This presentation was given July 23, 2010 by Ed Hauder of Exequity, Robert McCormick of Glass Lewis and Dan Walter of Performensation to the New York/New Jersey Chapter of the National Association of Stock Plan Professionals.
It provides a comprehensive look at how Say on Pay has impacted executive compensation in Europe, Australia and the US. The presentation also provides a drill down into each of the executive compensation provisions included in the Dodd-Frank Wall Street Reform and Consumer Protection law, sign July 21, 2010.
Direct Access to Recorded Session: http://bit.ly/c3kXnM
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
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
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
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.
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• 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.
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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