The NASPP Blog

December 21, 2010

Say-on-Pay: What You Can Do

For many stock plan administrators, all the press about Say-on-Pay has been just noise. Companies have been submitting their stock plans for shareholder approval for years, decades even, and stock plan administration often isn’t involved with cash-based executive pay, so what role does stock plan administration have here?

Say-on-Pay=Golden Opportunity?

But, I think that Say-on-Pay is a great opportunity for stock plan administrators to show that they deserve a seat at the table when it comes to designing compensation programs. Stock is likely to be a big part of your executives’ compensation and, likewise, a big part of the CD&A. You can help by making sure the folks drafting the CD&A are aware of which features in your stock plans are likely to draw shareholder criticism–and, therefore, may require additional explanation–and which features are likely to please shareholders–and, therefore, should be highlighted. You might even want recommend changes in your stock compensation programs that would make them more shareholder friendly.

The Critical First Year

I see this first year of Say-on-Pay as critical. Clearly, if shareholders have past grievances against your executive pay programs that they don’t feel have been attended to, this is an opportunity for them to express their ire. But, even more important than the Say-on-Pay vote, is the Say-on-Pay frequency vote–in which shareholders decide whether they want to vote on your executive compensation programs every one, two, or three years.

A well-crafted CD&A that addresses all shareholder concerns is critical this year. You want shareholders to feel absolutely confident about the decisions the company is making about executive compensation, so they don’t feel that they need to vote on the compensation every year (or even every two years).

Write a Memo

Now would be a great time to draft a memo for your manager that highlights the good, the bad, and the ugly in the stock compensation paid to your executives, with appropriate recommendations on how each issue might be addressed (or emphasized, for the good stuff) in the CD&A.

The Bad (and the Ugly)

To get you started, here are few stock-compensation related features that can irritate shareholders. If any of these apply to your stock plans, special discussion in the CD&A may be warranted:

  • Repricing, especially without shareholder approval
  • Mega grants
  • Grants made when your stock was at its low point that are now producing windfalls for executives
  • Paying dividends on unvested performance awards or units
  • Tax gross-ups
  • Performance awards where the performance criteria is too easily achieved or that are paid out even if the goals aren’t achieved
  • Liberal change-in-control provisions (e.g., CIC provisions that allow awards to be paid out even if the deal doesn’t close)

Of course, it goes without saying that discounted stock options are a problem, but, with the backdating scandal mostly behind us and 409A firmly in place, I doubt many, if any companies, still have any of these. Oddly enough, however, shareholders sometimes show an aversion to even at-the-money options over say, full value awards. So if you are still granting predominately stock options to execs, this may bear some discussion, depending on how enlightened your shareholders are.

The Good

And, here’s the flip side–stock compensation-related features that you want to emphasize to your shareholders:

  • Performance awards with appropriately challenging targets and where the board retains (negative) discretion over payouts
  • Hold-through-retirement policies and share retention requirements
  • Clawback and non-complete (and similar) provisions
  • Award deferral programs (a risk-mitigation strategy, similar to stock retention requirements)
  • Double-triggers and other responsible CIC provisions
  • Anti-hedging policies

And More…

Of course, neither of the above is a complete list–this is a blog that is already too long, not an unabridged compendium of executive compensation. If you missed the 18th Annual NASPP Conference, there were a number of sessions presented on Say-on-Pay and executive compensation that provide further information on shareholder hot buttons–purchase the audio for any and all of the these sessions. And the NASPP’s Plan Design Portal has some great articles that might also help with your memo.

Time is Running Out!
All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!  Don’t wait any longer–you have less than two weeks left to take advantage of this offer!

This offer is also available to anyone the joins the NASPP before December 31–tell all your friends!

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara