Our Executive Director, Barbara Baksa, has dedicated a couple of blogs (“CEO Pay Ratio Disclosure Rules” and “More on the CEO Pay Ratio Disclosure Rules“) to helping all of us understand the new CEO Pay Ratio disclosure rules that were adopted by the SEC last month. Although the new disclosures aren’t imminent, companies still need to prepare. The mechanics of that has already been covered here in the NASPP Blog, so today I’m going to cover some of the more philosophical aspects of the new CEO pay ratio disclosure rules.
Another in a Long Line of Changes?
We’ve seen a lot of changes to executive compensation requirements and related disclosures over the past several years. Dodd-Frank’s Say-on-Pay gave shareholders a stronger voice when it comes to executive compensation matters. Last month the SEC adopted final CEO Pay Ratio disclosure rules that essentially require public companies to disclose the ratio of CEO pay relative to the pay of a median employee. Some are wondering – is this yet another attempt to reign in executive compensation?
The Real Impact?
One question that arises from all these changes – what has the true impact been on executive compensation? Have oversized, outsized, CEO packages become a distant memory? Many experts don’t seem to think so as of yet. The question then becomes, will the new CEO pay ratio disclosure rules really do anything to right-size executive pay? One of my favorite assessments of the situation came from a New York Times article (“Why Putting a Number to C.E.O. Pay Might Bring Change“) on the subject, which quoted Charles Elson, professor of finance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware as saying,“The pay ratio was designed to inflame the employees. When they read that number, employees are going to say, ‘Why is this person getting paid so much more than me?’ I think the serious discontent will force boards to reconsider their organizations’ pay schemes.”
Shareholders have had more of a say for a while now. The latest approach seems to be to give shareholders (but really employees) a very simple number to explain how the CEO’s pay relates to that of the “median” employee – which in the employee’s case would undoubtedly cause them to compare their own pay to not only the CEO, but that of their median peer. I can see where this may lead – it’s quite possible many organizations will have incensed employees, especially those who realize their pay is below that of the median employee. In addition to preparing for the mechanics of the disclosures, companies should be thinking about how to handle the optics of the disclosure with their employees. It may be time to consider some changes to compensation programs now, in advance of the disclosure. If companies do anticipate some delicate situations as a result of the disclosure, they should craft a communication strategy well in advance. The earlier you get ahead of the curve on this one, the better. The last thing needed is a hit to employee morale.
There are no pay ratio disclosures yet, so it’s hard to tell just how large the pay ratios will be. According to the same New York Times article cited above, a 2014 study by Alyssa Davis and Lawrence Mishel at the Economic Policy Institute, a left-leaning advocacy group in Washington, showed that chief executive pay as a multiple of the typical worker’s earnings zoomed from an average of 20 times in 1965 to almost 300 in 2013.
For Some CEOs, Pay is Not the Most Important Thing
Not all CEOs need the optics of a pay ratio disclosure to evaluate the appropriateness of their compensation. Earlier this week, the CompensationStandards.com blog shared the story of a CEO who actually returned his RSU to the company, saying that “he does not believe that he should receive such an award unless Plum Creek’s stockholders see an increase in their investment return.” The estimated value of the RSU shares that were handed back to the company was about $1.85 million. From the appearance of it, the company’s board awarded the CEO a retention RSU grant. Several months later, facing tough economic times and lower than hoped company performance, the CEO approached the board and basically said he’s giving back the award because he didn’t deserve it. So clearly there are great examples of CEOs who are really focused on making sure their pay truly aligns with performance. I’d be interested to see the CEO pay ratio disclosure for that company, but we’ve still got quite a while for that – until the 2018 proxy season.
It’s not too early to start planning for the disclosure and evaluate current compensation practices and communication opportunities.
And the Winners Are…
We have three winners! Three of our Family Feud candidates in last week’s contest turned out to be very popular with voters. We happened to have an extra spot so we decided to include all three of them in our “families” for the game. Our winners are (in alphabetical order):
Terry Adamson of Aon Hewitt
Emily Cervino of Fidelity
Elizabeth Dodge of Stock & Option Solutions
Congratulations to our winners and a big thank-you to all of our candidates for putting themselves out there and being good sports.
Take Our Poll and Win an Amazon.com Gift Certificate
You know you’ve always wanted to participate in a Family Feud survey! Now is your chance. Complete our survey by this Friday, September 4, and you’ll be entered in a raffle for a $100 Amazon.com gift certificate (and you’ll be able to cross “Family Feud survey” off your bucket list)!
Read All About It: Global Equity Incentives Survey
The NASPP and PwC have just published the executive summary for our 2015 Global Equity Incentives Survey. Check it out today and don’t miss our webcast highlighting the results on September 22.
NASPP To Do List
Here’s your NASPP To Do List for the week:
I needed a quick blog entry for today (Jenn is on vacation), so I decided to do another poll with questions that have been posted recently to the NASPP’s discussion forum. If they apply to you, please take a moment to indicate your answers so we can help these folks out. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll). Thanks for indulging me!
Who Gets Your Vote? Vote for who you’d like to see on the keynote panel for “Family Feud: NASPP Style” at the 23rd Annual NASPP Conference. And don’t forget to register for the Conference!
Meeting Magic: 3 Tips for More Meaningful Meetings
Check out Andrea Best’s most recent blog in the NASPP Career Center on how to make your meetings more effective.
Read All About It: Global Equity Incentives Survey
The NASPP and PwC have just published the executive summary for our 2015 Global Equity Incentives Survey. Check it out today and don’t miss our webcast highlighting the results on September 22.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Vote for your favorite for the “Family Feud: NASPP Style” keynote at the 23rd Annual NASPP Conference.
Read Andrea Best’s latest blog in the NASPP Career Center and get more out of your meetings.
Check out the executive summary for the NASPP and PwC 2015 Global Equity Incentives Survey.
Register for the 23rd Annual NASPP Conference. Register today—the current price is only available through this Friday, August 21!
The “Top Compensation Consultants: Survivor Edition” keynote at last year’s NASPP Conference was so successful that we have decided to continue to infotainment theme for this year’s keynote with “Family Feud: NASPP Style.”
Just like the real Family Feud, we’ll be conducting polls in advance (but on hot issues in stock and executive compensation, not on what you have in your refrigerator). Our “families” will consist of industry luminaries who will try to guess the poll results and will offer their commentary on the topics du jour. I think it will be a lot of fun, but will also be an interesting juxtaposition of popular vs. expert opinions on some of today’s most controversial topics.
Vote for the Speakers!
We have identified most of our family members, but we still have two open slots. For those slots, we have decided to give our community a chance to participate. Back in July, we collected nominations for “family members.” Eight industry luminaries were nominated—vote for your favorite today.
Here are the rules:
You can only vote for one candidate and you can only vote once.
You can campaign on behalf of your favorite candidate (or yourself, if you are a candidate).
No write-ins.
The poll is open until 5:00 PM Pacific on Monday, August 31.
The two candidates that receive the most votes will be included in the families.
Chicago: Bill Gerek and Kevin McLaren of Hay Group present “Hay Group & The Wall Street Journal’s 2014 CEO Compensation Study.” (Tuesday, August 25, 7:30 AM)
Seattle: Barbara Klementz of Baker & McKenzie presents “Global Updates — Catching Up and Keeping Up with the Latest Global Equity News.” (Tuesday, August 25, 11:30 AM
We thought summer was going to be quiet, but it doesn’t ever really happen that way, does it? One of the main buzz points of summer 2015 has been the FASB’s proposed amendments to ASC 718, which has been heavily covered in prior NASPP blog entries (“The NASPP’s Comment Letter” (8/18/2015) and “It’s Here! The FASB’s Amendments to ASC 718” (6/9/2015) as well as the NASPP Alert: “FASB Issues Exposure Draft of ASC 718 Amendments.” There’s a lot of information out there about the proposed amendments to ASC 718, and we recently asked some industry experts to weigh in on which amendments are the most significant, along with things to consider in preparation for the eventual implementation of final changes.
First, a Shameless Plug for Podcasting
We tackled the topic of the proposed amendments to ASC 718 in a recent podcast interview with Takis Makridis of Equity Methods and AmyLynn Flood of PwC. Before I tell you what they said, I need to make my occasional plug for podcasting. If you’re not listening to the NASPP Equity Expert Podcast, start now! A podcast is like a mini webcast, minus the slides. Most of the episodes are short – in the 20 minute range – perfect listening in the car on the train or during transition points of your day. It’s portable, people. All you need is your phone, a podcast app, and headphones. The NASPP Equity Expert podcast is free – to everyone – members and non members. So if you want to stay on top of the hottest topics in the world of stock plans, subscribe to our podcast today.
Key Areas to Watch
Now we can return to the topic at hand. In speaking with Takis and AmyLynn, I asked them which amendments proposed by the FASB are the most significant to our stock plans. They suggested that share withholding for tax payments, tax accounting, and forfeiture rate changes are some of the most substantial areas to monitor.
Additionally, the podcast covered some interesting insights into some of the public sentiment reflected in comment letters submitted to the FASB (the deadline for comment submissions was 8/14/2015 – click here to read the NASPP’s comment letter). Not all of the proposed changes are seeming to be welcome changes.
What’s Next?
While no specific timeline has emerged from the FASB, and nobody has a reliable crystal ball, both Takis and AmyLynn agreed that it was conceivable to have a final draft of the amendments by sometime during the fourth quarter of 2015. In the meantime, companies should engage in internal discussions about how the proposed changes would impact current practices and procedures.
Extended! Last Chance to Save on the NASPP Conference
In response to overwhelming demand resulting from the SEC’s announcement of the final CEO pay ratio disclosure rules last week, we have extended the deadline to take advantage of the discounted rate for the 23rd Annual NASPP Conference through next Friday, August 21. Don’t miss out—register today!
Just Added: Pay Ratio Workshop
To help attendees prepare for CEO pay ratio disclosure, the Proxy Disclosure Preconference on October 27 now includes a special Pay Ratio Workshop that will be held online via audio webcast on Tuesday, August 25. Only attendees of the Proxy Disclosure Preconference are eligible to attend the Pay Ratio Workshop. Register for this preconference program by Friday, August 21 to take advantage of the discounted price and gain access to the Aug 25 Pay Ratio Workshop.
The Proxy Disclosure Preconference will be held on October 27 in San Diego, in advance of the 23rd Annual NASPP Conference.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Register for the 23rd Annual NASPP Conference. Register today—the current price is only available through this Friday, August 7!
Last week, the SEC adopted the final CEO pay ratio disclosure rules. I’ve been on vacation, so I don’t have a lot to say about them, but Broc Romanek’s blog on ten things to know about the rules is better than anything I could have written anyway, so I’m just going to repeat that here:
1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new “Top 10″ Lists in a couple years. Highest and lowest pay ratios. Although the rules aren’t effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules do not require companies to report pay ratio disclosures until fiscal years beginning after January 1, 2017.
2. You Don’t Need to Identify a New Median Employee Every Year! This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there’s a change in employee population or employee compensation arrangements). Your still need to disclose a pay ratio every year—but you don’t have to go through the hassle of conducting a median employee cost analysis every year. During those two years when you rely on a prior-calculated median employee, your CEO pay is the variable.
3. Pick Your Employee Base Within Three Months of FYE: The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don’t count folks not yet employed by that date—but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).
4. Independent Contractors Aren’t Employees: Duh.
5. Part-Time Employees Can’t Be Equivalized: The rules prohibit companies from full-time equivalent adjustments for part-time workers—or annualizing adjustments for temporary and seasonal workers—when calculating pay ratios.
6. Non-US Employees & the Whole 5% Thing: For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:
– Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules require a company to obtain a legal opinion on this issue—can you say “cottage industry”!
– Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.
7. Don’t Count New Employees From Deals (This Year): The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)
8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay: The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).
9. Alternative Ratios & Supplemental Disclosure Permitted: Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they’re clearly identified, not misleading nor presented with greater prominence than the required ratio).
10. Register NOW for the Proxy Disclosure Preconference and August 25 Pay Ratio Workshop:Register now before the discount ends next Friday, August 21. The Proxy Disclosure Preconference will be held on October 27, in advance of the NASPP Conference in San Diego. Registration for the Proxy Disclosure Preconference also includes access to a special online Pay Ratio Workshop that will be offered on August 25. The Course Materials will include model disclosures and more. Act by Friday, August 21 to save!
Here’s what’s happening at your local NASPP chapter this week.
DC/VA/MD: Greg Kopp and Marty Somelofske of Hay Group present results from the Hay Group/ The Wall Street Journal 2014 CEO Compensation study. The meeting will be followed by a cocktail reception. (Tuesday, August 11, at 3:30 PM)
Philadelphia: Robert Purser of E*TRADE and Gina Klein and Kerri McKenna of PwC present “FASB Proposed Changes and the Impact to Stock Plan Administration.” (Tuesday, August 11, 2:30 PM)
Dallas: Andy Ryser of Ernst & Young presents “ESPP: Design & Technical Aspects.” (Thursday, August 13, 7:30 AM)