As announced yesterday, we’ve extended the deadline to participate in the Domestic Stock Plan Administration Survey that the NASPP co-sponsors with Deloitte Consulting. For today’s blog entry, I have six things I am excited about learning from this year’s survey.
Domestic Mobility Compliance: New this year, we’ve added questions on tax compliance for domestically mobile employees. This is an area of increasing risk and I’m curious to learn how far companies have come in their compliance procedures.
ESPP Trends: This survey takes an in-depth look at the design and administration of ESPP plans. I hear rumors of increased interest in ESPPs—both in terms of companies implementing new plans and enhancing the benefits in their existing plans; I’m excited to see if this plays out in the survey results.
Stock Plan Administration Staffing: This is the only survey I’m aware of that collects data on how stock plan administration teams are staffed, the department that stock plan administration reports up through, and how companies administer their plans. It is always intriguing to see the trends in this area.
Ownership Guidelines: The prevalence of ownership guidelines has increased dramatically in the last decade, with 80% of respondents to the 2014 survey reporting that they have these guidelines in place. Has this trend topped out or will we be reaching near universal adoption of ownership guidelines in this survey?
Rule 10b5-1 Plans: These trading plans have become de rigueur for public company executives, with 84% of respondents to the 2014 survey allowing or requiring them. We’ve expanded this area of the survey to capture more data on policies and practices with respect to these plans.
Director Pay: The survey reports the latest trends in the use of equity in compensating outside directors. I’m particularly interested in seeing what percentage of respondents indicate that they have imposed a limit on the number of shares that can be granted to directors. This is a best practice to avoid shareholder litigation but adoption of it was low in the 2014 survey—have we made progress on this in the past three years?
If you are interested in these trends, too, you’re going to want to participate in the survey so that you’ll have access to the results. It’s not too late to participate, but you have to do so by the end of this week. We’ve already extended the deadline once; we can’t extend it again. Register to participate today!
– Barbara
* Only issuers can participate in the survey. Service providers who are NASPP members and who aren’t eligible to participate will receive full access to the published results.
For today’s blog, I discuss trends in the use of equity in compensation outside directors, as noted by consulting firm Frederic W. Cook & Co. in its 2016 Director Compensation Report.
The study includes 300 public companies of varying sizes in the financial services, industrial, retail, technology, and energy sectors. FW Cook has been publishing this study annually for well over a decade (the earliest report I can find on their website is from 2001). The 2016 study found that on average more than half (57%) of total director compensation is paid in the form of equity awards (in general, the larger the company, the greater the percentage of stock compensation for directors). It’s worth looking at a few of the trends in the use of equity in director compensation.
Trend #1: Restricted Stock/Unit Awards
With respect to the use of restricted stock and units versus stock options, the study found that:
Most of the studied companies (more than 80%) grant only restricted stock/RSUs to directors (no stock options).
Use of full-value-only equity programs increased year-over-year among small-cap companies while staying flat for large- and mid-cap companies. Option-only programs declined in prevalence at large- and small-cap companies versus last year.
At technology companies in the study, which have historically granted stock options more than companies in other sectors, there has been a significant swing toward the granting of only restricted stock/RSUs to directors (up from 78% to 85% of those companies). The leading sector for stock options is now the industrial group, where 18% of the companies grant stock options to directors.
Two Other Trends
A couple of other trends you should think about for your director compensation, if you aren’t doing these things already:
Compensation Limits: About a third of studied companies now include an annual limit on compensation paid to directors under their equity plans (in increase from prior years—by way of comparison, only 23% of respondents to the NASPP/Deloitte Consulting 2014 Domestic Stock Plan Administration survey included such a limit on director awards). Companies have been adding these limits in response to shareholder litigation over excessive director pay. FW Cook found that these limits are also increasingly covering total pay, not just equity awards.
Ownership Guidelines: A majority of studied companies have director stock ownership guidelines. The study notes that these guidelines have been ubiquitous at large-cap for many years and usage at small- and mid-cap companies has increased.
Earlier this fall, Frederic W. Cook released the findings of their 2015 Director Compensation study in a report titled “2015 Non-Employee Director Compensation Report”. In today’s blog I share some of the stock compensation related highlights from their report.
Demographics
The study was conducted with analysis of non-employee director compensation practices at 300 US public companies across a variety of sectors.
One Size Fits All?
In this year’s study, virtually all size categories (small, medium and large-cap) of companies that were studied compensate non-employee directors with primarily stock compensation (meaning more than 50% of director compensation was paid in stock awards and/or stock options). This continues a trend of increasing the equity compensation piece of the compensation pie, which makes sense when you think about aligning director compensation with the shareholder value they are tasked to oversee. Interestingly, while stock compensation ruled the majority when looking at size of company, it didn’t necessarily represent the majority of compensation in each industry sector. The financial services and industrials sectors have yet to pass the 50% mark in issuing equity over cash (cash still is the majority of compensation in those industries).
Stock Awards Continue Their Reign
The dominant equity compensation vehicle is full value stock awards (or units). 85% of the companies in the study use dollar denominated stock awards rather than share numbers. Stock option grants to directors continue to diminish. The technology sector continues to be the heaviest user of stock options to compensate directors, but even that industry is trending down in stock option usage – only 22% of tech companies issued stock options to directors (down from 32% the prior year).
The Trend Continues: Stock Ownership Guidelines
We’ve previously blogged about the continuing uptick in the number of companies adopting share ownership guidelines for executives and directors. The overwhelming majority (96%) of large-cap companies have stock ownership guidelines in place for directors. Small-cap companies continue to catch up in implementing guidelines for directors, with 60% having some form of guideline and/or retention policy in place. The good news is that’s up from just over half of small-cap companies last year. According to the Frederic W. Cook report, “The median ownership requirement is now five times the annual cash board retainer.” 10% of the companies studied have a mandatory hold-until-retirement policy for directors.
The report on this study, along with many other NASPP and outside surveys and studies can be found in the NASPP’s Survey and Studies portal. NASPP and co-sponsored surveys can also be found in the Surveys section of our website.
Quick Survey on Stock Plan Education
The NASPP and Fidelity Stock Plan Services are pleased to announce a joint survey on stock plan education programs. Take this quick survey today to find out how your education program compares to your peers’. The survey includes fewer than 25 questions; you can complete it in less than ten minutes—do it today, before you forget. The deadline to complete the survey is Friday, December 11.
New Studies
We’ve posted the following new studies to the NASPP website:
Today I have a grab bag of short topics for you, each worth mentioning but none are really long enough for their own blog.
The Most Ridiculous Section 162(m) Lawsuit Ever Last year, a Delaware federal court ruled in favor of a company that was the subject of lawsuit alleging that their incentive plan had not been properly approved by shareholders for Section 162(m) purposes. The plaintiff argued that because Section 162(m) requires the plan to be approved by the company’s shareholders, all shareholders–even those holding non-voting shares–should have been allowed to vote on it. Shareholder votes are governed by state law but the plaintiff attorney argued that the tax code preempted state law on this matter. Luckily the judge did not agree.
The plaintiff also argued that the company’s board violated their fiduciary duties because they used discretion to reduce the payments made pursuant to awards allowed under the plan. The plaintiff stipulated that this violates the Section 162(m) requirement that payments be based solely on objective factors. In a suit like this, the plaintiff attorney represents a shareholder of the company; it seems surprising that a shareholder would be upset about award payments being reduced–go figure. In any event, it’s fairly well established that negative discretion is permissible under Section 162(m) and the judge dismissed this claim.
Glass Lewis Policy Update Glass Lewis has posted their updated policy for 2014. For US companies, the policy was updated to discuss hedging by execs (spoiler alert: Glass Lewis doesn’t like it) and pledging (they could go either way on this). With respect to pledging, Glass Lewis identifies 12–count ’em, that’s 12–different factors they will consider when evaluating pledging by execs.
The policy was also updated to discuss the SEC’s new rules related to director independence and how the new rules impact Glass Lewis’s analysis in this area. Although we now have three perfectly good standards for director independence (Section 16, Section 162(m), and the NYSE/NASDAQ listing standards), Glass Lewis has developed their own standards and they’re sticking to ’em. I’m sure I’ve asked this before, but really, how many different standards for independence do we need? I’m not sure director independence is the problem here.
Should Your Plan Limit Awards to Directors? As you are getting this year’s stock plan proposal ready for a shareholder vote, one thing to consider is whether to include a limit on awards to directors. In 2012, a court refused to dismiss one of the plaintiff’s claims in Seinfeld v. Slager because the plan did not place sufficient limits on the grants directors could make to themselves and, thus, were not disinterested in administration of the plan, at least with respect to their own grants.
Since it is a holiday week, I thought I’d do something a little lighter. For today’s blog entry, I provide some quips and highlights from Nell Minow’s keynote at this year’s NASPP Conference.
Nell is a phenomenal speaker, outspoken, honest, engaging, and funny. She has not one, but two successful careers as a movie reviewer (she mentioned that she was interviewing Ben Afleck the day after her keynote presentation) and as a corporate governance critic, and is embarking on a third career as an ebook publisher. She was the fourth person to join ISS and she currently works for The Corporate Library/GMI, where they rate boards of directors on their effectiveness and sell those ratings to D&O insurers, plaintiff lawyers, investors, etc.
Nell on how she ended up as a both a film critic and corporate governance critic:
When I was in high school, one of my teachers said to me: “You think you’re going to make a living as a smart aleck?” I did not realize that was a rhetorical question; I thought it was career counseling…I managed to find not one but two careers where I do nothing but criticize people all the time.
On the qualifications for being a critic of either films or corporate governance:
The #1 requirement for being a movie critic or a corporate governance critic: an infinite tolerance for failure.
On the challenges of rating executive pay:
The challenges of rating executive pay are kind of like the challenges of rating movies, which is that so many of them are so terrible.
On Say-on-Pay:
I never really thought [Say-on-Pay] was going to be very effective but I’m extremely impressed and delighted that in just two years, Say-on-Pay has become significant enough that you could get a no vote at Citigroup…But let’s face it, anything that is precatory is not going to be very meaningful.
On director pay:
I used to say that we pay directors too much for what they do and not enough for what we want them to do. So I am in favor of serious pay for directors because we expect them to spend serious time on this…But again, as with CEO pay, you want that pay to be tied to performance.
If she were queen for the day:
I would say that no pay plans, particularly stock-based pay plans, have any credibility whatsoever unless they are indexed, preferably to the peer group but, if not, then to the market as a whole. I would make one sweeping change in that direction…If you are not outperforming your peer group, you shouldn’t get paid the big bucks.
Movie recommendations for the holiday season:
Ben Afleck directed and stars in “Argo,” which I strongly recommend…and no one should go see Kevin James in “Here Comes the Boom.”
Nell had a lot of interesting things to say on a lot of topics related to corporate governance. It’s not too late for you to hear her presentation; you can download her keynote and the panel she participated in afterwards (as well as any other session offered at the Conference). You can purchase just a single session or save with a multi-session package.
Because this is a holiday week, this will be our last blog until next week. I hope everyone has a great Thanksgiving!
Each study was comprised of U.S. public companies across a variety of sectors. Frederic W. Cook’s study spanned 240 companies, and The Conference Board (et al) surveyed 334 companies.
Size Does Matter
In general, one “rule of thumb” was confirmed: that “compensation levels vary primarily based on company size, while the structure of compensation is influenced by both company size and industry.” (Frederic W. Cook). Both studies presented similar results regarding the prevalence of director equity compensation by industry. While not every industry had a clear trend in terms of cash to stock ratios, the financial services industry clearly utilized the least amount of equity (less than 45%) in its compensation approach, and the technology sector utilized the most: approximately 70% of director compensation in this industry is stock based, according to both reports. When it comes to the blend between cash and stock compensation, it turns out company size does seem to be a factor, more so than industry. Larger companies were more likely to have a mix of cash, stock awards and stock options. Smaller companies reflected a more cash heavy compensation mix.
Stock Awards Rule!
The dominant equity compensation vehicle in use for directors across the board (no pun intended!) is full value stock awards (or units). Stock option grants to directors are minimal in most industries (utilized by less than 20% of retail, financial services and industrial companies, according to Frederic W. Cook). The technology sector’s trends were a bit different: companies in this industry predominantly issue stock awards as part of the compensation mix, yet, about 42% of them also issue stock options to their directors. That’s probably not surprising, given that the technology sector has long been assertive in emphasizing various forms of stock benefits as a component of overall compensation.
The Trend Continues: Stock Ownership Guidelines
We’ve previously blogged about the continuing uptick in the number of companies adopting share ownership guidelines for executives and directors. Both studies reported that a majority of respondents (greater than 50%) had stock ownership guidelines for directors in place. According to The Conference Board (et al), the most widely utilized type of guideline is that based on a multiple of the director’s annual retainer. One study noted a smaller related emerging trend – the implementation of a retention ratio or holding period in combination with their ownership guidelines. About 15% of companies analyzed in the Frederic W. Cook study reported having some form of retention ratio or holding period; with 12% utilizing such ratios or holding period in direct conjunction with their ownership guideline policies. This is a trend to watch, and seems very likely to continue to gain momentum.