are making changes to their long-term incentive plan measures.
– Twenty-three percent of respondents have added a clawback policy.
– About one-third of respondents are shifting toward time-based restricted stock and performance-based shares.
– One-third of respondents are reducing their long-term incentive grant values, with the average reduction to average at thirty-five percent.
– Only 1 percent of respondents have taken action on underwater stock options, although 17 percent are considering doing so.
We also surveyed company views on the current regulatory landscape. Approximately half of companies surveyed said that they were moderately to significantly concerned about “say on pay” measures (56 percent), expanded Compensation Discussion and Analysis (CD&A) disclosures (50 percent), deferred compensation limits (46 percent) and excluding “excessive risk” from compensation programs (43 percent). Despite the latter concern, more than seventy 70 percent of companies surveyed have not added a formal risk assessment process, and sixty-nine percent have not certified in their proxy that a risk assessment has been performed.
We see these TARP sections relating to excessive risk potentially being expanded (either by regulation or as a good governance practice) to companies outside the financial industry as the notion of actions compensation committees must take to fulfill their fiduciary obligations continues to evolve.
However, we would caution against adopting “conventional wisdom” in changing executive pay architecture, as companies need to find a balance between programs that create adequate incentives for executives to perform versus those that do not encourage excessive risk taking. Watson Wyatt will soon be publishing the results of some very important research on this issue that helps to empirically illustrate those pay elements that are risk “mitigators” versus those that are risk “aggravators.” We think this will be a “must-read” for compensation committees trying to balance these concerns.
For many compensation committees, the recent stock market nosedive has made decision-making about 2009 long-term incentive grants the most challenging in recent memory. One issue attracting a lot of attention right now is how to determine the appropriate number of options, shares or units to grant in light of the significant share price declines most companies have experienced over the past few months.
Companies that have followed a practice of granting a fixed number of options or restricted shares are concerned about how that practice may affect executive retention and motivation, in that a lower share price would mean a smaller expected grant value under this approach. The more common approach of targeting the specific dollar value of long-term incentives to grant, based on competitive levels and surveys, is also problematic in the current environment for a number of reasons.
The bottom line is that equity incentive grants are likely to be lower in value at many companies this year. Indeed, over 40% of the companies participating in our recent pulse survey on compensation issues in the economic crisis have already concluded that the expected value of their 2009 long-term incentive (LTI) grants will be lower than last year’s, and other recent studies have shown similar results. We expect when all decisions have been made, the percentage of companies reducing their grant values will end up being even larger than these studies suggest.
Here is a memo with a closer look at the LTI granting issues companies are facing in the current climate, and some of the key considerations compensation committees need to keep in mind. The decisions companies are making today regarding their LTI values will have a ripple effect in the future as these grant values make their way into proxy statements and compensation surveys. As such, and since the recent volatility in the capital markets may continue for the foreseeable future, we don’t expect the issue of how best to determine LTI grant values to go away any time soon.
Tune in tomorrow for our webcast – “Compensation Arrangements in a Down Market” – to hear Blair Jones of Semler Brossy, Mike Kesner of Deloitte Consulting and James Kim of Frederic W. Cook & Co. discuss how boards are rethinking compensation practices in the wake of the down market.
Recently, Bank of America filed preliminary proxy statement that includes BOTH a management proposal on say-on-pay and a shareholder proposal on say-on-pay (from Kenneth Steiner, whose agent is John Chevedden). The management proposal is an actual vote, while the shareholder proposal is merely a non-binding vote regarding whether the company should have a policy requiring an annual pay vote.
BofA had tried to exclude this proposal through the no-action letter process, arguing that it (1) conflicts with management’s proposal and (2) the company has substantially implemented the shareholder proposal by including the management proposal. The proponent won the day with his argument that the two proposals are not the same because management’s proposal is limited to the period of time that the company is in TARP, while his proposal is unlimited as to duration. On Monday, Corp Fin posted its response, not permitting BofA to exclude the proposal on either ground (they did waive the 80-day advance requirement).
I think dueling “say-on-pay” proposals will be confusing to shareholders – and I certainly hope this won’t be a new trend. Over the past month, most proponents withdrew their “say-on-pay” proposals once management included their own; this position by the Staff may cause them to reconsider going forward…