A topic that we have been writing about much recently is hold-through-retirement provisions. Not only does this type of provision provide a fairly easy fix to the “excessive compensation” concerns raised by Treasury (and Corp Fin Director John White) – as we have blogged about before – it’s something that major investors also have recognized as a key safeguard against irresponsible pay.
Recently, the AFL-CIO, Connecticut Retirement Plans and Trust Funds and AFSCME have submitted shareholder proposals to a number of companies (eg. Citigroup), urging them to extend the minimum period that senior executives must hold onto shares obtained through equity awards. These investors plan to file about 12 proposals that seek to address the risk alignment between executives and shareholders with a hold-through-retirement provision.
As an example of these, here is the proposal submitted to Dow Chemical last week that urges the company’s compensation committee to adopt a policy requiring that senior executives retain a significant percentage of shares acquired through equity compensation programs until two years following the termination of their employment. The proposal also recommends that the committee not adopt a retention requirement lower than 75 percent of net after-tax shares.
In their supporting statement, the investors note that requiring executives to retain their company stock for extended periods prompts them to focus on the company’s long-term performance: “In the context of the current financial crisis, we believe it is imperative that companies reshape their compensation policies and practices to discourage excessive risk-taking and promote long-term, sustainable value creation.”
In addition, the Laborers’ International Union of North America, International Brotherhood of Teamsters and United Brotherhood of Carpenters and Joiners have submitted shareholder proposals to 25 of the financial companies that sought TARP funds (originally, they planned to target 50 companies but ran into deadline issues). These proposals also contain a request for hold-through-retirement by seeking a “strong retention requirement that mandates that senior executives hold for the full term of their employment at least 75% of the shares obtained through the exercise of options or the award of restricted shares.” For an example of this shareholder proposal, see page 22 of this exclusion request from SunTrust Banks.
With so many important action items impacting your proxy disclosures right now, you will want to read the Fall 2008 Issue of the Compensation Standards print newsletter that covers some key issues regarding proxy disclosures to consider now. As a bonus, the issue includes a feature entitled “The Box” that provides an important “heads-up” regarding insiders’ margin accounts and a related D&O questionnaire pointer.
Since members of CompensationStandards.com get a free subscription to the Compensation Standards print newsletter, we have posted the Fall issue online.
Don’t Forget to Renew: Since all memberships are on a calendar-year basis (ie. your membership expires at the end of December), you should renew for ’09 today to continue getting all the guidance on this blog, on this site and in the Compensation Standards print newsletter.
A Coming Wave of New-Age Repricings?
I know that a lot of companies are rethinking their executive compensation arrangements right now. We just sent the Nov-Dec ‘08 issue of The Corporate Executive to the printer. This issue contains the definitive guidance on repricings (and related compensation restructuring issues) and how to implement hold-through-retirement provisions that will help comply with Treasury’s “excessive risk” limitations.
Act Now: To receive a non-blurred version of this issue right away (and on a complimentary basis), enter a No-Risk Trial for ‘09 today.
Note that last week, the Council of Institutional Investors issued a statement warning companies not to reset the bar for CEO pay because of the market meltdown. We have posted this statement – and other memos regarding underwater options – in our “Stock Options” Practice Area. In addition, we have posted other memos about executive compensation restructuring in our “Rolling Back Compensation” Practice Area.
Congrats to the three heads of the Big Three automakers into making fools of themselves and further muddying the executive compensation debate. After failing to think on their feet and not adequately explain the justification for business use of corporate jets, the CEOs of General Motors, Ford and Chrysler tried to “make up” with America by driving to Washington this week to attend follow-up Congressional hearings.
Of course, the obvious lesson-learned is that public (and shareholder) perception matters. This lesson was not immediately apparent to GM’s CEO, who tried to convince the FAA into blocking public access to information about where its corporate jets flew after last week’s Congressional hearing fiasco made watching the jets’ whereabouts a daily journalistic endeavor. This is the same company that tried to curry favor with “the people” prior to last week’s hearing with a You Tube campaign. Apparently, that public relations campaign didn’t apply to the senior management team.
Anyways, this disturbing storyline raises all sorts of thought-provoking questions, including:
1. Given the road trip by the Big Three CEOs, is it safe for CEOs of other companies to now fly on corporate jets? Or will they also be tracked and hunted down by the media? This season’s perks disclosures are sure to obtain even more scrutiny than in the past.
2. Just how smart are these CEOs given that they say their companies are running out of cash this month – yet, they are willing to spend two days in the car driving back and forth to Washington?
3. Just how smart are these CEOs given that my last four cars have been Toyotas, including the two hybrids that we own now? It’s been painfully obvious to everyone that the Big Three’s business strategy has been way off-track. So how can their boards really argue that they have needed to pay these guys big bucks to “retain” them? (And of course, one has to seriously wonder about the judgment of those boards anyways for agreeing to pursue failed business strategies.)
4. Just how many of these reputation-obliterating episodes are we gonna have to witness with Bob Nardelli? You may recall that when he served as Home Depot’s CEO, he essentially refused to allow shareholders to ask questions at the company’s annual meeting (by not having the company’s directors and other senior officers attend the meeting). Shareholders were angry at that meeting because they wanted to ask the board about how they could give Bob such an outsized pay package.
It’s become quite clear to the general public that it’s not just a few rogue CEOs and boards that don’t “get it.” The public can see that many of our corporate “leaders” feel entitled to the pay packages lavished upon them, even though it’s hard to argue that they have earned it. And despite the little fact that they don’t own the companies…
Is Congress footnoted.org’s New Competition?
I thought it was worth noting this recent blog from Michelle Leder of footnoted.org:
Earlier this week, we saw various members of Congress outraged because the three top executives of GM (GM), Ford (F) and Chrysler took corporate jets to beg for $25 billion in money. What’s next, you might ask, will Congressmen (and women) actually start reading SEC filings?
Yikes! It’s already starting to happen! We nearly fell off our chairs when we saw this release from Rep. Steven LaTourette, who seems to have dived head-first into the amended Form S-4 that PNC Financial (PNC) filed yesterday in relation to its taxpayer assisted merger – Treasury is kicking in $7.7 billion – with National City (NCC). The newest thing in yesterday’s S-4 – updated from an earlier filing on Nov. 10 – was the disclosure of $49.49 million in severance payments for 14 executives at the bank. Here’s how the Congressman described it:
‘When you have 29,000 National City Bank employees in nine states worried about their jobs and retirement, how do 14 people get these perks when billions of taxpayer dollars are making this merger possible? What about the other 28,986 employees and the shareholders?’
Footnoted regulars may remember that National City has been something of a frequent flyer here, including this post from July which questioned the hefty parting gifts for outgoing CFO Jeffrey Kelly, who presumably will continue to collect his $54K a month through the end of 2010, even though his name is never mentioned in the filing. We also pointed out back in December 2006 – the stock was trading in the mid 30s then – the time-sharing agreement for use of the corporate jet. (Odd how it all comes full circle, huh?).
This filing also had some interesting tidbits on fees paid to different financial services companies including the $228 million that National City paid to Goldman Sachs (GS) over the past two years. But wait – there’s more. Just this morning, PNC filed a second amendment to the S-4, which spelled out details on the dilution of PNC stock and an additional $2.6 million for National City executives.
We can’t wait to read the Congressman’s take on that!
– Ira Kay and Steve Seelig, Watson Wyatt Worldwide
We understand that at least some companies are discussing or considering special off-cycle equity grants for top executives in response to the recent decline in share prices. Such grants may pre-emptively address concerns that executives will “self re-price” by forfeiting options at their current employer in exchange for large new hire option grants with a relatively low exercise price at another company. While off-cycle grants were made by some companies during the last broad-based market decline in 2001, we believe that fewer companies will do this in today’s environment.
Our colleague Tom Kelly pointed out the reasons why this market is different:
1. Several companies who did this in 2001 found they made the special grants too early, and continued declines in share prices meant that the additional grants simply compounded the retention problem of underwater options.
2. Off-cycle equity grants are criticized by many investors as a form of “spring loading” or “market timing.”
3. With the new accounting rules, more companies have transitioned to viewing annual equity grants in terms of grant date value and as part of “total compensation.” Making off-cycle equity grants in response to a share price decline weakens the argument that equity grants are a key element of regular direct compensation.
4. The new proxy disclosure rules require companies to discuss in more detail their methodologies and processes for awarding equity-based compensation. This includes timing of awards as well as how the size of grants is determined.
5. Making an additional round of option grants just because the share price is considered to be at a low is not something most companies want to put into their proxy statement.
6. Companies are more judicious about managing their authorized pool for equity awards and Compensation Committees have become more diligent in managing things like overhang and total annual grant size. Accelerating 2009 grants into late 2008, which some companies did in 2001 and others did in 2005 (in advance of the change to FAS 123R), is similar to taking an advance on a line of credit. Using too much in one year can result in constraints on grant capacity in future years.
7. Fears about executives “self-repricing” by leaving their job and underwater options at one company for a large new hire grant at another company do not seem to be holding up in 2008 as compared to 2001. This time, the decline in share prices is more broad-based and the outlook for recovery is more uncertain.
8. Option grants are only one part of most companies’ long-term incentive program. Although other vehicles could be impacted by declining share prices, a primary reason why many companies shifted to restricted stock after 2001 was to provide a retention cushion in the event of share price declines.
While outstanding restricted shares have also declined in value since the time of grant, they still have some higher perceived value as compared to underwater stock options. Companies that have unvested restricted shares are less likely to feel the need to restore retention hooks through special grants of options.
– Pearl Meyer, Senior Managing Director, Steven Hall & Partners
I really love Fred Cook – and not just because he’s an icon – but rather because he’s tall, gray and handsome. And I absolutely agree that Say on Pay will be another costly blight on the community brought on by a few bad corporate actors and overzealous activists. It will serve only to further empower and enrich the proxy services who will now issue annual voting advisories on corporate executive pay, rather than when plans are up for approval every few years.
Fred’s suggestion is a reasoned one, but I would require a higher withhold of at least 20% on compensation committee chairs (who, of course, will be reluctant in the future to serve as targets in the catbird seat). If I had my druthers, I would also limit the vote to committed owners, as outlined in my earlier blog.
My suggestion was made after listening to Reps. Frank, Waxman, other politicos and advocates, such as Rich Ferlauto, note that mandatory Say-on-Pay legislation is inevitable. Like Fred, my purpose is to recommend a sane approach to any proposals put on the table. With best wishes for the Holiday Season and New Year!
We have just posted the first issue of our quarterly “Proxy Disclosure Updates” Newsletter, which is free for all those that try a no-risk trial to Lynn, Romanek and Borges’ “The Executive Compensation Disclosure Treatise & Reporting Guide.” We are pleased to announce that Mark Borges has agreed to keep us all updated on the newest best practices and guidance through our new Disclosure Updates newsletter.
Subscribers to the Treatise will receive this quarterly Updates newsletter (as part of the Annual Service that accompanies the Treatise at no charge), in which Mark and I will keep you abreast of all the latest guidance that you need to know.
This first issue focuses on key new disclosures all companies will need to address in the wake of EESA and other regulatory responses to the crisis. Subscribers will receive the second issue of Updates in early January, with plenty of last-minute critical pointers for your proxy disclosures.
Act Now: To receive a non-blurred copy today, try a No-Risk Trial to the “Lynn, Romanek & Borges’ ‘Executive Compensation Service'” today. Subscribers can access the full issue here.
Here Come the EESA-related Shareholder Proposals
Ted Allen of RiskMetrics Group recently noted on the RiskMetrics Risk & Governance Blog that shareholder proposals seeking compensation reforms are being submitted to financial institutions participating in the Treasury’s bailout program. The proponents are the Laborer’s International Union and the International Brotherhood of Teamsters. Ted’s blog indicates that the proponents expect that some institutions will seek to exclude the proposal on a “substantially implemented” argument, but the unions will fight any such efforts at the SEC.
Ted notes: “The proposal calls for directors to adopt the following reforms:
– Limit annual incentive compensation to an amount not exceeding one times the senior executive’s annual salary;
– Require that a majority of long-term compensation be awarded in the form of performance-vested equity instruments;
– Freeze new stock option awards to senior executives, unless the options are indexed to peer group performance so that relative, not absolute, future stock price improvements are rewarded;
– Require senior executives to hold for the full term of their employment at least 75 percent of the shares of stock obtained through equity awards;
– Prohibit accelerated vesting for all unvested equity awards held by senior executives;
– Limit all senior executive severance payments to an amount no greater than one times the executive’s annual salary; and
– Freeze the accrual of retirement benefits under any supplemental executive retirement plan (SERP) for senior executives.
The labor unions urge directors to adopt all of these reforms unless barred by existing executive employment agreements. ‘At this critically important time for the Company and our nation’s economy, the benefits afforded the Company from participation in the TARP justify these more demanding executive compensation reforms,’ the funds argue in their supporting statement.”
It’s Not Too Late
There is still time for all companies – and not just financial institutions – to take another look at their compensation programs in light of recent events. With a great deal of attention focused on the CD&A in next year’s proxy statement, now is the time to consider comparing existing compensation policies and practices with the emerging standards coming out of the EESA and the fallout from the financial crisis. While it is likely that many companies will already have appropriate policies and practices in place, it may be necessary now to revisit things like the company’s clawback policy or whether a hold-through-retirement policy should be adopted or amended.
Further, in light of the most recent economic events, including significant layoffs, cost-cutting and an increasing trend toward CEOs foregoing bonuses, it may be necessary to pay close attention to bonus decisions that have already been made – as well as upcoming bonus decisions – for senior executive officers. Justification for why bonuses are warranted (and the level of bonuses) in light of a company’s financial situation will likely be a principal focus of investors in upcoming CD&As.
All of these actions should be considered in the coming weeks, so that any changes can be implemented in time to be disclosed in the upcoming CD&A. You can find out more about these critical considerations in the inaugural issue of “Proxy Disclosure Updates” Newsletter Fall 2008.
Recently, New York Attorney General Andrew Cuomo subpoenaed Bank of America, demanding a list of every executive that received a bonus of more than $250,000 over the past two years. The subpoena is part of the AG’s investigation into bonuses paid out to banking executives during the run-up to the industry’s meltdown.
Last month, Cuomo’s office asked nine banks (including BofA) to voluntarily turn over information on executive pay and bonuses, as well as plans for awarding bonuses in 2008. All nine banks sent at least some information, but apparently Cuomo’s office wasn’t satisfied with BofA’s response, which included little of the data sought. Among other things, the subpoena seeks information about how the company awards bonuses, who makes the decisions, who gets them and the size of the anticipated bonuses for 2008.
Cuomo and AIG
Also notable is that Cuomo wrote AIG’s board last month demanding that the company recover bonuses and the cost of other perks from current and former executives – and AIG freezed some payments. According to this article in the NY Times, New York law allows creditors to challenge company payments for which value was not received in return. Some believe that if the Attorney General is successful in his pursuit of AIG, other creditors may use it to pursue other firms such as Lehman Brothers.
And Cuomo’s strategy seems to have worked. On Monday, AIG issued this press release indicating that AIG’s CEO will receive a $1 salary and no annual bonuses through ’09. In addition, AIG’s next top six executives will not get year-end bonuses. Here is AIG’s letter responding to Cuomo’s letter. Mark blogged about this development last night…
For your assistance as you are preparing to meet the year-end deadline for finalizing the documentation required to avoid excise taxes under IRC Section 409A, my partner Jeff Banish and I have prepared a one-page quick reference guide on 409A. It comes with the caveats that you would expect for a one page summary, but still provides a quick overview of what is – and is not – exempt, as well as the core requirements to qualify for the exemptions.
My strong advice: There were enough changes between everyone’s read of the initial law and what the final regulations provide, that if you have not looked at your compensation arrangements subsequent to the final rules, you need to. This includes not just employment agreements and severance plans, but all bonus plans, equity compensation arrangements, SERPs and any other plan or program that you have that could provide a post-termination benefit to an employee, independent contractor or director. If you have any comments on the guide, contact me at brink.dickerson@troutmansanders.com.
I love Pearl Meyer. I really mean it. She’s a pioneer, an icon, and a free spirit. And she speaks her mind, but not frequently. So when she does, attention must be paid. But I have a different idea for Say-on-Pay than the one she expresses in her recent blog.
I believe that a mandatory vote on Say-on-Pay vote each year for all public companies is overkill. There are approximately 10,000 US public companies. Pay practices that investors and the public regard as abusive are likely limited to a tiny fraction of these. So why impose an annual burden on the whole of private enterprise that is publicly owned?
My idea is to use a rifle rather than a shotgun to target the companies that have abusive practices. Let’s have the stock exchanges require that any company whose compensation committee chair receives 10% or more WITHOLD votes must submit its pay program to a advisory Say-on-Pay vote the following year, and every year thereafter until the negative vote drops under 10%.
That way shareholder activists and watchdog groups can target those companies with poor practices for Say-on-Pay, while leaving the vast majority of American businesses that have perfectly defensible executive pay practices alone.
Raise your hand if you have been throwing away memoranda concerning the October financial bailout legislation, officially named the Emergency Economic Stabilization Act of 2008, because your company is not a financial institution?
Don’t worry, we suspect you are not alone.
As you begin to prepare for December board and compensation committee meetings, you may want to keep in mind three key issues arising from the financial bailout legislation and recent national elections of particular concern to U.S. public companies that are not financial institutions:
1. Executive Compensation and Risk Management — Executive compensation decisions may increasingly be second-guessed for the risks they encouraged executives to take.
2. Clawback Policies — Anticipate increased scrutiny of clawback policies and campaigns for adoption of policies with more stringent recovery features.
3. Say on Pay — Plan for it to soon be a reality for your company.
See our alert for a “board-level” overview of these issues. One additional piece of information that was released after the date of this alert (which supports the first issue identified above) is the fact that executive compensation emerged as a key concern coming out the meeting this past weekend of the G-20 nations in Washington DC. See Dave Lynn’s recent blog on this topic.