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The Real Impact of Say on Pay and a Brief 
Th R l I      t fS        P     d Bi f
Updated from the Dodd‐Frank Wall Street 
  Reform and Consumer Protection Act

                 Hosted by:
   New York‐New Jersey Chapter of the NASPP
                July 23, 2010
Today s Presenters
               Today’s Presenters

• Dan Walter, President and CEO,
  Dan Walter, President and CEO, 
  Performensation 


• Ed Hauder, Senior Advisor, Exequity


• Robert McCormick, Esq., Chief Policy 
  Officer, Glass Lewis 
What is Say on Pay?
                    What is Say on Pay?

• “Say on Pay” (SOP) is used to refer to:
     y      y (    )
   – Shareholder proposals asking companies to put executive 
     compensation and/or policies to a non‐binding shareholder vote
       • As yet, there is no agreement on how companies should respond or how
         As yet, there is no agreement on how companies should respond or how 
         SOP will work
           – The populist view demands a vote on compensation policy and/or pay levels
   – Institutional investors appear to be more interested in regular 
                              pp                               g
     discussion with Compensation Committees to ensure pay systems 
     align with operating strategies
What is Management Say on Pay?
       What is Management Say on Pay?

• Management SOP (MSOP) proposals asking shareholders to 
       g            (        )p p             g
  approve by a non‐binding vote, the company’s executive 
  compensation and policies; in one of two forms (at the 
  moment):
   – Mandatory MSOPs—where the company is required to provide 
     shareholders with an MSOP vote because of a regulation or law, i.e., 
     participants in TARP or CPP are required to provide shareholders with 
     participants in TARP or CPP are required to provide shareholders with
     an MSOP vote and public companies incorporated in North Dakota are 
     required to provide an MSOP vote to shareholders
   – Voluntary MSOPs where the company has voluntarily
     Voluntary MSOPs—where the company has voluntarily 
     adopted/provided an MSOP vote to shareholders when not required 
     to do so by any regulation or law
What is Say on Pay meant to provide?
    What is Say on Pay meant to provide?

• Ability for shareholders to voice their opinion on pay policies
        y                                  p         p yp
   – Not a vote on specific compensation pay packages or elements
   – Origin in is current form goes back to 2003, in the United Kingdom
   – Now policy in many countries including: Netherlands Australia
     Now policy in many countries including: Netherlands, Australia, 
     Sweden, Norway
• Symbolic or does it change compensation philosophy and 
  execution?
The Historical Form and Timing of MSOP 
                         Proposals
                         P      l
Form and Timing of MSOP Proposals
■ Several approaches to MSOP proposals have appeared, though pending legislation and associated 
   regulations could dictate the approach that must be taken

   Comprehensive Vote (Yea or Nay)                      Segmented Vote                            Other Mechanisms

 Formulations vary CD&A and tables
               vary—CD&A and tables,          Vote separately on different aspects of 
                                              Vote separately on different aspects of    Survey of investor views
                                                                                                of investor views 
 CD&A only; approval vs. ratification;        the program, e.g., philosophy,             (Schering‐Plough, Amgen)
 annual vs. biannual vs. triennial            decisions in previous year (RMG)           Hold meetings with large shareholders 
 Advantage is that a single vote is           CEO compensation is within 20% of an       (Pfizer, 
 simple                                       acceptable amount and director             Occidental Petroleum)
 Disadvantage is that a single vote does      compensation is within 20% of an 
                                              compensation is within 20% of an           Solicit feedback from shareholders on 
 not permit differentiation and is a blunt    acceptable amount (Littlefield)            executive compensation disclosure 
 instrument that does not provide             Advantage is that these can provide for    (Prudential)
 meaningful input                             more meaningful feedback                   Shareholder e‐forum (Verizon)
                                              Disadvantage is that it is more 
                                              complicated and risks 
                                                   li   d d ik
                                              micromanagement
                                Timing issues—how often will an MSOP be presented to shareholders?
Basic approach taken by           Annually—typical structure among voluntary adopters; structure required for TARP/CPP companies
Dodd‐Frank                        Biennially—Bristol‐Myers Squibb; Colgate‐Palmolive; General Mills
                                  Triennially—Microsoft
Historical Perspective 
                 Historical Perspective ‐ US
•   Shareholder proposals fared fairly well in 2008 and 2009




•   Several companies voluntarily agreed to adopt such SOP proposals, with some 
    Several companies voluntarily agreed to adopt such SOP proposals, with some
    starting in 2009, including:
Historical Perspective 
                 Historical Perspective ‐ US
•   Effective February 17, 2009, the U.S. federal government required a non‐
    binding vote on executive compensation at all TARP/CPP companies
•   Legislation was proposed in 2009 that would have required say on pay 
    proposals at all public companies
     – The House of Representatives approved the Wall Street Reform and Consumer 
       Protection Act of 2009 (H.R. 4173) that would require an annual, non‐binding, 
       separate shareholder vote to approve the compensation of executives as 
       disclosed in the compensation committee report, the CD&A, the tables, and 
       disclosed in the compensation committee report the CD&A the tables and
       any related materials
•   SOP shareholder proposals were also the second highest governance 
    proposals put forward for the 2010 proxy season (58 reported by 
    proposals put forward for the 2010 proxy season (58 reported by
    RiskMetrics)
•   July 22, 2010 – Dodd Frank Wall Street Reform and Consumer Protection 
    Act is signed by President Obama
    Act is signed by President Obama
Voluntary Adoption of MSOP Proposals
     Voluntary Adoption of MSOP Proposals
•   Companies that have voluntarily adopted MSOP proposals include:
    AFLAC                                 Edison International                    Littlefield                              State Street*
    Alaska Air Group                      Fifth Third Bancorp*                    Logitech                                 Steris
    American Express*                     Forest Laboratories                     MBIA                                     SunOpta
    Ameriprise Financial                  Frontier Communications                 Microsoft                                SUPERVALU
    Apple                                 Goldman Sachs Group*                    Mobile Mini                              SYSCO
    Berkshire Hills Bancorp               Hain Celestial Group                    Morgan Stanley*                          Tech Data
    Blockbuster                           Hill‐Rom Holdings                       Motorola                                 Tecumseh Products
    Bristol‐Myers Squibb                  Honeywell International                 Occidental Petroleum                     PNC Financial*
    Capital One Financial*                Ingersoll‐Rand                          Pacific Gas & Electric                   Tupperware Brands
    Charming Shoppes                      Intel                                   Par Pharmaceutical                       US Bancorp*
    CoBiz Financial*
    C Bi Fi     i l*                      Intuit
                                          I t it                                  Pfizer
                                                                                  Pfi                                      Valero Energy
                                                                                                                           V l    E
    Colgate‐Palmolive                     Jones Apparel Group                     PG&E                                     Wells Fargo*
    CVS Caremark                          JPMorgan Chase*                         Prudential                               Windstream
    Ecolab                                Lexmark International                   Southern California Edison               Zale
    * TARP/CPP company that has since repaid funds to U.S. government, but has or will voluntarily include a MSOP proposal in its proxies
2010 Voting on MSOP Proposals
                    2010 Voting on MSOP Proposals
   All MSOP Proposals—Passed and Failed                              Voluntary MSOP Proposals—Passed and Failed
   (n = 194)
   (       )                                                         (n = 47)
                                                                     (      )
                  All MSOP Voting Results                                           Voluntary MSOP Voting Results
             5/27/2010 ‐ YTD ‐ Available Results                                  5/27/2010 ‐ YTD ‐ Available Results
100.0%                                                           100.0%

 90.0%                                                            90.0%       93.4%
             93.2%          90.8%                                                                92.1%
 80.0%                                                            80.0%

                                                                  70.0%                                           77.5%
 70.0%                                      75.3%

 60.0%                                                            60.0%

 50.0%                                                 Average    50.0%                                                      Average
         90.4%          88.5%                                             88.0%             86.8%
 40.0%                                                 Median     40.0%                                                      Median
                                       75.7%                                                                 73.8%
 30.0%                                                            30.0%

 20.0%
 20 0%                                                            20.0%
                                                                  20 0%

 10.0%                                                            10.0%

  0.0%                                                             0.0%
         For/F+A%      For/F+A+AB%   For/Outstanding                      For/F+A%          For/F+A+AB%    For/Outstanding
2010 Voting on MSOP Votes That Failed
        2010 Voting on MSOP Votes That Failed
 MSOP Votes that Failed through May 27, 2010
                          Votes Against % 
                          Votes Against %                                                  Votes For % 
                                                                                           Votes For %
70.0%

60.0%

50.0%        57.5%
                                         49.6%
                                         49 6%
40.0%                                                             43.6%                                                           KEY
                                                                                   42.5%
30.0%                                                                                                     36.7%                   MOT
                     54.3%                                             50.9%
                                                 45.6%                                 45.7%                                      OXY
20.0%                                                                                                         38.4%
10.0%
                             53.5%                       45.7%             46.8%              46.5%                39.6%
 0.0%
                A+ABS/F+A+ABS                  A+ABS/CSO               F/F+A         F/F+A+ABS                F/CSO

 Actual Vote Figures
  Company
  C                                               For (F)
                                                  F (F)           Against (A)
                                                                  A i t (A)          Abstain (ABS)
                                                                                     Ab t i (ABS)                          CSO*
  KeyCorp                                    322,682,561         418,099,427           17,693,063                  878,960,282
  Motorola                                   887,793,923         855,021,547          201,440,789                 2,314,437,239
  Occidental Petroleum                       321,676,254         365,053,432               5,722,279               812,155,102
 *As of the proxy record date
2010 Voting on MSOP Proposals That Failed
     2010 Voting on MSOP Proposals That Failed

What were the MSOP proposals that failed? 
What were the MSOP proposals that failed?
Company
                                      Resolution Voted on by Shareholders

KeyCorp       “RESOLVED, that the shareholders approve KeyCorp’s executive compensation, as 
(required)    described in the Compensation Discussion and Analysis and the tabular disclosure 
              regarding named executive officer compensation (together with the accompanying 
              narrative disclosure) in this Proxy Statement. “
Motorola      "Resolved, that the stockholders approve the overall executive compensation policies 
(voluntary)   and procedures employed by the Company, as described in the Compensation 
              Discussion and Analysis regarding named executive officer compensation (together 
              with the accompanying narrative disclosure) in this Proxy Statement."
2010 Voting on MSOP Proposals That Failed
       2010 Voting on MSOP Proposals That Failed

 What were the MSOP proposals that failed?
                    p p
Company                                                       Resolution Voted on by Shareholders
Occidental Petroleum   “RESOLVED, that the stockholders approve the company’s compensation philosophy, objectives and policies as 
(voluntary)            described below:
                                                    p         p g            g             ,
                        Occidental’s executive compensation program is designed to attract, motivate and retain outstanding  g
                       executives, to incentivize them to achieve superior performance in the pursuit of Occidental’s long‐term strategic 
                       objectives and to reward them for unique or exceptional contributions to overall sustainable value creation for 
                       stockholders and the attainment of long‐ and short‐term performance targets.
                       Specifically, the program is designed to:
                         Maintain a clear linkage between performance and compensation by ensuring that a high percentage of the 
                         Maintain a clear linkage between performance and compensation by ensuring that a high percentage of the
                       total compensation of executive officers is “at‐risk”, i.e., contingent on the achievement of objectively 
                       identifiable performance targets;
                         Apply clear performance measures and associated time horizons that measure both long‐term stockholder 
                       value creation and the consistent annual execution of Occidental’s business plan;
                         Develop and execute a business model that produces returns well in excess of Occidental’s estimated cost of 
                         D l         d       t b i          d l th t    d       t         ll i       f O id t l’ ti t d            t f
                       capital by focusing compensation targets on the following key elements of value creation: capital allocation, risk 
                       management, cash flow, and financial strength and flexibility; and
                         Align executive and stockholder interests by requiring a substantial ongoing equity ownership position for 
                       executives.”
Why did they fail?
Why did they fail?
2010 Voting on MSOP Proposals That Failed
   2010 Voting on MSOP Proposals That Failed

• KeyCorp Summary: pay for performance disconnect; STI plan 
     y p              y p y   p                        ;   p
  more discretionary and performance results only generally 
  referenced; same metrics used for both STI and LTI increasing 
  KEY s risk profile
  KEY’s risk profile
• Motorola Summary: increase of $8 MM in Dr. Jha’s payment if 
  separation does not occur; Dr. Jha’s amended agreement 
  includes a modified excise tax gross‐up provision; and, MOT 
  i l d          difi d    i                  ii       d MOT
  adjusted results for the MIP program in an inconsistent manner
• Occidental Summary: repeated failure to address: pay 
                        y p                           p y
  magnitude; pay disparity; peer group disparity; and, 
  performance target issues
International Experience with MSOP Votes
   International Experience with MSOP Votes

                           Advisory /
                                    /                                                                                  Date 
                                                                                                                       Date
  Country                  Binding               What is voted on?                                                     implemented
  U.K.                     Advisory,             Director’s Remuneration Report, which covers pay                      2003
                           annual                policy for next year(s) and prior year’s compensation 
                                                 for each director (executive)
                                                                   (          )
  Netherlands              Binding,              Binding vote to adopt the remuneration policy for        Oct. 2004
                           upon policy           executives and major changes to existing policy. Annual 
                           change                Remuneration Report itself is not subject to the 
                                                 shareholder vote
  Australia                Advisory,             Remuneration Report, which discloses compensation                     July 2005
                           annual                practices for directors and NEOs for past year
  Sweden                   Binding,              Guidelines for remuneration of senior executives                      CG Code: 
                           annual                                                                                      July 2005; 
                                                                                                                       July 2005;
                                                                                                                       Law: July 2006
  Norway                   Binding,              Remuneration policy for senior management for                         Jan. 2007
                           annual                coming year
Source: What International Markets Say on Pay, An Investor Perspective, Institutional Investor Services, April 2007.
S       Wh t I t    ti   lM k t S         P A I        t P        ti I tit ti       lI     t S i         A il 2007
International Experience with MSOP Votes UK
International Experience with MSOP Votes—UK

• MSOP votes were required for public companies in the U.K. 
                       q         p           p
  starting in 2003 after adoption of the UK’s Directors’ 
  Remuneration Report Regulations 2002 on August 1, 2002
   – Statement of company’s policy on directors’ [executives ] 
     Statement of company s policy on directors [executives’]
     remuneration (set forth in Appendix)
• The goals of the MSOP movement in the UK were:
   – Improve the linkage between pay and performance
   – Empower shareholders and improve shareholder democracy
   – Create greater focus and ownership of compensation process by 
            g                         p       p          p       y
     remuneration committees
   – Engage shareholders on remuneration policies in genera
International Experience with MSOP Votes UK 
 International Experience with MSOP Votes—UK

Significant UK Shareholder Rejections of Remuneration Resolutions




     Source: RiskMetrics G
     S       Ri kM t i Group
International Experience with MSOP Votes UK
 International Experience with MSOP Votes—UK

Reasons for UK Shareholders’ opposing, abstaining, or voting for an MSOP proposal
Voting against:                                 Voting to abstain:                        Voting in support:
A variety of issues can cause concern:            No evidence of excess and a               Clear disclosure of the main aspects of remuneration 
 Performance conditions have been                 good level of disclosure; but             (ie, performance criteria, maximum awards, any 
 changed which causes them to be                  salaries have been increased              departures from normal practices/scheme details)
 easier to meet                                   y
                                                  year on year and there is no 
                                                           y
                                                  justifiable reason as to why              No evidence of excess
  High levels of pay and there is no real 
  link to the performance achieved, or            Overall, there are no structural          Clear link between pay levels and performance
  to be achieved                                  issues but there is a general 
                                                  lack of disclosure and there is           Clear alignment of the interests of shareholders and 
  Annual bonuses continue to rise and 
  Annual bonuses continue to rise and             scope for more information to 
                                                  scope for more information to             directors through robust remuneration practices
                                                                                            directors through robust remuneration practices
  salaries continue to increase, perhaps          be disclosed and for the 
  double digit salary increases become            company to be more                        Remuneration committee demonstrates behaviors 
  a pattern                                       transparent                               that protect the interests of shareholders whilst 
                                                                                            offering pay packages and remuneration policies 
  Structural issues and overall lack of                                                     which allow incentivisation and retention
  performance linkage
                                                                                            Performance targets for the long‐term incentive 
  Performance targets do not align                                                          plans do support the long‐term strategic plan of the 
  with the long‐term strategy of the                                                        company
  company
Source: Say on Pay, Six Years On, Lessons from the UK Experience, a report by Railpen Investments and PIRC Limited (September 2009)
Empirical Evidence:  Research from the UK
Empirical Evidence: Research from the UK
• Say on Pay does not have a great impact on most companies
• June 2008 Study
       • Academic Paper by Fabrizio Ferri and  David Maber Harvard Business 
         School 
   – No evidence that Say on Pay changed the levels or growth of executive 
     compensation
   – Higher sensitivity of CEO cash and total pay to negative operating 
     performance
        f
Empirical Evidence: Cautionary UK 
                    research
                           h
• August 2009 Study
       • Jeffrey N. Gordon, Columbia University
   – The details of pay‐for‐performance may be too complex to effectively 
     communicate to shareholders
   – Annual voting requirement may result in a narrow range of 
     compensation best practices
   – Smaller firms would be unlikely to benefit for Say on Pay and 
     restrictions to act like larger firms, may negatively impact their ability 
        t i ti    t    t lik l       fi             ti l i      t th i bilit
     to grow
   – Truly abnormal pay may be limited to a large companies in a small 
     group of industries 
     group of industries
Empirical Evidence: Research from the US and UK
   p

• Say on Pay may create shareholder value
    y      y y
• August 2009 Study
       • Jie Cai and Ralph A. Walkling, Drexel University 
   – St k f fi
     Stocks of firms with the highest abnormal CEO pay and low pay‐for‐
                       ith th hi h t b          l CEO        dl        f
     performance sensitivity react in a significant, positive manner to the 
     Say‐on‐Pay
   – M
     More value created in companies with strong ownership by “vote‐no” 
             l        t di          i     ith t              hi b “ t       ”
     mutual funds. Dissenting voice creates pressure for change.
International Experience with MSOP Votes—Australia 
                    p

•    Australia’s Proposed Changes to MSOP Votes
      – The Productivity Commission (PC) released a review of executive pay in Australia in 
         h      d i i           i i ( ) l          d     i    f      i       i       li i
        January 2010
      – The Australian government responded to the PC’s report in April 2010 and 
        indicated it would introduce legislation to implement many of the PC’s 17 
        recommendations, including the  two strikes proposal for MSOP votes
        recommendations including the “two strikes” proposal for MSOP votes
      – As currently proposed, the two strikes proposal for MSOP votes would work as 
        follows:
           • A minimum 25% “no” vote on remuneration report triggers reporting obligation on how 
             concerns addressed, and
           • A subsequent “no” vote of at least 25% activates a resolution for elected directors to submit for 
             re‐election within 90 days
                 – Unclear whether this would apply to the entire board, or just the remuneration committee or 
                   chair
      – Additionally, the proposals with which the Australian government agreed included:
           • Prohibiting key management personnel from voting undirected proxies on remuneration 
             resolutions, and
           • Prohibiting key management personnel that hold shares from voting on their own 
             remuneration arrangements
Companies that will be most impacted by MSOP
Companies that will be most impacted by MSOP

• Companies with excessive or ineffective executive 
  compensation
• Companies with independent‐mind shareholders who are 
  willing to challenge management
  willing to challenge management
• Companies that have historically responded positively to 
  shareholder pressure
Shareholder Response to MSOP Proposals
    Shareholder Response to MSOP Proposals
•   Shareholder response to MSOP votes is likely to be heavily influenced by 
    the type of shareholder they are:
    the type of shareholder they are
     – Retail account (mom & pop) shareholders—likely to ignore MSOP votes (and all 
       other votes) unless something captures their attention and makes them want to 
       vote
     – Active investors short term (hedge funds opportunists etc ) looking for the
       Active investors—short‐term (hedge funds, opportunists, etc.)—looking for the 
       lowest cost response that will maximize short‐term share returns
     – Active investors—long‐term (mutual funds)—looking for low cost response that will 
       maximize long‐term share returns
     – Index investors—long‐term owners with little overhead costs from investment
       Index investors long term owners with little overhead costs from investment 
       activities – looking for most effective response that will result in the best long‐term 
       share returns possible
•   Interestingly, in the UK, it was the index investors which led the adoption 
    of MSOP votes. Largely because they had funds available due to their 
    of MSOP votes. Largely because they had funds available due to their
    structure and could not take a “Wall Street Walk” if a company began to 
    disappoint them
     – Felt the best way to improve on their investments was to agitate for change and 
       open dialogues with management and boards
        p         g              g
Shareholder Response to MSOP Proposals
     Shareholder Response to MSOP Proposals
Several Possible Shareholder Approaches to MSOP Votes
Shareholder 
Shareholder                                 Impact on Investment
                                                   on Investment     Impact if Broker Non‐Votes 
                                                                     Impact if Broker Non Votes
Approach              Cost to Shareholder   Decision                 Excluded                         Other
Ignore                Low                   Neutral                  Negative (a broker non‐vote);    Likely approach for retail 
                                                                     increases influence of           shareholders
                                                                     shareholders that vote
Support               Low                   Supports                 Positive                         Sound argument assuming 
Management                                                                                            same management as when 
                                                                                                      investment made
Abstain               Low                   Unknown / Negative       Negative                         Could be a negative if media 
                                            (depending on how 
                                            (depending on how                                         focuses on shareholders that
                                                                                                              on shareholders that 
                                            abstentions counted)                                      do nothing about excessive 
                                                                                                      pay
Develop Own           High                  Supports                 Unknown; to extent               Complicated, resource
Analysis                                                             shareholder owns significant     intensive task; unable to 
                                                                     stakes in many companies, 
                                                                     stakes in many companies         leverage
                                                                     could increase its influence
Outsource to Proxy    Medium (lowest        Unknown – could          Unknown; likely to increase      Provides “cover” for 
Advisor               relative cost for     support or be negative   influence of proxy advisors      shareholders at lowest cost 
                      informed vote)                                                                  possible; minimizes cost for 
                                                                                                      informed vote
                                                                                                      i f     d t
Glass Lewis (GL) Policies Regarding MSOP Proposals
            ( )             g     g         p

•   Will support MSOP proposals where:
     – Pay is aligned with performance, and
           i li d i h         f           d
     – Shareholders are provided with a clear, comprehensive discussion of the processes 
       and procedures related to executive compensation
•   Specifically, GL’s approach to evaluating MSOP proposals involves the 
    following:
    f ll
     – CD&A Analysis
          • Evaluates content and clarity, consists of a nuanced approach when assessing companies’ 
            rationale for significant adjustments made to performance metrics, target payouts, and 
            benchmarking
          • CD&A disclosure is rated based on a critique of several key elements, including:
                –   Whether the company provides a reasonable rationale for benchmarking at a specific percentile
                –   Its disclosure of performance metrics
                –   Its disclosure of how actual performance translates into pay decisions
                –   Its evaluation of a companies rationale for granting discretionary cash or equity awards and
                    Its evaluation of a companies’ rationale for granting discretionary cash or equity awards, and
                –   Its review of the extent to which performance plays a role in the granting of equity incentives
     – Proprietary Pay‐for‐Performance Analysis
          • Evaluates the relationship between relative executive compensation and relative performance
          • GL benchmarks the compensation of the NEOs to the compensation of the NEOs at peer 
            companies and compares the company’s performance to that of those same peers
                          d            h           ’     f           h   f h
RiskMetrics Group 
              Policies Regarding MSOP Proposals
              P li i R      di MSOP P        l
•   Assesses MSOP proposals on a case‐by‐case basis, considering the following 
    factors in light of a company s specific circumstances and the board s disclosed 
    factors in light of a company’s specific circumstances and the board’s disclosed
    rationale for its practices:
     – Relative Considerations
          •   Assessment of performance metrics relative to business strategy, as discussed and explained in the 
              CD&A
          •   Evaluation of peer groups used to set target pay or award opportunities
                  l       f                d                          d
          •   Alignment of company performance and executive pay trends over time (e.g., performance down; pay 
              down)
          •   Assessment of disparity between total pay of the CEO and other NEOs
     – Design Considerations
          •   Balance of fixed versus performance‐driven pay
                       ff                f
          •   Assessment of excessive practices with respect to perks, severance packages, SERPs, and burn rates
     – Communication Considerations
          •   Evaluation of information and board rationale provided in CD&A about how compensation is 
              determined
          •   Assessment of board’s responsiveness to investor input and engagement on compensation issues
•   RiskMetrics Group also will use MSOP proposals as the primary vehicle to address 
    “problematic pay practices”
RiskMetrics Group Problematic Pay Practices
              Group Problematic Pay Practices

• Problematic Pay Practices
   – Formerly referred to as “poor” pay practices
   – Now, two groups:
       • “Major”—can lead to negative vote recommendations if one exists; set out in the 
         2010 Policy Updates
       • “Minor”—can lead to negative vote recommendations if more than one exists; set 
         out in the 2010 Compensation FAQs
   – RMG will utilize MSOP proposals as the initial vehicle to address 
     problematic pay practices. RMG may recommend votes:
       • Against MSOP proposals
       • Against/Withhold from compensation committee members or, in rare cases where 
         full board is deemed responsible for the practice, all directors, or when no MSOP 
         item is on the ballot, or when the board has failed to respond to concerns raised in 
         prior MSOP evaluations
         prior MSOP evaluations
       • Against an equity‐based incentive plan proposal if excessive non‐performance‐
         based equity awards are the major contributor to a pay‐for‐performance 
         misalignment
   – List is extensive and detailed
Other Influential Voices
             Other Influential Voices

• Council of Institutional Investors
  Council of Institutional Investors
• The Corporate Library
Mandatory MSOP in 2011
            Mandatory MSOP in 2011

• MSOP proposals are required for 2011 and beyond (new 
          p p            q                      y    (
  reality for public companies in the U.S.)
• At least once every 6 years shareholders must be given an 
  opportunity to vote on the frequency of MSOP votes
         t it t       t   th f             f MSOP t
• Companies must provide a choice of voting every year, every 
  two years or every three years
       y             y      y
• Form will be a comprehensive vote (yes/no) on all the 
  executive compensation disclosed in the proxy— CD&A, 
  required tables and associated narrative
       i d bl          d    i d         i
So what does it all 
So what does it all
  mean to you??
Critical Questions to be Resolved
      Critical Questions to be Resolved

• Will SEC exempt smaller companies from MSOP for
  Will SEC exempt smaller companies from MSOP for 
  some period?
• What form will the vote on frequency take?
                                   q     y
• What changes will occur with shareholders whose 
  current stance is against MSOP?
                     g
• What will the final rules look like once all of the 
  details are settled?
• Will this change the frequency or levels of pay in a 
  measurable way?
Critical Steps as You Move Forward
      Critical Steps as You Move Forward

• Know your shareholder base, what they want and what they 
        y                       ,         y                   y
  do not like regarding your compensation policies, designs, 
  awards and payments
• O
  Open up lines of communication with your shareholders 
            li     f          i ti    ith    h h ld
  before next proxy season – both the investment and voting 
  sides of your institutional shareholders
• Understand what compensation issues your shareholders 
  could have with your company, and how those might 
  influence their vote on MSOP proposals and your directors
  influence their vote on MSOP proposals and your directors
Critical Steps as You Move Forward, cont.
 Critical Steps as You Move Forward, cont.

• Explore ways to address any perceived issues with your 
    p         y               yp                        y
  compensation
• Evaluate any compensation changes or tweaks through the 
  rubric of the MSOP vote so you can anticipate any negative 
    b i f th MSOP t                       ti i t             ti
  reaction that such changes or tweaks might engender and act 
  to minimize or address any shareholder concerns
• Review disclosures to ensure executive compensation is 
  understandable (plain English, executive summary, charts, 
  graphs, tables should be utilized as much as possible), the 
  graphs tables should be utilized as much as possible) the
  whys of compensation decisions are explained, and the 
  rationale for controversial pay practices is clearly articulated
Some Parting Thoughts on MSOP
       Some Parting Thoughts on MSOP
• Say on Pay is not a harbinger of doom
• Executive compensation at most companies is not likely to be 
  dramatically impacted
• We will continue to see growth in performance based pay but
  We will continue to see growth in performance‐based pay, but 
  variety may be stifled
• Companies with poor remuneration practices may see 
  positive shareholder value as a result of compensation 
      iti   h h ld        l           lt f          ti
  changes
• The real impact may be the need for improved 
  communication and explanation of compensation practices
   – This may be especially important for companies with adversarial 
     shareholder, but reasonable executive remuneration policies
Dodd‐Frank Wall Street Reform and 
    Consumer Protection Act
     Executive Compensation Provisions 
             (Sections 951–957)
Background
•   The following presentation walks through the highlights of the executive 
    compensation provisions contained in the Dodd‐Frank Wall Street Reform and 
    Consumer Protection Act. This presentation is based on the version of the bill 
    dated June 26, 2010 (5:27 p.m.) and posted on the House Committee on Financial 
    Services Web page: 
    Services Web page:
    http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/Finan
    cial_Regulatory_Reform062410.html (under Title IX—Investor Protections and 
    Improvements to the Regulation of Securities).
       p                     g                   )
•   Act was signed into law by President Obama, July 22, 2010



•   For more information about Exequity, please visit our Web site at www.exqty.com.
Overview  Part 1
                           Overview – Part 1
•   The Dodd‐Frank Wall Street Reform and Consumer Protection Act (Dodd‐Frank) 
    has several provisions that impact executive compensation, including:
     – A nonbinding shareholder vote on the compensation of executives as disclosed in the 
       proxy (“say on pay vote”) at least once every 3 years.
     – A nonbinding shareholder vote on the frequency of the say on pay vote at least once
       A nonbinding shareholder vote on the frequency of the say on pay vote at least once 
       every 6 years.
     – A nonbinding shareholder vote on golden parachutes.
     – Requirement for most public companies to have only independent directors on their 
       compensation committees.
                   i        i
     – Requirement for most public companies’ compensation committees to utilize only 
       independent compensation consultants and other advisors.
     – Mandate for most compensation committees to be given authority to retain a 
                              p                            g          y
       compensation consultant and independent legal counsel and other advisers, including 
       fiscal authority.
Overview  Part 2
                              Overview – Part 2
•   The Dodd‐Frank Wall Street Reform and Consumer Protection Act (Dodd‐Frank) 
    has several provisions that impact executive compensation, including:
     – Requirement for companies to disclose more information about executive 
       compensation, including:
          •   Pay versus performance;
              Pay versus performance;
          •   Median annual total compensation of all employees;
          •   CEO’s annual total compensation; and
          •   Ratio of median annual total compensation of all employees to that of the CEO.
     – Requirement for public companies to implement a clawback policy
       Requirement for public companies to implement a clawback policy.
     – Requirement for companies to disclose their policy with respect to executive and 
       director hedging of company equity securities.
     – Making covered financial institutions subject to enhanced compensation structure 
       reporting and prohibitions.
     – Eliminates broker votes on director elections, executive compensation, or any other 
       significant matter, as determined by the Securities and Exchange Commission (SEC), for 
                                   y
       uninstructed shares held by beneficial owners.
Golden Parachute Votes
                            Golden Parachute Votes
•   In any proxy for a meeting where shareholders will be asked to approve an acquisition, merger, 
    consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer (CIC), 
    consolidation or proposed sale or other disposition of all or substantially all the assets of an issuer (CIC)
    the following must be disclosed and a separate, nonbinding shareholder vote must be held to approve:
     –   Any agreements or understandings with named executive officers concerning any type of compensation that is based 
         on or otherwise relates to the acquisition, merger, consolidation, sale, or other disposition of all or substantially all 
         the assets of the issuer (“CIC Compensation”);
     –   The aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become 
         payable to or on behalf of such executive officer; and
•   Effective for shareholder meetings occurring more than 6 months after Dodd‐Frank is enacted.
•   This vote is not required if agreements or understandings were previously subject to a say on pay vote.

•   Issues/Concerns
     –   Broad definition of CIC Compensation; seems to include vesting of prior awards like IRC Section 280G. Thus, disclosure and vote 
         seems expansive.
     –   The rules specifically provide that no vote is necessary if previously approved in say on pay vote. If no design changes occur, will 
         a prior vote eliminate need to have vote in merger proxy? Can the  aggregate total be adequately disclosed and approved in a
         a prior vote eliminate need to have vote in merger proxy? Can the “aggregate total” be adequately disclosed and approved in a
         prior proxy?
     –   How (if at all) will this relate to the termination disclosures for named executive officers in proxies? Will this change the current 
         form of disclosure, either by rule or practice?
     –   What happens if the board has authorized CIC Compensation and contractually bound the company but shareholders don’t 
         agree? The shareholder vote is nonbinding—what will the practical consequence be? Can or will companies guard against such a 
         scenario, e.g., will contracts contain shareholder approval contingency clauses?
Compensation Committee Independence
    Compensation Committee Independence
•   Companies will not be permitted to be publicly listed unless their compensation 
    committees are composed entirely of independent directors.
    committees are composed entirely of independent directors
•   Definition of “independence” will be issued by the national securities exchanges 
    and associations, taking into consideration relevant factors, including:
     – The source of compensation of a director, including any consulting, advisory, or other 
       compensatory fee paid by the company to such director; and
       compensatory fee paid by the company to such director; and
     – Whether the director is affiliated with the company, a subsidiary, or an affiliate of a subsidiary.
•   The SEC shall permit national securities exchanges and associations to exempt a 
    particular relationship from the above requirements, taking into consideration the 
    size of the company and any other relevant factors.
                    p y         y
•   Issues/Concerns
     – We expect the definition of independence to be largely the existing definitions used by the 
       national securities exchanges and associations for audit committee members, tailored to 
       members of the compensation committee.
       members of the compensation committee
     – This requirement will put a final nail in the coffin of having nonindependent directors sit on a 
       compensation committee (which is now only a minor practice).
Independence of Compensation Consultants and 
   Other Compensation Committee Advisers
   Oh C            i C      i   Ad i
•   Compensation committees of public companies may only select a compensation consultant, legal counsel, or 
    other adviser ( advisers ) after taking into consideration the factors identified by the SEC.
    other adviser (“advisers”) after taking into consideration the factors identified by the SEC.
•   The SEC must identify factors that affect the independence of an adviser. 
     – Such factors shall be competitively neutral among categories of advisers and preserve the ability of 
          compensation committees to retain the services of members of any such category, and shall include:
            •   The provisions of other services to the company by the person that employs the adviser;
            •   The amount of fees received from the company by the person that employs the adviser, as a percentage of the 
                The amount of fees received from the company by the person that employs the adviser as a percentage of the
                total revenue of the person that employs the adviser;
            •   The policies and procedures of the person that employs the adviser that are designed to prevent conflicts of 
                interest;
            •   Any business or personal relationship of the adviser with a member of the compensation committee; and
            •      y                 p y            y
                Any stock of the company owned by the adviser.
•   The compensation committee, at its discretion, may retain the services of an adviser. However, this does not:
     – Require the compensation committee to implement or act consistently with the advice or recommendations 
         of the adviser; or
     – Affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of 
          the duties of the compensation committee.
          the duties of the compensation committee
•   Required disclosures—for any shareholder meeting occurring on or after the 1‐year anniversary of the date of 
    enactment of Dodd‐Frank, public companies will be required to disclose in their proxies whether:
     – The compensation committee retained or obtained the advice of a compensation consultant; and
     – The work of the compensation consultant has raised any conflict of interest and, if so, the nature of the 
          conflict and how it is being addressed.
          conflict and how it is being addressed
Independence of Compensation Consultants and 
   Other Compensation Committee Advisers 
   Other Compensation Committee Advisers
                 (Continued)
•   Companies that fail to comply with the requirements of this section of Dodd‐Frank will be 
    prohibited from being publicly listed; those failing to comply will be given a  reasonable 
    prohibited from being publicly listed; those failing to comply will be given a “reasonable
    opportunity to cure any defects” before their listing is prohibited.
•   SEC will permit the national securities exchanges and associations to exempt a category of issuers 
    from the compensation committee independence and independent adviser requirements.
     –   Shall take into account the potential impact on smaller reporting companies.
     –   Controlled companies shall be exempt from these requirements.
         Controlled companies shall be exempt from these requirements
           •   Controlled company is a company that is listed on a national securities exchange or association and holds an election for 
               the board of directors in which more than 50% of the voting power is held by an individual, a group, or another company.
•   The SEC must conduct a study and review of the use of compensation consultants and the effects of 
    such use and submit a report to Congress within 2 years after enactment of Dodd‐Frank on the 
    results of such study and review.

•   Issues/Concerns
     –   The language does permit compensation committees to engage any adviser they like so long as they at least 
         consider the factors to be promulgated by the SEC.
     –   However, consistent with current trends, these requirements will likely persuade a majority of companies to 
         engage independent advisers to advise their compensation committees.
                 i d     d t d i        t d i th i                ti         itt
     –   Unclear just how the factors mentioned in Dodd‐Frank will be applied by the SEC.
     –   The SEC regulations are unlikely to outright prohibit the consultant from providing any other services to the 
         company, but this may in practice become a compensation committee requirement. Note, this also applies 
         to other advisors such as legal counsel; this could result in committees engaging different legal counsel than 
         the counsel involved in other corporate matters.
                                           p
Executive Compensation Disclosures
         Executive Compensation Disclosures
•   Pay vs. Performance—SEC must require each company to disclose in any proxy for an annual meeting a clear 
    description of any compensation required to be disclosed under the proxy disclosure rules, including:
      – Information that shows the relationship between executive compensation actually paid and the financial 
          performance of the company, taking into account any change in the value of shares of stock and dividends 
          and any distributions; this disclosure may include a graphic.
•   Additional Disclosures—SEC shall require companies to disclose in any filing which requires disclosure regarding 
    the compensation of a company’s named executive officers:
      – ThThe median of the annual total compensation of all employees, except the CEO (Median Employee Annual 
                  di    f th        lt t l           ti    f ll    l            t th CEO (M di E l            A     l
          Compensation);
      – The annual total compensation of the CEO (CEO Annual Compensation); and 
      – The ratio of the Median Employee Annual Compensation to the CEO Annual Compensation.
             •   Total compensation is defined as it is for purposes of the Total Compensation column in the Summary 
                 Compensation Table.
                 Compensation Table

•   Issues/Concerns
      – Determining the Median Employee Annual Compensation will take a significant amount of work for companies with 
          large employee bases and/or operations in multiple countries. For example, total compensation includes annual 
          pension increases which can significantly increase the disclosure burden.
      – Since ratios will almost always be a sizeable multiple, it is likely to spark shareholder ire where company performance 
          is subpar. Note, again, that this ratio is done largely based on pay opportunity rather than actual pay realized, 
          particularly with respect to equity incentives. 
      – This pay ratio concept has historically been used to compare executive pay across various countries. However, it is 
          unlikely to guide future pay decisions nor allow for solid comparisons across companies. For example, outsourcing 
          decisions can have a material impact on the calculation.
Clawback Provision—Recovery of Erroneously 
          Awarded Compensation Policy
          A     d dC         i P li
•   Public companies can only be listed if they comply with the following requirements:
     –   Each company shall: 
           •   Disclose its policy on incentive‐based compensation that is based on financial information required to be reported 
               under the securities laws; and
           •   In the event that the company is required to prepare an accounting restatement due to the material noncompliance 
               of the company with any financial reporting requirement under the securities laws, recover from any current or 
               former executive officer who received incentive‐based compensation (including stock options awarded as 
               compensation) during the 3‐year period preceding the date on which the company is required to prepare an 
               accounting restatement, based on the erroneous data, in excess of what would have been paid to the executive 
               officer under the accounting restatement.

•   Issues/Concerns
     –   How will compensation that is based on or related to the movement in the company’s stock price be treated under this 
         required clawback policy? In other words, with respect to such awards, how can a company determine what “excess 
         amount” was paid if the stock price reflected the market’s understanding of the financial reporting information that was 
         restated?
     –   Will shareholders have the right to bring a derivative action under this provision if a company does not?
     –   How will this clawback provision interact with any mandatory holding periods a company has imposed on 
         company securities received by executives or directors, especially where the amounts held relate to a period prior to the 
         3‐year period prior to any required restatement?
     –   Can the  appropriate clawback amount be defined or must this by its nature require significant discretion?
         Can the “appropriate” clawback amount be defined or must this by its nature require significant discretion?
     –   How will other legal challenges be addressed (e.g., wage laws), if at all?
Disclosure Regarding Employee and Director 
                     Hedging
                     H d i
•   SEC shall require companies to disclose in any proxy for an annual meeting 
    whether any employee or member of the board of directors, or any 
    whether any employee or member of the board of directors or any
    designee of such employee or director, is permitted to purchase financial 
    instruments (including prepaid variable forward contracts, equity swaps, 
    collars, and exchange funds) that are designed to hedge or offset any 
    decrease in the market value of equity securities:
    decrease in the market value of equity securities:
     – Granted to the employee or director by the company as part of his compensation; 
       or
     – Held, directly or indirectly, by the employee or director.

•   Issues/Concerns
     – Given the Section 16 insider trading rules, hedging activities by officers and 
       directors were not prevalent practice.
     – However this will cause companies to formalize an anti hedging policy (if they have
       However, this will cause companies to formalize an anti‐hedging policy (if they have 
       not already done so) and apply the policy to all employees.
     – To the extent any employee or director is hedging, and the company is concerned 
       about disclosing such transactions, they may wish to undo these transactions prior 
       to the filing of their next proxy.
                   g               p y
Enhanced Compensation Structure Reporting for 
            Financial Companies
            Fi    i lC      i
•   Covered financial institutions will be subject to new rules and regulations to be promulgated by the 
    appropriate Federal regulators within 9 months after enactment of Dodd Frank.
    appropriate Federal regulators within 9 months after enactment of Dodd‐Frank.
•   These regulations will require each covered financial institution to disclose to the appropriate 
    Federal regulator the structures of all incentive‐based compensation arrangements offered by such 
    covered financial institutions sufficient to determine whether the compensation structure:
     –   Provides an executive officer, employee, director, or principal shareholder with excessive compensation, 
         fees, or benefits; or
             ,            ;
     –   Could lead to material financial loss to the covered financial institution.
•   Covered financial institutions with less than $1 billion of assets will be exempt from these 
    requirements.

•   Issues/Concerns
     –   Based on the review conducted by the Federal Reserve of large, complex banking organizations, it is 
         safe to assume that the appropriate Federal regulators will be looking to make significant changes 
         with respect to compensation, including requiring:
           •   Mandatory holding periods;
           •   A significant portion of compensation to be deferred; and
           •   Introducing an absolute metric governing payouts of any performance‐based compensation subject to relative 
               performance measures, e.g., relative total shareholder returns.
     –   We believe compensation at covered financial institutions will be transformed as a result of this 
         provision and the Federal Reserve’s recent review. It remains to be seen how compensation 
         programs will be changed and the impact this may have on financial institutions’ ability to attract, 
         motivate, and retain key talent.
         motivate and retain key talent
Voting by Brokers
                              Voting by Brokers
•   Dodd‐Frank prohibits brokers from voting securities unless the beneficial owner 
    has instructed the broker how to vote the proxy on the following matters:
    has instructed the broker how to vote the proxy on the following matters:
     – Election of directors;
     – Executive compensation; or
     – Any other significant matter, as determined by the SEC.
     But does not include the uncontested election of directors of any investment company.
     But does not include the uncontested election of directors of any investment company
•   Dodd‐Frank specifically does not prohibit a national securities exchange from 
    promulgating rules that would expand the list of such matters regarding which 
    brokers are prohibited from voting without instructions from the beneficial owner
•   Issues/Concerns
     – This provision will apply to the new mandatory say on pay votes regarding executive 
       compensation, which will have a negative impact on vote outcomes and likely will force 
       companies to evaluate whether a proxy solicitation campaign targeted at retail beneficial 
       owners is warranted.
       owners is warranted
     – Likely will increase the influence of proxy advisory firms as the broker votes are not counted 
       on the above issues.
About Robert McCormick
                       About Robert McCormick
•   Prior to joining Glass Lewis, Bob McCormick was the Director of Investment Proxy Research at Fidelity 
    Management & Research Co., which he joined in 1997. At Fidelity, he managed the proxy voting of more 
    Management & Research Co which he joined in 1997 At Fidelity he managed the proxy voting of more
    than 700 retail and mutual fund accounts, holding 4,000 domestic and international securities worth in 
    excess of $1 trillion. Prior to joining Fidelity, McCormick was a staff attorney at Keenan, Powers & Andrews 
    and Prudential Securities Incorporated, both in New York City. McCormick is an attorney who earned his 
    law degree from Quinnipiac University School of Law after graduating with honors from Providence 
    College. He serves on the International Corporate Governance Network’s Cross‐Border Voting Practices 
    and Securities Lending committees.

    Robert McCormick, Esq.
    rmccormick@glasslewis.com 
    rmccormick@glasslewis com
    415‐678‐4228 

•   www.glasslewis.com
About Ed Hauder
                                  About Ed Hauder
•   Edward Hauder—Senior Executive Compensation Advisor
     –   Senior advisor and practical thought leader: Ed is known industry wide as a leading advisor on executive 
         Senior advisor and practical thought leader: Ed is known industry‐wide as a leading advisor on executive
         compensation matters. He maintains long‐term relationships with numerous companies, serves on the 
         CompensationStandards.com Executive Compensation Task Force, maintains his acclaimed Equity 
         Compensation Blog, edwardhauder.com, and is a practical thought leader on compensation matters.
     –   Experience across a range of industries: Ed has consulted with hundreds of companies in multiple industries 
         on all aspects of executive and director compensation. Ed focuses on helping companies design 
         compensation programs that help them achieve their strategic goals and objectives, while at the same time 
         compensation programs that help them achieve their strategic goals and objectives while at the same time
         keeping them out of the penalty box with shareholders and the media. Ed also helps companies understand 
         and find practical solutions for technical matters impacting compensation, e.g., financial accounting, 
         securities, tax, and corporate governance issues. His expertise includes RiskMetrics Group (a.k.a. ISS) 
         compensation modeling and policies, which enabled him to create the Flexible Share Authorization to 
         maximize equity plan flexibility.
     –   Articles and quotes on compensation issues: Ed has recently written articles that have appeared in The 
         Articles and quotes on compensation issues: Ed has recently written articles that have appeared in The
         Corporate Board, workspan Weekly, BNA’s Executive Compensation Library, and Tax Management 
         Compensation Planning Journal. He has been quoted in such publications as BNA’s Pension & Benefits Daily, 
         Business Finance, Forbes, HR Magazine, and The NASPP Advisor.
     –   Background and education: Before joining Exequity, Ed was employed as a Principal at Buck Consultants 
         where he managed the Technical Solutions and Innovation Team. Prior to that, Ed was a member of Hewitt 
         Associates Executive Compensation Center of Technical Excellence Ed received a B A in International
         Associates’ Executive Compensation Center of Technical Excellence. Ed received a B.A. in International 
         Relations from Juniata College, a J.D., cum laude, from Seattle University School of Law, and an LL.M. (Tax), 
         with honors, from IIT‐Chicago‐Kent College of Law.
     –   Contact information: edward.hauder@exqty.com or (847) 996‐3990
         Ed’s Equity Compensation Plan Blog: www.edwardhauder.com
About Dan Walter
                                    About Dan Walter
•   Dan Walter, CEP, President and CEO of Performensation. 
     –   Dan has more than 15 years of experience assisting companies with both executive and broad‐based compensation programs. 
         He provides end‐to‐end solutions for private and public companies in both the United States and 
         abroad. 
     –   His clients have ranged from entrepreneurial start‐ups to established Fortune 100 companies 
         providing his clients with a unique perspective on compensation issues. 
         providing his clients with a unique perspective on compensation issues
     –   Dan’s expertise includes equity compensation, executive programs, performance‐based pay and 
         talent management issues. His experience with these programs includes: diagnosis, design, 
         communication, administration and reporting. Dan has experience with all forms of equity including 
         stock options, restricted shares and units, stock purchase and performance‐based programs. 
•   Phone: ofc: +1‐415‐625‐3405 | mobile: +1‐917‐734‐4649
•   Twitter: @performensation   |    Skype: performensation
•   LinkedIn: www.linkedin.com/in/danwalter
•   Performensation Website: www.performensation.com
•   Equity Compensation Experts: www.equitycompensationexperts.groupsite.com
•   CompensationCafe Blog: www.compensationcafe.com

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The Real Impact of Say on Pay and a Brief Update from the Dodd-Frank Bill

  • 1. The Real Impact of Say on Pay and a Brief  Th R l I t fS P d Bi f Updated from the Dodd‐Frank Wall Street  Reform and Consumer Protection Act Hosted by: New York‐New Jersey Chapter of the NASPP July 23, 2010
  • 2. Today s Presenters Today’s Presenters • Dan Walter, President and CEO, Dan Walter, President and CEO,  Performensation  • Ed Hauder, Senior Advisor, Exequity • Robert McCormick, Esq., Chief Policy  Officer, Glass Lewis 
  • 3. What is Say on Pay? What is Say on Pay? • “Say on Pay” (SOP) is used to refer to: y y ( ) – Shareholder proposals asking companies to put executive  compensation and/or policies to a non‐binding shareholder vote • As yet, there is no agreement on how companies should respond or how As yet, there is no agreement on how companies should respond or how  SOP will work – The populist view demands a vote on compensation policy and/or pay levels – Institutional investors appear to be more interested in regular  pp g discussion with Compensation Committees to ensure pay systems  align with operating strategies
  • 4. What is Management Say on Pay? What is Management Say on Pay? • Management SOP (MSOP) proposals asking shareholders to  g ( )p p g approve by a non‐binding vote, the company’s executive  compensation and policies; in one of two forms (at the  moment): – Mandatory MSOPs—where the company is required to provide  shareholders with an MSOP vote because of a regulation or law, i.e.,  participants in TARP or CPP are required to provide shareholders with  participants in TARP or CPP are required to provide shareholders with an MSOP vote and public companies incorporated in North Dakota are  required to provide an MSOP vote to shareholders – Voluntary MSOPs where the company has voluntarily Voluntary MSOPs—where the company has voluntarily  adopted/provided an MSOP vote to shareholders when not required  to do so by any regulation or law
  • 5. What is Say on Pay meant to provide? What is Say on Pay meant to provide? • Ability for shareholders to voice their opinion on pay policies y p p yp – Not a vote on specific compensation pay packages or elements – Origin in is current form goes back to 2003, in the United Kingdom – Now policy in many countries including: Netherlands Australia Now policy in many countries including: Netherlands, Australia,  Sweden, Norway • Symbolic or does it change compensation philosophy and  execution?
  • 6. The Historical Form and Timing of MSOP  Proposals P l Form and Timing of MSOP Proposals ■ Several approaches to MSOP proposals have appeared, though pending legislation and associated  regulations could dictate the approach that must be taken Comprehensive Vote (Yea or Nay) Segmented Vote Other Mechanisms Formulations vary CD&A and tables vary—CD&A and tables,  Vote separately on different aspects of  Vote separately on different aspects of Survey of investor views of investor views  CD&A only; approval vs. ratification;  the program, e.g., philosophy,  (Schering‐Plough, Amgen) annual vs. biannual vs. triennial decisions in previous year (RMG) Hold meetings with large shareholders  Advantage is that a single vote is  CEO compensation is within 20% of an  (Pfizer,  simple  acceptable amount and director  Occidental Petroleum) Disadvantage is that a single vote does  compensation is within 20% of an  compensation is within 20% of an Solicit feedback from shareholders on  not permit differentiation and is a blunt  acceptable amount (Littlefield) executive compensation disclosure  instrument that does not provide  Advantage is that these can provide for  (Prudential) meaningful input more meaningful feedback Shareholder e‐forum (Verizon) Disadvantage is that it is more  complicated and risks  li d d ik micromanagement Timing issues—how often will an MSOP be presented to shareholders? Basic approach taken by  Annually—typical structure among voluntary adopters; structure required for TARP/CPP companies Dodd‐Frank Biennially—Bristol‐Myers Squibb; Colgate‐Palmolive; General Mills Triennially—Microsoft
  • 7. Historical Perspective  Historical Perspective ‐ US • Shareholder proposals fared fairly well in 2008 and 2009 • Several companies voluntarily agreed to adopt such SOP proposals, with some  Several companies voluntarily agreed to adopt such SOP proposals, with some starting in 2009, including:
  • 8. Historical Perspective  Historical Perspective ‐ US • Effective February 17, 2009, the U.S. federal government required a non‐ binding vote on executive compensation at all TARP/CPP companies • Legislation was proposed in 2009 that would have required say on pay  proposals at all public companies – The House of Representatives approved the Wall Street Reform and Consumer  Protection Act of 2009 (H.R. 4173) that would require an annual, non‐binding,  separate shareholder vote to approve the compensation of executives as  disclosed in the compensation committee report, the CD&A, the tables, and  disclosed in the compensation committee report the CD&A the tables and any related materials • SOP shareholder proposals were also the second highest governance  proposals put forward for the 2010 proxy season (58 reported by  proposals put forward for the 2010 proxy season (58 reported by RiskMetrics) • July 22, 2010 – Dodd Frank Wall Street Reform and Consumer Protection  Act is signed by President Obama Act is signed by President Obama
  • 9. Voluntary Adoption of MSOP Proposals Voluntary Adoption of MSOP Proposals • Companies that have voluntarily adopted MSOP proposals include: AFLAC Edison International Littlefield State Street* Alaska Air Group Fifth Third Bancorp* Logitech Steris American Express* Forest Laboratories MBIA SunOpta Ameriprise Financial Frontier Communications Microsoft SUPERVALU Apple Goldman Sachs Group* Mobile Mini SYSCO Berkshire Hills Bancorp Hain Celestial Group Morgan Stanley* Tech Data Blockbuster Hill‐Rom Holdings Motorola Tecumseh Products Bristol‐Myers Squibb Honeywell International Occidental Petroleum PNC Financial* Capital One Financial* Ingersoll‐Rand Pacific Gas & Electric Tupperware Brands Charming Shoppes Intel Par Pharmaceutical US Bancorp* CoBiz Financial* C Bi Fi i l* Intuit I t it Pfizer Pfi Valero Energy V l E Colgate‐Palmolive Jones Apparel Group PG&E Wells Fargo* CVS Caremark JPMorgan Chase* Prudential Windstream Ecolab Lexmark International Southern California Edison Zale * TARP/CPP company that has since repaid funds to U.S. government, but has or will voluntarily include a MSOP proposal in its proxies
  • 10. 2010 Voting on MSOP Proposals 2010 Voting on MSOP Proposals All MSOP Proposals—Passed and Failed  Voluntary MSOP Proposals—Passed and Failed (n = 194) ( ) (n = 47) ( ) All MSOP Voting Results Voluntary MSOP Voting Results 5/27/2010 ‐ YTD ‐ Available Results 5/27/2010 ‐ YTD ‐ Available Results 100.0% 100.0% 90.0% 90.0% 93.4% 93.2% 90.8% 92.1% 80.0% 80.0% 70.0% 77.5% 70.0% 75.3% 60.0% 60.0% 50.0% Average 50.0% Average 90.4% 88.5% 88.0% 86.8% 40.0% Median 40.0% Median 75.7% 73.8% 30.0% 30.0% 20.0% 20 0% 20.0% 20 0% 10.0% 10.0% 0.0% 0.0% For/F+A% For/F+A+AB% For/Outstanding For/F+A% For/F+A+AB% For/Outstanding
  • 11. 2010 Voting on MSOP Votes That Failed 2010 Voting on MSOP Votes That Failed MSOP Votes that Failed through May 27, 2010 Votes Against %  Votes Against % Votes For %  Votes For % 70.0% 60.0% 50.0% 57.5% 49.6% 49 6% 40.0% 43.6% KEY 42.5% 30.0% 36.7% MOT 54.3% 50.9% 45.6% 45.7% OXY 20.0% 38.4% 10.0% 53.5% 45.7% 46.8% 46.5% 39.6% 0.0% A+ABS/F+A+ABS A+ABS/CSO F/F+A F/F+A+ABS F/CSO Actual Vote Figures Company C For (F) F (F) Against (A) A i t (A) Abstain (ABS) Ab t i (ABS) CSO* KeyCorp 322,682,561 418,099,427 17,693,063 878,960,282 Motorola 887,793,923 855,021,547 201,440,789 2,314,437,239 Occidental Petroleum 321,676,254 365,053,432 5,722,279 812,155,102 *As of the proxy record date
  • 12. 2010 Voting on MSOP Proposals That Failed 2010 Voting on MSOP Proposals That Failed What were the MSOP proposals that failed?  What were the MSOP proposals that failed? Company Resolution Voted on by Shareholders KeyCorp  “RESOLVED, that the shareholders approve KeyCorp’s executive compensation, as  (required) described in the Compensation Discussion and Analysis and the tabular disclosure  regarding named executive officer compensation (together with the accompanying  narrative disclosure) in this Proxy Statement. “ Motorola "Resolved, that the stockholders approve the overall executive compensation policies  (voluntary) and procedures employed by the Company, as described in the Compensation  Discussion and Analysis regarding named executive officer compensation (together  with the accompanying narrative disclosure) in this Proxy Statement."
  • 13. 2010 Voting on MSOP Proposals That Failed 2010 Voting on MSOP Proposals That Failed What were the MSOP proposals that failed? p p Company Resolution Voted on by Shareholders Occidental Petroleum “RESOLVED, that the stockholders approve the company’s compensation philosophy, objectives and policies as  (voluntary) described below: p p g g , Occidental’s executive compensation program is designed to attract, motivate and retain outstanding  g executives, to incentivize them to achieve superior performance in the pursuit of Occidental’s long‐term strategic  objectives and to reward them for unique or exceptional contributions to overall sustainable value creation for  stockholders and the attainment of long‐ and short‐term performance targets. Specifically, the program is designed to: Maintain a clear linkage between performance and compensation by ensuring that a high percentage of the  Maintain a clear linkage between performance and compensation by ensuring that a high percentage of the total compensation of executive officers is “at‐risk”, i.e., contingent on the achievement of objectively  identifiable performance targets; Apply clear performance measures and associated time horizons that measure both long‐term stockholder  value creation and the consistent annual execution of Occidental’s business plan; Develop and execute a business model that produces returns well in excess of Occidental’s estimated cost of  D l d t b i d l th t d t ll i f O id t l’ ti t d t f capital by focusing compensation targets on the following key elements of value creation: capital allocation, risk  management, cash flow, and financial strength and flexibility; and Align executive and stockholder interests by requiring a substantial ongoing equity ownership position for  executives.”
  • 15. 2010 Voting on MSOP Proposals That Failed 2010 Voting on MSOP Proposals That Failed • KeyCorp Summary: pay for performance disconnect; STI plan  y p y p y p ; p more discretionary and performance results only generally  referenced; same metrics used for both STI and LTI increasing  KEY s risk profile KEY’s risk profile • Motorola Summary: increase of $8 MM in Dr. Jha’s payment if  separation does not occur; Dr. Jha’s amended agreement  includes a modified excise tax gross‐up provision; and, MOT  i l d difi d i ii d MOT adjusted results for the MIP program in an inconsistent manner • Occidental Summary: repeated failure to address: pay  y p p y magnitude; pay disparity; peer group disparity; and,  performance target issues
  • 16. International Experience with MSOP Votes International Experience with MSOP Votes Advisory / /  Date  Date Country Binding What is voted on? implemented U.K. Advisory,  Director’s Remuneration Report, which covers pay  2003 annual policy for next year(s) and prior year’s compensation  for each director (executive) ( ) Netherlands Binding,  Binding vote to adopt the remuneration policy for  Oct. 2004 upon policy  executives and major changes to existing policy. Annual  change Remuneration Report itself is not subject to the  shareholder vote Australia Advisory,  Remuneration Report, which discloses compensation  July 2005 annual practices for directors and NEOs for past year Sweden Binding,  Guidelines for remuneration of senior executives CG Code:  annual July 2005;  July 2005; Law: July 2006 Norway Binding,  Remuneration policy for senior management for  Jan. 2007 annual coming year Source: What International Markets Say on Pay, An Investor Perspective, Institutional Investor Services, April 2007. S Wh t I t ti lM k t S P A I t P ti I tit ti lI t S i A il 2007
  • 17. International Experience with MSOP Votes UK International Experience with MSOP Votes—UK • MSOP votes were required for public companies in the U.K.  q p p starting in 2003 after adoption of the UK’s Directors’  Remuneration Report Regulations 2002 on August 1, 2002 – Statement of company’s policy on directors’ [executives ]  Statement of company s policy on directors [executives’] remuneration (set forth in Appendix) • The goals of the MSOP movement in the UK were: – Improve the linkage between pay and performance – Empower shareholders and improve shareholder democracy – Create greater focus and ownership of compensation process by  g p p p y remuneration committees – Engage shareholders on remuneration policies in genera
  • 18. International Experience with MSOP Votes UK  International Experience with MSOP Votes—UK Significant UK Shareholder Rejections of Remuneration Resolutions Source: RiskMetrics G S Ri kM t i Group
  • 19. International Experience with MSOP Votes UK International Experience with MSOP Votes—UK Reasons for UK Shareholders’ opposing, abstaining, or voting for an MSOP proposal Voting against: Voting to abstain: Voting in support: A variety of issues can cause concern: No evidence of excess and a  Clear disclosure of the main aspects of remuneration  Performance conditions have been  good level of disclosure; but  (ie, performance criteria, maximum awards, any  changed which causes them to be  salaries have been increased  departures from normal practices/scheme details) easier to meet y year on year and there is no  y justifiable reason as to why No evidence of excess High levels of pay and there is no real  link to the performance achieved, or  Overall, there are no structural  Clear link between pay levels and performance to be achieved issues but there is a general  lack of disclosure and there is  Clear alignment of the interests of shareholders and  Annual bonuses continue to rise and  Annual bonuses continue to rise and scope for more information to  scope for more information to directors through robust remuneration practices directors through robust remuneration practices salaries continue to increase, perhaps  be disclosed and for the  double digit salary increases become  company to be more  Remuneration committee demonstrates behaviors  a pattern transparent that protect the interests of shareholders whilst  offering pay packages and remuneration policies  Structural issues and overall lack of  which allow incentivisation and retention performance linkage Performance targets for the long‐term incentive  Performance targets do not align  plans do support the long‐term strategic plan of the  with the long‐term strategy of the  company company Source: Say on Pay, Six Years On, Lessons from the UK Experience, a report by Railpen Investments and PIRC Limited (September 2009)
  • 20. Empirical Evidence:  Research from the UK Empirical Evidence: Research from the UK • Say on Pay does not have a great impact on most companies • June 2008 Study • Academic Paper by Fabrizio Ferri and  David Maber Harvard Business  School  – No evidence that Say on Pay changed the levels or growth of executive  compensation – Higher sensitivity of CEO cash and total pay to negative operating  performance f
  • 21. Empirical Evidence: Cautionary UK  research h • August 2009 Study • Jeffrey N. Gordon, Columbia University – The details of pay‐for‐performance may be too complex to effectively  communicate to shareholders – Annual voting requirement may result in a narrow range of  compensation best practices – Smaller firms would be unlikely to benefit for Say on Pay and  restrictions to act like larger firms, may negatively impact their ability  t i ti t t lik l fi ti l i t th i bilit to grow – Truly abnormal pay may be limited to a large companies in a small  group of industries  group of industries
  • 22. Empirical Evidence: Research from the US and UK p • Say on Pay may create shareholder value y y y • August 2009 Study • Jie Cai and Ralph A. Walkling, Drexel University  – St k f fi Stocks of firms with the highest abnormal CEO pay and low pay‐for‐ ith th hi h t b l CEO dl f performance sensitivity react in a significant, positive manner to the  Say‐on‐Pay – M More value created in companies with strong ownership by “vote‐no”  l t di i ith t hi b “ t ” mutual funds. Dissenting voice creates pressure for change.
  • 23. International Experience with MSOP Votes—Australia  p • Australia’s Proposed Changes to MSOP Votes – The Productivity Commission (PC) released a review of executive pay in Australia in  h d i i i i ( ) l d i f i i li i January 2010 – The Australian government responded to the PC’s report in April 2010 and  indicated it would introduce legislation to implement many of the PC’s 17  recommendations, including the  two strikes proposal for MSOP votes recommendations including the “two strikes” proposal for MSOP votes – As currently proposed, the two strikes proposal for MSOP votes would work as  follows: • A minimum 25% “no” vote on remuneration report triggers reporting obligation on how  concerns addressed, and • A subsequent “no” vote of at least 25% activates a resolution for elected directors to submit for  re‐election within 90 days – Unclear whether this would apply to the entire board, or just the remuneration committee or  chair – Additionally, the proposals with which the Australian government agreed included: • Prohibiting key management personnel from voting undirected proxies on remuneration  resolutions, and • Prohibiting key management personnel that hold shares from voting on their own  remuneration arrangements
  • 24. Companies that will be most impacted by MSOP Companies that will be most impacted by MSOP • Companies with excessive or ineffective executive  compensation • Companies with independent‐mind shareholders who are  willing to challenge management willing to challenge management • Companies that have historically responded positively to  shareholder pressure
  • 25. Shareholder Response to MSOP Proposals Shareholder Response to MSOP Proposals • Shareholder response to MSOP votes is likely to be heavily influenced by  the type of shareholder they are: the type of shareholder they are – Retail account (mom & pop) shareholders—likely to ignore MSOP votes (and all  other votes) unless something captures their attention and makes them want to  vote – Active investors short term (hedge funds opportunists etc ) looking for the Active investors—short‐term (hedge funds, opportunists, etc.)—looking for the  lowest cost response that will maximize short‐term share returns – Active investors—long‐term (mutual funds)—looking for low cost response that will  maximize long‐term share returns – Index investors—long‐term owners with little overhead costs from investment Index investors long term owners with little overhead costs from investment  activities – looking for most effective response that will result in the best long‐term  share returns possible • Interestingly, in the UK, it was the index investors which led the adoption  of MSOP votes. Largely because they had funds available due to their  of MSOP votes. Largely because they had funds available due to their structure and could not take a “Wall Street Walk” if a company began to  disappoint them – Felt the best way to improve on their investments was to agitate for change and  open dialogues with management and boards p g g
  • 26. Shareholder Response to MSOP Proposals Shareholder Response to MSOP Proposals Several Possible Shareholder Approaches to MSOP Votes Shareholder  Shareholder Impact on Investment on Investment  Impact if Broker Non‐Votes  Impact if Broker Non Votes Approach Cost to Shareholder Decision Excluded Other Ignore Low Neutral Negative (a broker non‐vote);  Likely approach for retail  increases influence of  shareholders shareholders that vote Support  Low Supports Positive Sound argument assuming  Management same management as when  investment made Abstain Low Unknown / Negative  Negative Could be a negative if media  (depending on how  (depending on how focuses on shareholders that on shareholders that  abstentions counted) do nothing about excessive  pay Develop Own  High Supports Unknown; to extent  Complicated, resource Analysis shareholder owns significant  intensive task; unable to  stakes in many companies,  stakes in many companies leverage could increase its influence Outsource to Proxy  Medium (lowest  Unknown – could  Unknown; likely to increase  Provides “cover” for  Advisor relative cost for  support or be negative influence of proxy advisors shareholders at lowest cost  informed vote) possible; minimizes cost for  informed vote i f d t
  • 27. Glass Lewis (GL) Policies Regarding MSOP Proposals ( ) g g p • Will support MSOP proposals where: – Pay is aligned with performance, and i li d i h f d – Shareholders are provided with a clear, comprehensive discussion of the processes  and procedures related to executive compensation • Specifically, GL’s approach to evaluating MSOP proposals involves the  following: f ll – CD&A Analysis • Evaluates content and clarity, consists of a nuanced approach when assessing companies’  rationale for significant adjustments made to performance metrics, target payouts, and  benchmarking • CD&A disclosure is rated based on a critique of several key elements, including: – Whether the company provides a reasonable rationale for benchmarking at a specific percentile – Its disclosure of performance metrics – Its disclosure of how actual performance translates into pay decisions – Its evaluation of a companies rationale for granting discretionary cash or equity awards and Its evaluation of a companies’ rationale for granting discretionary cash or equity awards, and – Its review of the extent to which performance plays a role in the granting of equity incentives – Proprietary Pay‐for‐Performance Analysis • Evaluates the relationship between relative executive compensation and relative performance • GL benchmarks the compensation of the NEOs to the compensation of the NEOs at peer  companies and compares the company’s performance to that of those same peers d h ’ f h f h
  • 28. RiskMetrics Group  Policies Regarding MSOP Proposals P li i R di MSOP P l • Assesses MSOP proposals on a case‐by‐case basis, considering the following  factors in light of a company s specific circumstances and the board s disclosed  factors in light of a company’s specific circumstances and the board’s disclosed rationale for its practices: – Relative Considerations • Assessment of performance metrics relative to business strategy, as discussed and explained in the  CD&A • Evaluation of peer groups used to set target pay or award opportunities l f d d • Alignment of company performance and executive pay trends over time (e.g., performance down; pay  down) • Assessment of disparity between total pay of the CEO and other NEOs – Design Considerations • Balance of fixed versus performance‐driven pay ff f • Assessment of excessive practices with respect to perks, severance packages, SERPs, and burn rates – Communication Considerations • Evaluation of information and board rationale provided in CD&A about how compensation is  determined • Assessment of board’s responsiveness to investor input and engagement on compensation issues • RiskMetrics Group also will use MSOP proposals as the primary vehicle to address  “problematic pay practices”
  • 29. RiskMetrics Group Problematic Pay Practices Group Problematic Pay Practices • Problematic Pay Practices – Formerly referred to as “poor” pay practices – Now, two groups: • “Major”—can lead to negative vote recommendations if one exists; set out in the  2010 Policy Updates • “Minor”—can lead to negative vote recommendations if more than one exists; set  out in the 2010 Compensation FAQs – RMG will utilize MSOP proposals as the initial vehicle to address  problematic pay practices. RMG may recommend votes: • Against MSOP proposals • Against/Withhold from compensation committee members or, in rare cases where  full board is deemed responsible for the practice, all directors, or when no MSOP  item is on the ballot, or when the board has failed to respond to concerns raised in  prior MSOP evaluations prior MSOP evaluations • Against an equity‐based incentive plan proposal if excessive non‐performance‐ based equity awards are the major contributor to a pay‐for‐performance  misalignment – List is extensive and detailed
  • 30. Other Influential Voices Other Influential Voices • Council of Institutional Investors Council of Institutional Investors • The Corporate Library
  • 31. Mandatory MSOP in 2011 Mandatory MSOP in 2011 • MSOP proposals are required for 2011 and beyond (new  p p q y ( reality for public companies in the U.S.) • At least once every 6 years shareholders must be given an  opportunity to vote on the frequency of MSOP votes t it t t th f f MSOP t • Companies must provide a choice of voting every year, every  two years or every three years y y y • Form will be a comprehensive vote (yes/no) on all the  executive compensation disclosed in the proxy— CD&A,  required tables and associated narrative i d bl d i d i
  • 32. So what does it all  So what does it all mean to you??
  • 33. Critical Questions to be Resolved Critical Questions to be Resolved • Will SEC exempt smaller companies from MSOP for Will SEC exempt smaller companies from MSOP for  some period? • What form will the vote on frequency take? q y • What changes will occur with shareholders whose  current stance is against MSOP? g • What will the final rules look like once all of the  details are settled? • Will this change the frequency or levels of pay in a  measurable way?
  • 34. Critical Steps as You Move Forward Critical Steps as You Move Forward • Know your shareholder base, what they want and what they  y , y y do not like regarding your compensation policies, designs,  awards and payments • O Open up lines of communication with your shareholders  li f i ti ith h h ld before next proxy season – both the investment and voting  sides of your institutional shareholders • Understand what compensation issues your shareholders  could have with your company, and how those might  influence their vote on MSOP proposals and your directors influence their vote on MSOP proposals and your directors
  • 35. Critical Steps as You Move Forward, cont. Critical Steps as You Move Forward, cont. • Explore ways to address any perceived issues with your  p y yp y compensation • Evaluate any compensation changes or tweaks through the  rubric of the MSOP vote so you can anticipate any negative  b i f th MSOP t ti i t ti reaction that such changes or tweaks might engender and act  to minimize or address any shareholder concerns • Review disclosures to ensure executive compensation is  understandable (plain English, executive summary, charts,  graphs, tables should be utilized as much as possible), the  graphs tables should be utilized as much as possible) the whys of compensation decisions are explained, and the  rationale for controversial pay practices is clearly articulated
  • 36. Some Parting Thoughts on MSOP Some Parting Thoughts on MSOP • Say on Pay is not a harbinger of doom • Executive compensation at most companies is not likely to be  dramatically impacted • We will continue to see growth in performance based pay but We will continue to see growth in performance‐based pay, but  variety may be stifled • Companies with poor remuneration practices may see  positive shareholder value as a result of compensation  iti h h ld l lt f ti changes • The real impact may be the need for improved  communication and explanation of compensation practices – This may be especially important for companies with adversarial  shareholder, but reasonable executive remuneration policies
  • 37. Dodd‐Frank Wall Street Reform and  Consumer Protection Act Executive Compensation Provisions  (Sections 951–957)
  • 38. Background • The following presentation walks through the highlights of the executive  compensation provisions contained in the Dodd‐Frank Wall Street Reform and  Consumer Protection Act. This presentation is based on the version of the bill  dated June 26, 2010 (5:27 p.m.) and posted on the House Committee on Financial  Services Web page:  Services Web page: http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/Finan cial_Regulatory_Reform062410.html (under Title IX—Investor Protections and  Improvements to the Regulation of Securities). p g ) • Act was signed into law by President Obama, July 22, 2010 • For more information about Exequity, please visit our Web site at www.exqty.com.
  • 39. Overview  Part 1 Overview – Part 1 • The Dodd‐Frank Wall Street Reform and Consumer Protection Act (Dodd‐Frank)  has several provisions that impact executive compensation, including: – A nonbinding shareholder vote on the compensation of executives as disclosed in the  proxy (“say on pay vote”) at least once every 3 years. – A nonbinding shareholder vote on the frequency of the say on pay vote at least once A nonbinding shareholder vote on the frequency of the say on pay vote at least once  every 6 years. – A nonbinding shareholder vote on golden parachutes. – Requirement for most public companies to have only independent directors on their  compensation committees. i i – Requirement for most public companies’ compensation committees to utilize only  independent compensation consultants and other advisors. – Mandate for most compensation committees to be given authority to retain a  p g y compensation consultant and independent legal counsel and other advisers, including  fiscal authority.
  • 40. Overview  Part 2 Overview – Part 2 • The Dodd‐Frank Wall Street Reform and Consumer Protection Act (Dodd‐Frank)  has several provisions that impact executive compensation, including: – Requirement for companies to disclose more information about executive  compensation, including: • Pay versus performance; Pay versus performance; • Median annual total compensation of all employees; • CEO’s annual total compensation; and • Ratio of median annual total compensation of all employees to that of the CEO. – Requirement for public companies to implement a clawback policy Requirement for public companies to implement a clawback policy. – Requirement for companies to disclose their policy with respect to executive and  director hedging of company equity securities. – Making covered financial institutions subject to enhanced compensation structure  reporting and prohibitions. – Eliminates broker votes on director elections, executive compensation, or any other  significant matter, as determined by the Securities and Exchange Commission (SEC), for  y uninstructed shares held by beneficial owners.
  • 41. Golden Parachute Votes Golden Parachute Votes • In any proxy for a meeting where shareholders will be asked to approve an acquisition, merger,  consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer (CIC),  consolidation or proposed sale or other disposition of all or substantially all the assets of an issuer (CIC) the following must be disclosed and a separate, nonbinding shareholder vote must be held to approve: – Any agreements or understandings with named executive officers concerning any type of compensation that is based  on or otherwise relates to the acquisition, merger, consolidation, sale, or other disposition of all or substantially all  the assets of the issuer (“CIC Compensation”); – The aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become  payable to or on behalf of such executive officer; and • Effective for shareholder meetings occurring more than 6 months after Dodd‐Frank is enacted. • This vote is not required if agreements or understandings were previously subject to a say on pay vote. • Issues/Concerns – Broad definition of CIC Compensation; seems to include vesting of prior awards like IRC Section 280G. Thus, disclosure and vote  seems expansive. – The rules specifically provide that no vote is necessary if previously approved in say on pay vote. If no design changes occur, will  a prior vote eliminate need to have vote in merger proxy? Can the  aggregate total be adequately disclosed and approved in a a prior vote eliminate need to have vote in merger proxy? Can the “aggregate total” be adequately disclosed and approved in a prior proxy? – How (if at all) will this relate to the termination disclosures for named executive officers in proxies? Will this change the current  form of disclosure, either by rule or practice? – What happens if the board has authorized CIC Compensation and contractually bound the company but shareholders don’t  agree? The shareholder vote is nonbinding—what will the practical consequence be? Can or will companies guard against such a  scenario, e.g., will contracts contain shareholder approval contingency clauses?
  • 42. Compensation Committee Independence Compensation Committee Independence • Companies will not be permitted to be publicly listed unless their compensation  committees are composed entirely of independent directors. committees are composed entirely of independent directors • Definition of “independence” will be issued by the national securities exchanges  and associations, taking into consideration relevant factors, including: – The source of compensation of a director, including any consulting, advisory, or other  compensatory fee paid by the company to such director; and compensatory fee paid by the company to such director; and – Whether the director is affiliated with the company, a subsidiary, or an affiliate of a subsidiary. • The SEC shall permit national securities exchanges and associations to exempt a  particular relationship from the above requirements, taking into consideration the  size of the company and any other relevant factors. p y y • Issues/Concerns – We expect the definition of independence to be largely the existing definitions used by the  national securities exchanges and associations for audit committee members, tailored to  members of the compensation committee. members of the compensation committee – This requirement will put a final nail in the coffin of having nonindependent directors sit on a  compensation committee (which is now only a minor practice).
  • 43. Independence of Compensation Consultants and  Other Compensation Committee Advisers Oh C i C i Ad i • Compensation committees of public companies may only select a compensation consultant, legal counsel, or  other adviser ( advisers ) after taking into consideration the factors identified by the SEC. other adviser (“advisers”) after taking into consideration the factors identified by the SEC. • The SEC must identify factors that affect the independence of an adviser.  – Such factors shall be competitively neutral among categories of advisers and preserve the ability of  compensation committees to retain the services of members of any such category, and shall include: • The provisions of other services to the company by the person that employs the adviser; • The amount of fees received from the company by the person that employs the adviser, as a percentage of the  The amount of fees received from the company by the person that employs the adviser as a percentage of the total revenue of the person that employs the adviser; • The policies and procedures of the person that employs the adviser that are designed to prevent conflicts of  interest; • Any business or personal relationship of the adviser with a member of the compensation committee; and • y p y y Any stock of the company owned by the adviser. • The compensation committee, at its discretion, may retain the services of an adviser. However, this does not: – Require the compensation committee to implement or act consistently with the advice or recommendations  of the adviser; or – Affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of  the duties of the compensation committee. the duties of the compensation committee • Required disclosures—for any shareholder meeting occurring on or after the 1‐year anniversary of the date of  enactment of Dodd‐Frank, public companies will be required to disclose in their proxies whether: – The compensation committee retained or obtained the advice of a compensation consultant; and – The work of the compensation consultant has raised any conflict of interest and, if so, the nature of the  conflict and how it is being addressed. conflict and how it is being addressed
  • 44. Independence of Compensation Consultants and  Other Compensation Committee Advisers  Other Compensation Committee Advisers (Continued) • Companies that fail to comply with the requirements of this section of Dodd‐Frank will be  prohibited from being publicly listed; those failing to comply will be given a  reasonable  prohibited from being publicly listed; those failing to comply will be given a “reasonable opportunity to cure any defects” before their listing is prohibited. • SEC will permit the national securities exchanges and associations to exempt a category of issuers  from the compensation committee independence and independent adviser requirements. – Shall take into account the potential impact on smaller reporting companies. – Controlled companies shall be exempt from these requirements. Controlled companies shall be exempt from these requirements • Controlled company is a company that is listed on a national securities exchange or association and holds an election for  the board of directors in which more than 50% of the voting power is held by an individual, a group, or another company. • The SEC must conduct a study and review of the use of compensation consultants and the effects of  such use and submit a report to Congress within 2 years after enactment of Dodd‐Frank on the  results of such study and review. • Issues/Concerns – The language does permit compensation committees to engage any adviser they like so long as they at least  consider the factors to be promulgated by the SEC. – However, consistent with current trends, these requirements will likely persuade a majority of companies to  engage independent advisers to advise their compensation committees. i d d t d i t d i th i ti itt – Unclear just how the factors mentioned in Dodd‐Frank will be applied by the SEC. – The SEC regulations are unlikely to outright prohibit the consultant from providing any other services to the  company, but this may in practice become a compensation committee requirement. Note, this also applies  to other advisors such as legal counsel; this could result in committees engaging different legal counsel than  the counsel involved in other corporate matters. p
  • 45. Executive Compensation Disclosures Executive Compensation Disclosures • Pay vs. Performance—SEC must require each company to disclose in any proxy for an annual meeting a clear  description of any compensation required to be disclosed under the proxy disclosure rules, including: – Information that shows the relationship between executive compensation actually paid and the financial  performance of the company, taking into account any change in the value of shares of stock and dividends  and any distributions; this disclosure may include a graphic. • Additional Disclosures—SEC shall require companies to disclose in any filing which requires disclosure regarding  the compensation of a company’s named executive officers: – ThThe median of the annual total compensation of all employees, except the CEO (Median Employee Annual  di f th lt t l ti f ll l t th CEO (M di E l A l Compensation); – The annual total compensation of the CEO (CEO Annual Compensation); and  – The ratio of the Median Employee Annual Compensation to the CEO Annual Compensation. • Total compensation is defined as it is for purposes of the Total Compensation column in the Summary  Compensation Table. Compensation Table • Issues/Concerns – Determining the Median Employee Annual Compensation will take a significant amount of work for companies with  large employee bases and/or operations in multiple countries. For example, total compensation includes annual  pension increases which can significantly increase the disclosure burden. – Since ratios will almost always be a sizeable multiple, it is likely to spark shareholder ire where company performance  is subpar. Note, again, that this ratio is done largely based on pay opportunity rather than actual pay realized,  particularly with respect to equity incentives.  – This pay ratio concept has historically been used to compare executive pay across various countries. However, it is  unlikely to guide future pay decisions nor allow for solid comparisons across companies. For example, outsourcing  decisions can have a material impact on the calculation.
  • 46. Clawback Provision—Recovery of Erroneously  Awarded Compensation Policy A d dC i P li • Public companies can only be listed if they comply with the following requirements: – Each company shall:  • Disclose its policy on incentive‐based compensation that is based on financial information required to be reported  under the securities laws; and • In the event that the company is required to prepare an accounting restatement due to the material noncompliance  of the company with any financial reporting requirement under the securities laws, recover from any current or  former executive officer who received incentive‐based compensation (including stock options awarded as  compensation) during the 3‐year period preceding the date on which the company is required to prepare an  accounting restatement, based on the erroneous data, in excess of what would have been paid to the executive  officer under the accounting restatement. • Issues/Concerns – How will compensation that is based on or related to the movement in the company’s stock price be treated under this  required clawback policy? In other words, with respect to such awards, how can a company determine what “excess  amount” was paid if the stock price reflected the market’s understanding of the financial reporting information that was  restated? – Will shareholders have the right to bring a derivative action under this provision if a company does not? – How will this clawback provision interact with any mandatory holding periods a company has imposed on  company securities received by executives or directors, especially where the amounts held relate to a period prior to the  3‐year period prior to any required restatement? – Can the  appropriate clawback amount be defined or must this by its nature require significant discretion? Can the “appropriate” clawback amount be defined or must this by its nature require significant discretion? – How will other legal challenges be addressed (e.g., wage laws), if at all?
  • 47. Disclosure Regarding Employee and Director  Hedging H d i • SEC shall require companies to disclose in any proxy for an annual meeting  whether any employee or member of the board of directors, or any  whether any employee or member of the board of directors or any designee of such employee or director, is permitted to purchase financial  instruments (including prepaid variable forward contracts, equity swaps,  collars, and exchange funds) that are designed to hedge or offset any  decrease in the market value of equity securities: decrease in the market value of equity securities: – Granted to the employee or director by the company as part of his compensation;  or – Held, directly or indirectly, by the employee or director. • Issues/Concerns – Given the Section 16 insider trading rules, hedging activities by officers and  directors were not prevalent practice. – However this will cause companies to formalize an anti hedging policy (if they have However, this will cause companies to formalize an anti‐hedging policy (if they have  not already done so) and apply the policy to all employees. – To the extent any employee or director is hedging, and the company is concerned  about disclosing such transactions, they may wish to undo these transactions prior  to the filing of their next proxy. g p y
  • 48. Enhanced Compensation Structure Reporting for  Financial Companies Fi i lC i • Covered financial institutions will be subject to new rules and regulations to be promulgated by the  appropriate Federal regulators within 9 months after enactment of Dodd Frank. appropriate Federal regulators within 9 months after enactment of Dodd‐Frank. • These regulations will require each covered financial institution to disclose to the appropriate  Federal regulator the structures of all incentive‐based compensation arrangements offered by such  covered financial institutions sufficient to determine whether the compensation structure: – Provides an executive officer, employee, director, or principal shareholder with excessive compensation,  fees, or benefits; or , ; – Could lead to material financial loss to the covered financial institution. • Covered financial institutions with less than $1 billion of assets will be exempt from these  requirements. • Issues/Concerns – Based on the review conducted by the Federal Reserve of large, complex banking organizations, it is  safe to assume that the appropriate Federal regulators will be looking to make significant changes  with respect to compensation, including requiring: • Mandatory holding periods; • A significant portion of compensation to be deferred; and • Introducing an absolute metric governing payouts of any performance‐based compensation subject to relative  performance measures, e.g., relative total shareholder returns. – We believe compensation at covered financial institutions will be transformed as a result of this  provision and the Federal Reserve’s recent review. It remains to be seen how compensation  programs will be changed and the impact this may have on financial institutions’ ability to attract,  motivate, and retain key talent. motivate and retain key talent
  • 49. Voting by Brokers Voting by Brokers • Dodd‐Frank prohibits brokers from voting securities unless the beneficial owner  has instructed the broker how to vote the proxy on the following matters: has instructed the broker how to vote the proxy on the following matters: – Election of directors; – Executive compensation; or – Any other significant matter, as determined by the SEC. But does not include the uncontested election of directors of any investment company. But does not include the uncontested election of directors of any investment company • Dodd‐Frank specifically does not prohibit a national securities exchange from  promulgating rules that would expand the list of such matters regarding which  brokers are prohibited from voting without instructions from the beneficial owner • Issues/Concerns – This provision will apply to the new mandatory say on pay votes regarding executive  compensation, which will have a negative impact on vote outcomes and likely will force  companies to evaluate whether a proxy solicitation campaign targeted at retail beneficial  owners is warranted. owners is warranted – Likely will increase the influence of proxy advisory firms as the broker votes are not counted  on the above issues.
  • 50. About Robert McCormick About Robert McCormick • Prior to joining Glass Lewis, Bob McCormick was the Director of Investment Proxy Research at Fidelity  Management & Research Co., which he joined in 1997. At Fidelity, he managed the proxy voting of more  Management & Research Co which he joined in 1997 At Fidelity he managed the proxy voting of more than 700 retail and mutual fund accounts, holding 4,000 domestic and international securities worth in  excess of $1 trillion. Prior to joining Fidelity, McCormick was a staff attorney at Keenan, Powers & Andrews  and Prudential Securities Incorporated, both in New York City. McCormick is an attorney who earned his  law degree from Quinnipiac University School of Law after graduating with honors from Providence  College. He serves on the International Corporate Governance Network’s Cross‐Border Voting Practices  and Securities Lending committees. Robert McCormick, Esq. rmccormick@glasslewis.com  rmccormick@glasslewis com 415‐678‐4228  • www.glasslewis.com
  • 51. About Ed Hauder About Ed Hauder • Edward Hauder—Senior Executive Compensation Advisor – Senior advisor and practical thought leader: Ed is known industry wide as a leading advisor on executive  Senior advisor and practical thought leader: Ed is known industry‐wide as a leading advisor on executive compensation matters. He maintains long‐term relationships with numerous companies, serves on the  CompensationStandards.com Executive Compensation Task Force, maintains his acclaimed Equity  Compensation Blog, edwardhauder.com, and is a practical thought leader on compensation matters. – Experience across a range of industries: Ed has consulted with hundreds of companies in multiple industries  on all aspects of executive and director compensation. Ed focuses on helping companies design  compensation programs that help them achieve their strategic goals and objectives, while at the same time  compensation programs that help them achieve their strategic goals and objectives while at the same time keeping them out of the penalty box with shareholders and the media. Ed also helps companies understand  and find practical solutions for technical matters impacting compensation, e.g., financial accounting,  securities, tax, and corporate governance issues. His expertise includes RiskMetrics Group (a.k.a. ISS)  compensation modeling and policies, which enabled him to create the Flexible Share Authorization to  maximize equity plan flexibility. – Articles and quotes on compensation issues: Ed has recently written articles that have appeared in The  Articles and quotes on compensation issues: Ed has recently written articles that have appeared in The Corporate Board, workspan Weekly, BNA’s Executive Compensation Library, and Tax Management  Compensation Planning Journal. He has been quoted in such publications as BNA’s Pension & Benefits Daily,  Business Finance, Forbes, HR Magazine, and The NASPP Advisor. – Background and education: Before joining Exequity, Ed was employed as a Principal at Buck Consultants  where he managed the Technical Solutions and Innovation Team. Prior to that, Ed was a member of Hewitt  Associates Executive Compensation Center of Technical Excellence Ed received a B A in International Associates’ Executive Compensation Center of Technical Excellence. Ed received a B.A. in International  Relations from Juniata College, a J.D., cum laude, from Seattle University School of Law, and an LL.M. (Tax),  with honors, from IIT‐Chicago‐Kent College of Law. – Contact information: edward.hauder@exqty.com or (847) 996‐3990 Ed’s Equity Compensation Plan Blog: www.edwardhauder.com
  • 52. About Dan Walter About Dan Walter • Dan Walter, CEP, President and CEO of Performensation.  – Dan has more than 15 years of experience assisting companies with both executive and broad‐based compensation programs.  He provides end‐to‐end solutions for private and public companies in both the United States and  abroad.  – His clients have ranged from entrepreneurial start‐ups to established Fortune 100 companies  providing his clients with a unique perspective on compensation issues.  providing his clients with a unique perspective on compensation issues – Dan’s expertise includes equity compensation, executive programs, performance‐based pay and  talent management issues. His experience with these programs includes: diagnosis, design,  communication, administration and reporting. Dan has experience with all forms of equity including  stock options, restricted shares and units, stock purchase and performance‐based programs.  • Phone: ofc: +1‐415‐625‐3405 | mobile: +1‐917‐734‐4649 • Twitter: @performensation   |    Skype: performensation • LinkedIn: www.linkedin.com/in/danwalter • Performensation Website: www.performensation.com • Equity Compensation Experts: www.equitycompensationexperts.groupsite.com • CompensationCafe Blog: www.compensationcafe.com