It’s been months since I last discussed anything related to the Dodd-Frank Act so in today’s blog, I provide an update on SEC rulemaking related to the Act.
More Delays
The SEC recently updated its calendar for rulemaking activities pertaining to Dodd-Frank to delay a number of projects, including:
Requirements for companies to adopt clawback policies for compensation paid to executives.
Disclosure of the ratio of CEO pay to the median pay of all employees.
Disclosure of the relationship of executive compensation to corporate financial performance.
Disclosure of hedging policies for employees and directors.
Final rules on these projects are now scheduled to be issued no earlier than July and possibly as late as December 2012. This means we won’t have final rules in time for this year’s proxy season (but you had probably already figured that out for yourself). The SEC expects to issue proposed rules during the first half of 2012.
Accredited Investors
The SEC has amended the definition of an “accredited investor” to exclude the value of primary residences from net worth. This is an important definition under Regulation D, which provides a number of exemptions from registration for offerings of stock, some of which limit the number of nonaccredited investors that can participate in the offering.
Next up, the SEC is set to finalize rules prohibiting “bad actors” from participating in Rule 506 offerings. At first I thought this meant that Pauly Shore and David Caruso wouldn’t be able to participate in unregistered offerings, but it actually relates to felons and others that have been convicted of or sanctioned for securities fraud and similar activities.
These changes probably don’t impact the operation of most companies’ stock plans. Public companies generally register all the shares issued under their stock plans and private companies are generally relying on Rule 701 for an exemption from registration. Either way, neither has to worry about accredited investors or complying any with of the Regulation D exemptions (including Rule 506). But where a private company has exceeded the limitations in Rule 701 (10 points if you know what they are off the top of your head–no Googling) or where either public or private companies are making private sales of stock to investors outside of their stock plans, the Regulation D exemptions can come into play.
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.
They grow up so fast! July 21 was the one-year anniversary of the Dodd-Frank Act (in case you are wondering, it’s been nine years since SOX was passed–time sure flies when you’re having fun). Today I take a look at Say-on-Pay results and highlight a recent announcement from the SEC about the timeline of further Dodd-Frank rulemaking projects.
To reminisce more on Dodd-Frank developments over the past year, check out the memo “Dodd-Frank One Year Later” by David Lynn of Morrison & Foerster (and editor of TheCorporateCounsel.net).
Say on Pay: The Results So Far
With proxy season winding down, here are the latest Say-on-Pay results (courtesy of Mark Borges, who has been providing weekly Say-on-Pay updates in his excellent blog on CompensationStandards.com):
2,596 companies have reported votes. Of those, only 37 reported failed votes, but there are three additional companies (Cooper Industries, Hemispherix Biopharma, and isoRay) where whether the Say-on-Pay vote passed depends on how you count. Of course, if your Say-on-Pay vote is that close, it probably doesn’t matter whether you count it as a pass or fail; either way, you are likely to be making some changes to your executive pay.
At least three companies (Lockheed Martin, General Motors, and Umpqua Holdings) modified prior grants to be subject to performance vesting in response to shareholder comments in connection with their Say-on-Pay votes.
At a majority (about 76%) of the companies reporting votes, shareholders expressed a preference for annual Say-on-Pay votes.
SEC Delays Further Rulemaking
In his also excellent blog on CompensationStandards.com, Mike Melbinger reported yesterday that the SEC has modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation. Here is the new schedule:
August – December 2011
§951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
§§953 and 955: Adopt rules regarding disclosure of pay-for-performance, CEO to median employee pay ratio, and hedging policies
§954: Adopt rules regarding recovery of executive compensation (i.e., clawbacks)
§956: Adopt rules (jointly with others) regarding executive compensation at covered financial institutions
July – December 2012
§952: Report to Congress on study and review of the use of compensation consultants and the effects of such use
Given the new schedule, Mike thinks it unlikely that most of these rules will be effective for next year’s proxy season, but there is a chance that one or two provisions will be effective for proxies filed after January (as with the Say-on-Pay rules, published in January 2011). Mike notes that the SEC will propose rules first (and already has for a couple of the provisions), so we should know well in advance which provisions will be final for the 2012 proxy season.
It’s Not Too Late to Enroll in the NASPP’s Financial Reporting Course The NASPP’s newest online program, “Financial Reporting for Equity Compensation” started on Thursday, July 14, but it’s not too late to get into the course. All webcasts have been archived for you to listen to at your convenience.
Designed for non-accounting professionals, this course will help you become literate in all aspects of stock plan accounting, from expense measurement and recognition, to EPS and tax accounting. Register today so you don’t miss any more webcasts.
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.
Don’t miss your local NASPP chapter meetings in Kansas/Missouri, Philadelphia, and Phoenix. And, next week, on August 10, the San Francisco chapter will host their annual all-day event at Wente Vineyard in Livermore, CA. You really should come out for this exceptional event.
In addition to the various changes we know are coming under the Dodd-Frank Act–e.g., CEO to median employee pay ratio, disclosures of hedging policies, expanded clawback requirements, expanded pay-for-performance disclosures, Say-on-Pay (wait, that’s already here)–this week, I blog about a potential change you might not have been aware of: less time to file Forms 3.
Form 3 Deadline In a little-known provision (at least to me), the Dodd-Frank Act amended Section 16(a) to authorize the SEC to shorten the deadline for filing Forms 3. The amendment isn’t effective until July and then some SEC rulemaking will be necessary to effect the change, but, since the SEC requested the authority to do this, it seems likely that they will follow through on it.
Currently, when someone becomes an insider at a reporting company, a Form 3 must be filed within ten days. Alan Dye, of Section16.net and Hogan Lovells, speculates that the SEC will change the deadline to be more in line that of Form 4–e.g., two business days.
As things stand now, most new officers and directors receive a grant upon assuming their new role that must be reported on Form 4 within two business days anyway, even if the Form 3 is not due for ten days (and, in this circumstance, the SEC encourages insiders to file the Form 3 concurrently with the Form 4). It does seem to me to create a fundamental unbalance in the universe to file a Form 4 before filing a Form 3 for an insider–now, presumably, balance will be restored (at least, that’s what Alan thinks–and my money’s on him–but this is all speculation, we don’t actually know what the new Form 3 deadline will be).
A two-day deadline on filing Forms 3 will make it even more critical to be on top of obtaining EDGAR codes for new insiders.
Thanks to Tami Bohm of Radian Group (and member of the NASPP Executive Advisory Committee) for bringing this development to my attention.
A More Social NASPP The NASPP is networking socially: you can now follow us on Twitter or like us on Facebook. We’ll be posting announcements whenever we post new content on Naspp.com–it’s a great way to keep up with all the content we have on the website.
Online Fundamentals–Early-Bird Ends February 25 The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins on April 14. This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation. It’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register by February 25 for early-bird savings.
Submit Speaking Proposals for the NASPP Conference by February 28 The NASPP is currently accepting speaking proposals for 19th Annual NASPP Conference. Submit your proposal by February 28.
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.
Last Tuesday, January 25, the SEC issued final regulations on Say-on-Pay votes. For the most part, the SEC adopted the proposed regulations, with only a few minor adjustments.
As expected the regulations require three non-binding votes:
Say-on-Pay: Shareholders must be permitted to vote on executive compensation every one, two, or three years. The first vote must be held at the company’s first annual meeting on or after January 21, 2011. Shareholders will be voting on the compensation paid to executives as disclosed in the proxy statement.
Say-on-Pay-Frequency: Shareholders must also be permitted to vote on how frequently the company holds a Say-on-Pay vote. This vote must occur at least every six years, with the first vote occurring at the company’s first annual meeting on or after January 21, 2011.
Say-on-Parachutes: Shareholders must be permitted to vote on golden parachute arrangements. If these arrangements have not previously been voted on, this vote must be included in the proxy statement relating to the merger (or similar transaction) for which the compensation will be paid. This requirement applies to filings on or after April 25, 2011.
McGuireWoods provides a good summary of the final regulations; we’ll be posting an alert with links to additional memos as we receive them.
Other Dodd-Frank Rulemaking Delayed As Broc Romanek mentioned in his blog (“Four of Corp Fin’s Dodd-Frank Rulemakings Delayed,” January 27, 2011), the SEC has pushed back its estimate of when proposed rules will be issued for the following projects:
Pay-for-performance disclosure (how compensation is related to financial performance)
Pay ratios (ratio of CEO pay to median employee pay)
Clawback policies (clawback of officers’ compensation upon financial restatement)
Hedging policies (whether the company has a policy regarding the ability of directors and employees to hedge)
Based on the SEC’s revised timeline for implementing the Dodd-Frank Act–the proposed rules now aren’t expected until August, at the earliest, and possibly as late as December–Broc speculates that rules for these projects may not be finalized in time for the 2012 proxy season.
A More Social NASPP The NASPP has boarded the social networking train: you can now follow us on Twitter or like us on Facebook. We’ll be posting announcements whenever we post new content on Naspp.com–it’s a great way to keep up with all the content we have on the website.
NASPP Members Eligible for Discount on CEP Exam If you’ve been thinking about enrolling for the Certified Equity Professional exam, now is the time to do it. Because the NASPP serves on the CEP Institute Advisory Board, we are able to offer NASPP members a $200 discount on the June 4, 2011 exam.*
The CEP program is the certification standard for the equity compensation industry, comprised of a three-level, self-study program in the technical regulatory issues affecting equity compensation.
Visit the CEPI website for more information on the program. To take advantage of the NASPP member discount, contact the CEPI at (408) 554-2187. Don’t wait; registration closes on April 22.
* The Fine Print: Eligible registrations include new Level 1, Level 2 or Level 3 registrations for individuals who are involved in administering or managing their own company’s equity programs. Deferrals and re-tests are not eligible for a discount. Individuals already registered are not eligible for a retroactive discount. Candidates from service providers do not qualify. Questions regarding eligibility can be directed to the CEPI at (408) 554-2187.
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.
If you are in the San Diego area, attend the San Diego NASPP chapter meeting on Wednesday, Feb 2. Robyn Shutak, the NASPP’s Education Director will there; be sure to say hello!
According to the NASPP’s 2010 Domestic Stock Plan Design Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute), 68% of respondents report that their stock compensation programs are not subject to a clawback provision. I’m hearing predictions that this will change, with more companies implementing clawbacks for executive level employees in the future.
Clawback Provisions A clawback provision enables the company to recover, or “clawback” previously paid or realized compensation upon the occurrence of specified events or behavior. Historically used to enforce noncompete provisions, we are now seeing clawbacks for financial restatements due to misconduct or compliance failures, inaccurate financial reports, and fraud or ethical misconduct (whether or not it results in financial restatement). I’ve even heard of a company including a clawback on performance awards if the board later determined that the way the performance goal was achieved wasn’t quite the behavior they were looking for. Clawbacks can apply to bonuses and various types of stock awards, including stock options, restricted stock/units, and performance awards.
Why Clawbacks Now?
Clawbacks are hot now in part because several recent pieces of legislation have required them, including SOX, the Emergency Economic Stabilization Act, and, most recently, Dodd-Frank. Although the requirements are fairly limited in each case (for example, EESA only applies to TARP companies), regulator interest in clawbacks is likely indicative of the public and media support for them. And now clawbacks are viewed as an effective tool for mitigating risk in compensation programs.
In addition to the obvious questions that must be addressed when implementing clawbacks–who should the clawback cover, what compensation should it cover, what events should trigger it, and how long it should be in effect–there are a number of more sophisticated matters to address:
Should the clawback be a provision in the plan or award agreement or should it be a more general policy?
Will the clawback be enforceable? State laws can be a particular hindrance to enforcement, so this question is not always as easy to answer as you might think, given that federal laws require clawbacks in some circumstances.
How will the clawback be communicated to executives and what level of consent will be required from them (for example, executives have to indicate consent by signature)? If the clawback policy covers previously granted awards, what will the consequences be if executives don’t consent?
What level of discretion to enforce (or not enforce) the policy will be provided to the board?
If a company has a clawback policy or provision in place, one tip from the “Risk Mitigation for Stock Compensation” panel is to discuss the policy prominently in the Executive Summary of the CD&A in your proxy statement. Clawbacks are exactly the type of risk mitigation strategy that ISS and shareholders (and other shareholder advisory groups) are looking for; having a clawback policy could offset other problematic compensation practices.
The panel also included a detailed discussion of the tax treatment that applies when a clawback is triggered–information that is likely to be very useful in the future as we see more enforcement of these provisions.
Conference Audio Available If you missed these panels and want to know more about clawbacks, don’t despair–you can purchase the recorded audio for any and all Conference sessions in downloadable MP3 format. Purchase just the session(s) you want or save by purchasing a package of sessions.
Free Conference Session Audio If You Renew by Dec 31 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!
Join Now and Get Three Months Free! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. 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.
As those of you that have been keeping up with my blog entries know, for the past few weeks, I’ve been covering the executive compensation-related provisions of the Dodd-Frank Act, highlighting tidbits I learned at a presentation by Mike Andresino of Posternak Blankstein & Lund and David Wise and Sara Wells of Hay Group at the July Silicon Valley NASPP chapter meeting. This week I discuss some of the changes David thinks we can expect to see for stock compensation as a result of the Act. (If you’re keeping score, that’s three blog entries from one chapter meeting–now that’s what I call a productive meeting!)
Stock Compensation Under Dodd-Frank Here are a few changes we might see to stock compensation under the Dodd-Frank Act.
More Double-Triggers
In the NASPP’s 2010 Stock Plan Design Survey (co-sponsored by Deloitte), I was surprised by the number of companies with plans that provide for immediate acceleration of vesting on a change-in-control. With shareholders now given the opportunity to vote on executive pay packages and a separate vote for change-in-control provisions that haven’t previously been voted on, expect to see more companies move to a double-trigger (i.e., vesting accelerates only if the executive is terminated within a specified period after the CIC).
Greater Use of Performance Awards
With companies now required to disclose how executive pay relates to performance, it seems fairly clear that this will propel the use of performance-based awards. At the same time, the requirement to disclose the ratio of CEO pay to median employee pay may cause boards to look for ways to reduce the value of CEO pay. Since this disclosure is based on amounts in the SCT–rather than actual payouts–one way to accomplish this is to grant options and awards that are subject to performance conditions.
For LTI programs in general, David expects to see more interest in relative goals (because absolute goals have become so challenging to set), more use of multiple goals (e.g., an absolute goal with a relative goal), more companies using three measures instead of just two measures, lowering of plan maximums, and longer vesting schedules.
Premium-Priced Options
Options granted with a price above the grant date FMV have never really caught on, but do result in a lower grant-date valuation. Since this is the value reported in the SCT, premium priced options could help improve the CEO to median employee pay ratio, perhaps increasing their popularity.
Broad-Based Plans?
Another way to make the CEO to median employee pay ratio look better is to increase employee pay. Could this cause companies to consider expanding eligibility for stock compensation programs? Maybe–if you are looking at raising pay, seems like it would be easier to do this with a non-cash expense than with cash compensation.
Deferrals
More companies may also start requiring deferred payout for awards. David points out that deferrals serve two goals: (i) they can be of assistance in enforcing clawback provisions–now required under Dodd-Frank and (ii) they help facilitate enforcement of stock ownership/holding requirements–a primary means of risk mitigation in stock plans.
The 18th Annual NASPP Conference is Just Five Weeks Out! Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay and the other requirements of the Dodd-Frank Act. We’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win! Don’t delay–this program ends on August 31.
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.
It’s a big week for NASPP Chapter meetings: don’t miss the meetings in Atlanta, Denver, NY/NJ, Orange County, Phoenix, and San Diego. Robyn Shutak, the NASPP’s Education Director, will be attending the San Diego meeting; be sure to say hello!
Last Tuesday, I blogged about the Say-on-Pay provisions of the Dodd-Frank Act, but the Act includes a number of other corporate governance provisions that are of interest to stock plan professionals. Luckily, the presentation I attended by Mike Andresino of Posternak Blankstein & Lund and David Wise and Sara Wells of Hay Group at the Silicon Valley NASPP chapter meeting covered these aspects of the Act as well.
The Dodd-Frank Act: More Than Say-on-Pay The Dodd-Frank Act is very broad in scope, with banking legislation and consumer protections as well as regulating private placements and private investment funds–that’s nice to know, but we don’t really care about any of it for purposes of this blog. I want to focus on the areas of the Act that are likely to intersect with my readers’ job responsibilities.
Internal Pay Equity
As I noted in my June 29 blog, the Act requires companies to disclose the ratio of CEO pay to the median pay of all other employees. I understand that the jury is still out on how this ratio will actually be computed–preparing a Summary Compensation Table for all employees just to calculate their median pay may not be feasible–but, regardless, this disclosure is likely to cause a lot of consternation (David Wise pointed out that it was a top focus of the business lobby). The definition of all employees could include employees in overseas operations, including, say, manufacturing plants in countries where wages are considerably lower than in the United States. We are only beginning to contemplate the implications of this disclosure.
Relationship of Pay to Performance
Companies will be required to disclose the relationship of executive compensation to corporate financial performance. Like Say-on-Pay, this is another provision that I naively thought we already had–i.e., the performance graph in the executive compensation disclosures. Silly me. As Mike Andresino pointed out, the Act doesn’t limit the disclosure to just the top five NEOs, so this “pay for performance” disclosure could be quite a bit more work to put together than the performance graph.
According to a Pearl Meyer & Partners memo on the Act that we’ve posted in the NASPP’s Say-on-Pay Portal, there are lots of issues to resolve for this requirement, including which “executives,” what “compensation,” what “financial performance,” the time period the disclosure covers, and whether the disclosure is on an aggregate or individual basis (or by component of compensation–imagine what fun that would be to put together).
Clawbacks
The Act expands the requirements for companies to adopt clawback policies for compensation paid to executives beyond what was required under Sarbanes-Oxley. According to the NASPP’s 2010 Domestic Stock Plan Design Survey (co-sponsored by Deloitte), only 32% of respondents have clawback policies for stock compensation and of those that don’t, only 20% are considering adding one. That’s going to have to change.
Broker Non-Votes
The Act requires the SEC to direct the stock exchanges to prohibit brokers from voting uninstructed shares for director elections, executive compensation matters (e.g., Say-on-Pay), and any other significant matter (brokers are already prohibited from voting uninstructed shares on matters relating to stock plans).
This doesn’t leave a whole lot that brokers can vote uninstructed shares on. Mike Andresino pointed out that if there’s nothing in the proxy that brokers can vote on without instruction, companies may have problems achieving a quorum at shareholder meetings.
Compensation Committees
The Act requires the stock exchanges to establish new independence standards for compensation committee members. In addition, the committee must have the ability to retain its own independent (per standards to be determined by the SEC) comp consultants, legal counsel, and other advisors.
18th Annual NASPP Conference Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay and all of the other executive pay reforms required under the Dodd-Frank Act. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
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.
Tune in next Tuesday, August 10, for the NASPP webcast highlighting the results of the 2010 Domestic Stock Plan Design Survey (co-sponsored by Deloitte, survey support provided by the CEP Institute). There’s sure to be some surprises!
Refer new members to the NASPP so you qualify for the August raffle and Conference discount available through our New Member Referral Program.
Don’t miss your local upcoming NASPP chapter meetings in Boston, Chicago and Michigan. In addition, the San Francisco chapter is hosting its annual all-day program at the bucolic Wente Vineyards on August 11–I’m looking forward to it and hope to see you there.
The New Long-Term Incentive Paradigm–Conserving Share Usage Through Innovative Incentive Design by Myrna Hellerman, Sibson Consulting
The Dodd-Frank Act “Say-on-Pay” provision…something totally new? Not really. For years shareholders have had a voice in compensation decision making, especially through the power to approve incentive and equity compensation plans. They just haven’t used their power to its full potential. Dodd-Frank provides a clearer platform and framework to exercise this power.
Next year we will celebrate the “coming of age,” 18th anniversary of Section 162(m), the infamous “Million Dollar Cap” for non-performance-based compensation. Like Dodd-Frank, there was an expectation that Section 162(m) would “reel in” executive pay, create a greater alignment between pay and performance, and give the shareholder a “say on pay.” The logic was simple: “You lose deductibility of top executive pay if it exceeds $1 million unless the pay is earned under a shareholder approved performance-based incentive compensation plan.” In 2003 the SEC further strengthened shareholder’s “say on pay” by affirming the new NYSE and Nasdaq rules that expanded the shareholder approval requirement to equity compensation plans and amendments thereto.
So, does the existence of the formal Dodd-Frank Say-on-Pay Vote imply that earlier attempts to give shareholders a say on pay have been complete failures. Headline news over the years would suggest this to be so. However, we think not. Successful outcomes just don’t make the headlines. One of these formerly untold success stories will be presented at the 18th Annual NASPP Conference in September. The presentation, “The New Long-Term Incentive Paradigm–Conserving Share Usage Through Innovative Incentive Design,” provides an exemplar outcome in response to a pre-Dodd-Frank “say-on-pay” vote. The takeaways from this presentation will be valuable as organizations prepare for the more formal Say-on-Pay vote required under Dodd-Frank.
In 2005 stockholders rejected an additional share authorization at the 9,000+ employee Arthur J. Gallagher & Co due to burn-rate and dilution concerns. This “No” vote was unexpected at a company with generally shareholder-friendly, conservative pay practices. In response, the organization began a lengthy transformational journey that resulted in a new long-term incentive paradigm. The paradigm recognizes several key realities:
The voice of the shareholder is very powerful. Shareholders need to be continually educated about the company’s pay practices and deserve a reasoned response to their objections.
A purge of poor pay practices and a “diet” to get value transfer and burn-rates into line are not just part of a short-term solution. They are a way of life.
A culture of “ownership” in the long-term success of the organization can be preserved even when there is a paucity of equity. At Gallagher this was accomplished through the use of a uniquely designed, 162(m) compliant long-term cash incentive approach, which mirrors the risks and rewards of equity (this design will be detailed in the presentation).
Management must get comfortable with the difficult, prioritized decisions that are required to effectively manage long-term incentives.
The board, and especially the compensation committee, need to embrace a more intimate role in executive compensation decision making, especially with respect to long-term incentives. Management and the outside independent advisor must provide the education, transparency of information, and the analytics that allow the directors to be successful in this role.
The NASPP Conference presentation and the accompanying discussion will be lead by Myrna Hellerman (SVP, Sibson Consulting), Jon Minor (Sr. Consultant, Sibson Consulting) and Tom Paleka (VP Global Rewards, Arthur J. Gallagher)., three catalysts to Arthur J. Gallagher’s transformational journey that began because of a “say on pay” vote.
Last Wednesday, July 21, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, making Say-on-Pay votes mandatory for all public companies in the United States.
The New Say-on-Pay Vote When I first heard the phrase “Say-on-Pay,” I naively thought to myself, “What’s so new about that; haven’t we had “Say-on-“Pay” for stock compensation since 2003, when the NYSE and NASDAQ implemented rules requiring listed companies to submit virtually all stock plans to a shareholder vote?” Well, on Thursday of last week, I had the good fortune to attend the Silicon Valley NASPP chapter meeting, where Mike Andresino of Posternak Blankstein & Lund presented a summary of the new rules, along with David Wise and Sara Wells of Hay Group. In today’s blog, I present some of Mike’s comments regarding how these new rules differ from current law and practices.
What Exactly Are Shareholders Voting On?
Despite my initial oversimplification, this is actually a sea change for executive compensation in the United States. Shareholders will be voting on all compensation paid to NEOs, as disclosed in the proxy–cash bonuses, individual awards, exercise and award transactions, perks (including use of corporate aircraft)–the whole shebang. And it’s an all or nothing vote–a little scary when you think about it. If shareholders are really irritated about that huge award payout the former CEO received under his severance agreement when he left last year, they might express their displeasure by voting against all of this year’s executive pay. One grant or award transaction by an exec (or one perk) that is particularly irksome to shareholders and there goes the whole Say-on-Pay vote. There is some concern that shareholders may even use the Say-on-Pay vote to express displeasure over company practices or policies that have nothing to do with executive compensation.
Advisory Vote
Of course, it is just an advisory vote, so if shareholders do vote against executive pay, the company isn’t left unable to pay executives over the coming year. (Unlike votes on stock plans, which are NOT advisory–if shareholders vote down your stock plan, that means no more stock plan.) But I expect that most companies that receive a majority (or even a large percentage) of votes against their executive pay will be forced into a dialogue with shareholders to address their concerns (especially since the Dodd-Frank Act also gives shareholders the right to add their own director candidates to the proxy).
Frequency of Vote
And with shareholder approval of stock plans, the company has control over how often it puts a plan to a shareholder vote. With a large share reserve, an evergreen plan, share replenishment, and conservative share usage, companies may be able to put off seeking approval for new plans/shares. With Say-on-Pay, shareholders vote on how often they get to vote on executive pay; this could be an annual vote (and, in no event, can it be less than every three years).
Golden Parachute Arrangements
Shareholders will have to be permitted to vote on any pay related to a change-in-control that they haven’t already voted on under a prior Say-on-Pay vote. This was likely included in the bill in respond to recent media criticisms of awards made in anticipation of mergers–see my October 20, 2009 blog entry “The Next Big Options Scandal…or Not.” The proxy related to the merger will include a vote on the merger and a separate vote on any previously undisclosed golden parachute arrangements. It isn’t completely clear what this vote accomplishes since it is advisory only and, in some cases, the shareholders of the target may not even end up being shareholders in the new company.
More Information
We’re posting new memos on the Dodd-Frank Act every day in the NASPP’s Say-on-Pay Portal.
Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
The New Pay Legislation: Action Items With the new legislative pay reforms–particularly mandatory “Say-on-Pay” and the new “sleeper” internal pay equity disclosure–all eyes will be focused like never before on executive compensation practices (and the resulting proxy disclosures). You will need answers even before the SEC issues new rules and it is critical to have the best possible guidance. Free to registrants of the “18th Annual NASPP Conference,” “7th Annual Executive Compensation Conference,” and “5th Annual Proxy Disclosure Conference,” this pre-conference webcast on July 29 is the first step as part of the full Conferences that will provide the latest essential–and practical–implementation guidance that you need.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!
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.
Every week brings us a little closer to mandatory “Say-on-Pay.” Last week (very early Friday morning), Senate and House conferees reached agreement on the finance reform bill. All that remains now is for the House and Senate to vote on the bill and for President Obama to sign it into law–all this is expected to be wrapped up in time for the July 4 holiday. (Is it just me or does it seem like all major regulatory changes happen right before a holiday? It’s a good thing we have holidays or nothing would ever get done in this country.)
The full bill is 2,000 pages long–a little light reading for down-time during your 4th of July picnic. For those of you that want the cliff-notes version, we’ve posted a 23-page excerpt of the sections relating to executive compensation.
A Triennial Requirement (or How Much Control Will Your Shareholders Want)?
The final bill would allow companies to seek shareholder approval to hold a Say-on-Pay vote only once every two or three years, rather than requiring the vote every year. Shareholders would have to be allowed to vote on the frequency of Say-on-Pay votes at least once every six years. This must be a separate resolution from the Say-on-Pay vote.
SCT for Rank-and-File Employees
The final bill requires companies to disclose the median pay of all employees other than the CEO and the ratio of this pay to the CEO’s pay. “Pay” for this purpose is computed based on the requirements for reporting total compensation in column (j) of the Summary Compensation Table. The amount for employees other than the CEO will be disclosed on a aggregate basis (you won’t disclose pay for non-NEOs on an individual basis)–but to get to the aggregate amount, you’ll have to apply the SCT principles to each individual employee. Now would be a good time to check with your administrative service providers to determine if their solution offers a report to assist with this calculation.
A Bill by Any Other Name
The last motion on the bill was to change the name to the “Dodd-Frank Wall Street Reform and Consumer Protection Act.” That’s quite a mouthful, so Broc Romanek, in his June 28 blog on the bill, has a poll on what the shorthand name should be. True to my 80’s roots, my favorite is the “Doddy-Frank Goes to Hollywood Act (Relax, don’t do it…)”
18th Annual NASPP Conference Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.
NASPP New Member Referral Program Refer new members to the NASPP and your NASPP Conference registration could be free. You can save $150 off your registration for each new member you refer, up to the full cost of registration. You’ll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership–it’s a win-win!
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.