The NASPP Blog

I realize the title of my blog is somewhat broad – I mean, I’m guessing that highly paid CEOs have a lot in common (a nice office, fancy cars, access to private jets, world travel…). Alright, daydreaming aside, I’ll kill the suspense and answer my own question. In today’s blog I’m angling for an answer along the lines of “at least $95M each in income last year from stock compensation”.

With a rallying stock market, a legendary IPO and other favorable factors, the 10 most highly paid CEOs in 2012 (based on a recent poll by GMI Ratings – a corporate governance rating group) all earned in excess of $100M. The top two in that group earned in excess of a billion dollars. “Ah, so what?”, I thought. Then I looked a little closer and realized that that largest cash bonus in that group was $9.5M. The landslide majority of that compensation all came from stock compensation – both restricted stock and stock options.

It’s been a banner couple of years for executive pay. Once again, equity compensation appears to be squarely on top of the executive compensation pie. Of course the concerns about disproportionate gains (executives who are winning big while shareholders still are not) have surfaced, too. I’m going to avoid that discussion today, but if you’re interested in more on that topic, see Broc Romanek’s recent blog. Remember, the GMI Ratings information reflects 2012 compensation. With the stock market soaring, it seems that 2013 may even outpace 2012 in terms of realized gains on stock compensation.

When I start to see such record gains from stock compensation, and the corresponding publicity, I think about several things that stock administrators should consider:

• Prepare for trading activity. As year-end draws near and the stock market is going gangbusters, this seems to be the perfect combination for increased trading activity from executives. Even those with 10b5-1 plans may still lead to increased activity – if the 10b5-1 plan was based on a series of limit orders, those limits may execute quickly in an up market. Tax and financial advisers may also encourage executives to liquidate some of their position for one reason or another. This means there could be a surge in executives looking to trade in the coming weeks (requiring availability for pre-clearance procedures, and assurance the executive knows who to contact to execute the transaction).
• Consider whether there will be say-on-pay considerations for your upcoming proxy season. Is your company up for a say-on-pay vote this coming proxy season? With record executive compensation, there is bound to be scrutiny as to how those gains compare to shareholder returns. This opens the window to more of a microscope when the say-on-pay filter is applied. Even if you don’t get overly involved in the proxy preparation, given that a huge portion of executive compensation may have come from stock option or restricted stock transactions, you may need to be more involved in providing information for the disclosures. Now, for those who yawn at the mention of say-on-pay, let me just go tangential for a second to say that as of last week, there were 64 companies so far this year with a failed say-on-pay vote – already exceeding the 61 failures in all of 2012. So this is not an area where bygones have become bygones.
• Is it time to beef up year-end communications? Have you been considering sprucing up the old examples you use in your year-end communications? With an up stock market, I’m guessing the equity compensation windfalls may not be limited to just executives. With more employees cashing in on market gains, they are bound to be more interested in your year-end communications. Now’s the time to consider enhancing those communications with more detail and timely examples in order to proactively address employee questions. Remember, this is the first year some of those quirky taxes (like the additional medicare withholding rate) kick in, so employees may not be fully aware of how they may be or have been affected by these changes.

Who doesn’t love a good stock market rally? As keepers of the stock plans, this is what we hope for when we issue those grants and/or awards. Try to keep that in mind during those times when volume of transactions is up, and more year-end preparation is needed.

-Jennifer