Earlier this summer, Apple announced that CEO Tim Cook’s previously granted RSU for 1 million shares will be modified to vest contingent on relative TSR–per his own request. In today’s blog entry, I take a look at this development.
The Modification
Cook’s award was granted in 2011 and originally vested as to 500,000 shares in August 2016 and another 500,000 shares in August 2021. I’m sure you can guess what I thought of the original award, based on my prior entries covering Apple and mega grants (“Steve Jobs’ Affinity for Mega Grants,” April 28, 2009, and “And Another Thing,” May 5, 2009).
As modified, 100,000 shares still vest in August 2016 and 2021, regardless of performance. The remaining shares vests in increments of 80,000 per year, from 2012 to 2021, with the vesting in years 2014 to 2021 subject to a relative TSR goal (a small portion of the shares vesting in 2013 is also subject to a relative TSR goal). The TSR goal is applicable to 50% of each 80,000-share vesting tranche–so 40,000 shares vest every year regardless of Apple’s TSR and another 40,000 shares vest if specified TSR thresholds are achieved.
Why Do This?
What’s most interesting about this story is that the award was modified at the request of Cook. Past examples of companies modifying awards to vest contingent on performance conditions have been executed under threat of a failed Say-on-Pay or stock plan proposal or in response to a failed Say-on-Pay vote (“Eleven and Counting,” May 3, 2011). So why would Cook voluntary ask for his award to be modified? The stated reason (Apples’ Form 8-K, June 21, 2013) is that Apple is going to be granting performance awards to executives in the future and Cook wants to lead by example. Which could be true, but I’m a skeptic, especially when it comes to grants of stock currently worth close to $500 million. So I wondered, was the real reason:
To demonstrate confidence in Apple’s products and performance
To make other CEOs look bad
Because Cook is worried he won’t perform well if not properly motivated
Because Cook really wants his personal wealth to be better aligned with Apple’s shareholders’ wealth
After gestating on this question for a while, my suspicion is that it was a preemptive strike. In the 8-K announcing the change, Apple says:
“In outreach discussions this year with many of our largest shareholders, we heard that they believe it is appropriate to attach performance criteria to a portion of our future executive stock awards that have been entirely time-based (i.e., vesting for continued service) in the past.”
I think that Cook saw awards held by other CEO’s modified in response to shareholder pressure and thought it might be smart to get out ahead of any demands for the same thing from Apple’s shareholders. This way, he has more control over the modifications and was able to ensure that over 50% of the award still vests based solely on the passage of time.
More on Say-on-Pay and Performance Awards
Tune in tomorrow for the NASPP’s webcast “Performance Equity Design in Light of Say-on-Pay,” which will take a look at the pressure to grant performance awards that has resulted from Say-on-Pay votes and how this is changing long-term incentive programs.
I’m a San Diegoan at heart, and, as I write today, I’m thinking about a picture taken last year on a beautiful beach day. The water was sparkly, reflecting the bright sun. The beaches were filled with sunbathers. Someone snapped a photo of this perfect day, and accidentally captured something amazing – the image of a shark swimming through a wave, virtually unnoticed. People were smiling, nobody seemed to have a care in the world. That day ended well – it seems no one was bitten by the shark, and people probably didn’t even understand the potential danger until they saw that image later that evening on the news. So why on earth am I talking about sharks in this equity compensation blog? Well, as you’ve probably garnered by now, I’m drawing a parallel to an issue I feel is looming, somewhat under the radar, for many companies.
Stock Plan Sharks
You’ve probably heard the buzz over the past year or so about a wave of litigation surrounding say-on-pay and proxy proposals. The litigation, in short, has been brought as a series of class action suits by shareholders who want to see more information disclosed in the proxy around various proposals that are being submitted to shareholders for a vote. Many of these proposals involve stock plans (approval of a stock plan, increasing shares in an existing plan, and so on). The theory behind the lawsuits is that that shareholders have a right to be fully informed before they vote. The claim is that proxy statements lack a complete and full disclosure of material information that would aid in the shareholder’s ability to make an informed decision. In the past year there have been 21 of these cases filed. Of those, 10 cases were “successfully resolved” according to the plaintiff’s lawyer (successful meaning they resulted in a preliminary injunction or restraining order, which paved the way to an acceptable outcome). While 21 may seem to be a small number, keep in mind that this is the actual number of cases “filed” with a court. There have been many more instances where companies have received a letter from plaintiff’s attorneys, which ultimately opens a door that most companies would prefer remain closed.
Although many companies seem to have cognizance of these lawsuits, it seems that most still think “it can’t happen to us”. There have even been rumors that the litigation is dead. If you’re thinking those thoughts, think again. These lawsuits appear to be far from dead. In fact, in a unique set of circumstances at this year’s annual conference, we had both the plaintiff’s attorney and defending attorneys at front and center in these lawsuits come together to share their perspective on these suits.
The session was interesting, and I can’t do it full justice in this blog (the materials are available online for conference attendees, and the audio is available for purchase). However, I wanted to raise awareness of this concern and share some of the “red flags” that the plaintiff’s attorney shared during this session.
An Invitation to a Plaintiff’s Attorney?
Share Increases: Increasing the number of shares in an equity plan? Plaintiffs attorneys are scouring proxies to see if companies have disclosed information such as any projections that helped determined the number of shares to request.
Consultants: If the company or board hires a consultant who uses things like analysis of “share value transfer” in their assessment, and the board evaluates or relies on that information in making compensation decisions, then that information should be disclosed in the proxy.
Peer Groups: If the board determines that executive compensation should be based on peer group data points, then plaintiff’s attorneys are looking for information on the companies in the peer group, the metrics evaluated (e.g. number of employees, enterprise value), and any performance metrics, such as TSR.
Now, before you shoot the messenger – I’m not taking a stance advocating these disclosures. I’m relaying what I heard the plaintiff’s attorney identify as “red flags” when they are looking at proposals and evaluating proxy statements. If you have items going before shareholders in a vote this upcoming proxy season (yes, the proxy is months away for calendar year-end companies, but proposals are likely to be discussed in the near-term), then you absolutely want to be aware that plaintiff’s attorneys are going to look at your proxy through this lens.
Advance Mitigation
You know the sharks are out there – now what? Before I answer that, I just have to disclose that the term “shark” was borrowed from the panel’s own chosen title – so I’m not labeling anyone a shark, and I certainly appreciated the entire panel’s contribution to our conference. Now, back to the sharks and how to avoid them – there are a few suggestions that I gleaned from the presentation:
Consider including more disclosure (if it won’t hurt, it might make you appear to be a less easy target)
Advise your board of directors that a proxy proposal could result in litigation
Consider getting 3rd party advice on how to size your equity pool
Additional details, such as insight about what to do if your company is contacted by a plaintiff’s attorney can be found in the materials and audio for the conference session titled “Stock Plan Proposal and Say-on-Pay Litigation: How to Avoid the Sharks”. This is definitely an area where companies should focus some attention as they prepare for the 2014 proxy season.
Thanks to panelists Douglas Clark and David Thomas of Wilson Sonsini Goodrich & Rosati, Juan Monteverde of Faruqi & Faruqi, and John Grossbauer of Potter Anderson & Corroon for the content that I used in writing this blog.
The 2013 Domestic Stock Plan Design Survey is now open for participation. This is the industry’s most comprehensive survey on stock plan design, easily worth the cost of NASPP membership. Seriously–consulting firms charge upwards of $1,000 to participate in surveys that offer less data with fewer respondents. We let you participate for free–but issuers have to participate to receive the full survey results. Don’t put it off; you’re going to want this data and you only have until April 5 to complete the survey.
For today’s blog, I highlight just a few of the many data points in the survey that I am eagerly anticipating an update on. These are hot topics today and I’m looking forward to finding out where current practices stand with respect to them:
Performance Award Usage: In the 2010 survey, usage of full value awards largely caught up to usage of stock options. Usage of performance awards had increased significantly, but still lagged a bit. I am very curious to see if performance award usage has plateaued or if usage of these awards will rival that of traditional service-based awards. The 2010 survey also revealed that companies were granting performance awards down further into the organization. I’m not sure that performance awards work well below management; I’m very interested to see if this trend continues or if companies have pulled back on their performance award programs.
Clawbacks: Only 32% of respondents indicated that awards are subject to a clawback provision. This seemed surprisingly low, given the shareholder optics on this issue, as well as pressure from regulators (a la SOX and Dodd-Frank). When we conducted the survey in 2010, Say-on-Pay had not yet gone into effect. Now that we’ve completed two rounds of Say-on-Pay votes and are in the middle of a third, I’m curious to see where clawbacks come out.
Double-Triggers: Almost 60% of respondents indicated that vesting is automatically accelerated on a change-in-control and only 38% of respondents reported that awards were subject to a double-trigger. I was very surprised to see such low usage of double-triggers and I’m very interested to see if this data reverses itself in the new survey.
Flexible Share Reserves: Only 17% of respondents in 2010 reported that their stock plan had a flexible share reserve. I’ve heard a lot of consultants promoting flexible share reserves and I agree that they make a lot of sense, so I was surprised that usage was low and even more surprised that it really hadn’t changed since we last conducted the survey in 2007. I’m intrigued to see if usage remains flat again in 2013 or if this plan feature has started to take hold.
Deferrals: Only 22% of respondents in 2010 reported that they allowed (or required) deferral of payout of RSUs. I think deferral programs offer some key advantages, including tax planning opportunities for award holders and easier enforcement of clawbacks and stock ownership guidelines for companies. I’m curious to see if usage of deferral programs has increased in 2013.
– Barbara
P.S. (can I do a PS in a blog?) – If you missed my cat, Kaylee’s appearance in the blog last week, you should check it out for your daily quota of cute.
This week I have a couple of additional treats from the smorgasbord of topics related to stock compensation. Enjoy!
FAQs on ISS Peer Groups I guess I wasn’t the only one confused by ISS’s new peer group methodology; ISS has issued an FAQ to explain the new process.
There’s still a bunch of stuff about 8-digit, 6-digit, 4-digit, and 2-digit GICS codes that I don’t understand, but the gist that I came away with is that peers are selected first from within the company’s 8-digit code. ISS constrains which companies can be considered peers based on size (by revenue and market capitalization), so if there aren’t any 8-digit peers that fit within those constraints, then ISS moves to the 6-digit peers, and then to the four-digit peers. ISS will not select peers that match only based on the 2-digit code.
I finally googled “GICS Codes” to figure out what all these digits mean. Standard & Poor’s assigns companies to ten 2-digit industry groups (your 2-digit GICS code). Then within that 2-digit code, you are assigned to a more specific 4-digit code, and within that 4-digit code…all the way down to the 8-digit code. So the companies that share your 8-digit code should be those that most closely resemble you in terms of industry classification.
When selecting among those peers that meet your size constraints, ISS will give priority to companies that are in your self-selected peer group or that have been selected you as a peer, as well as companies that have been selected as peers by your peers or that have selected by your peers as their peers. This sort of feels like that game “Six Degrees of Kevin Bacon.” Note that if you’ve changed the companies in your self-selected peer group since last year, ISS has provided a special form that you can use to notify them of the change; you have until Dec 21 to do so.
What does all of this have to do with stock compensation you ask? Well, not much, because these peers have nothing to do with the burn rate tables published by ISS (those are based solely on 4-digit GICS codes). ISS uses these peer groups only for purposes of determining whether compensation paid to your CEO aligns with company performance. But it’s good to be aware of your ISS peer group because it probably differs from the peers you’ve identified for purposes of your performance awards and other LTI programs. Thus, even though your CEO has awards that vest based on performance, ISS could still find that his/her pay doesn’t align with company performance.
Top Ten Myths on Say-on-Pay A group of academics from Stanford and the University of Navarra have written a paper to debunk myths related to Say-on-Pay. Beside being an interesting topic, the paper has the advantages of being short (only 14 pages, including exhibits) and is written in fairly straightforward English (the word “sunspot” doesn’t appear in it anywhere).
My favorite myth is #6: “Plain-vanilla equity awards are not performance-based.”
Both ISS and Glass-Lewis have published updated corporate governance guidelines for the 2013 proxy season. The good news for my readers is that, in both cases, there aren’t a lot of changes in the policies specific to stock compensation; I think that Say-on-Pay is a much hotter issue for the proxy advisors right now than your stock compensation plan. Here is a quick summary of what’s changed with respect to stock compensation.
I don’t think ISS made any changes that directly apply to stock compensation, but there were some changes in their general policies on executive and CEO pay that may have an impact on your stock program:
Peer Groups: ISS assigns each company to a peer group for purposes of identifying pay-for-performance misalignments in CEO pay. The determination of company peer groups has been an ongoing source of much consternation; many companies disagree with the peers ISS assigns. In the past, peers have been determined based on GICS codes, market capitalization, and revenue. The new policy involves a lot of technical mumbo jumbo about 8-digit and 2-digit CICS groups that I don’t understand, but the gist that I came away with is that companies’ self-selected peers will somehow be considered in constructing peer groups. I’m not convinced this will be the panacea companies are looking for, but hopefully it will be an improvement.
Realizable Pay: Where ISS identifies a quantitative misalignment in pay-for-performance, a number of qualitative measures are taken into consideration before ISS finalizes a recommendation with respect to the company’s Say-on-Pay proposal. Under the 2013 policy, for large cap companies, these measures will include a comparison of realizable pay to grant date pay. For stock awards, realizable pay includes the value of awards earned during a specified performance period, plus the value as of the end of the period for unearned awards. Values of options and SARs will be based on the Black-Scholes value computed as of the performance period. If you work for a large-cap company, you should probably get ready to start figuring out this number.
Pledging and Hedging: Significant pledging and any amount of hedging of stock/awards by officers is considered a problematic pay practice that may result in a recommendation against directors. My guess, based on data the NASPP and others have collected, is that most of you don’t allow executives to pledge or hedge company stock. But if this is something your company allows, you may want to get an handle on the amounts of stock executives have pledged and consider reining in hedging altogether.
Say-on-Parachute Payments: When making recommendations on Say-for-Parachute Payment proposals, ISS will now focus on existing CIC arrangements with officers in addition to new or extended arrangements and will place further scrutiny on multiple legacy features that are considered problematic in CIC agreements. If you still have options or awards with single-trigger vesting acceleration upon a CIC (and, based on the NASPP and Deloitte 2010 Stock Plan Design Survey, many of you do), those may be a problem if you ever need to conduct a Say-on-Parachute Payments vote.
Glass Lewis Updates
Glass Lewis, in their tradition of providing as little information as possible, published their 2013 policy without noting what changed. I don’t have a copy of their 2012 policy, so I couldn’t compare the two but I’ve read reports from third-parties that highlight the changes.
As far as I can tell, the only change in their stock plan policy is that Glass Lewis will now be on the lookout for plans with a fungible share reserve where options and SARs count as less than one share (the idea is that full value awards count as one share, so options/SARs count as less than a share). It’s a clever idea for making your share reserve last as long as possible, but, to my knowledge, these plans are very rare (I’ve never seen one even in captivity, much less in the wild), so I suspect this isn’t a concern for most of you.
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!
The 20th Annual Conference in New Orleans was packed with fantastic and useful information throughout. In particular, I want to draw attention to a special moment that actually occurred in one of the pre-conference sessions. Attendees of the pre-conference session on Proxy Disclosure were treated to an address by Meredith Cross, Director of the SEC’s Corporation Finance Division. Director Cross shared insight into SEC priorities and roadmap, as well as iterated some specific reminders for public companies. In today’s blog I’ll summarize some of Director Cross’ key points.
Housekeeping
First, I want to mention that Director Cross began her address with a disclaimer, stating that what she said reflects her own opinions and not formally those of the SEC. I feel compelled to reiterate that here. Still, her insights are undoubtedly valuable insight into the workings and thought process of the SEC.
Disclosures, Disclosures
Director Cross began by sharing her opinion on the state of company disclosures post adoption of Say-on-Pay. She stated that overall, the SEC has observed compliance with the requirements and resultant higher quality disclosures. One thing the SEC is considering is a retrospective review of Say-on-Pay related disclosures to see if they are actually achieving what the SEC hoped they would. What is the SEC hoping for in terms of quality Say-on-Pay disclosures? One example would be individualized reporting for each company director; that level of granularity is what the SEC is looking for in the context of quality disclosures. Data gathered during the review of disclosures will likely be used to determine if any disclosure requirements need tweaking.
Dodd-Frank: What’s Next?
The Dodd-Frank Act came with a myriad of rules to implement, which has kept the SEC rather busy. Some of the rules adopted by the SEC direct the national securities exchanges to develop their own listing standards to implement certain requirements of the Dodd-Frank Act that relate to compensation committees and director independence. The stock exchanges had until 9/25/2012 to submit their proposals to the SEC. Both NYSE and NASDAQ have posted their proposals on their respective web sites. Director Cross encourages companies to review the proposals and comment as they feel appropriate. The SEC has until 6/27/2013 to adopt the new standards.
On other Dodd-Frank notes, the SEC still has remaining rules to implement. Self admittedly, the SEC was challenged in accurately predicting the timing for implementation. Director Cross noted that the SEC has made good progress on all Dodd-Frank requirements that had deadlines, which took priority. Attention will now turn to implementation of the remaining rules (after turning some attention to focus on deadlines imposed by the JOBS Act first).
Tips
What I really appreciated about Director Cross’ address is that she had real tips to provide to issuer companies. I think anytime there’s an opportunity to hear from someone at one of the regulators, visibility into their thinking is more transparent. For example, the Director Cross says the SEC is aware of some specific concerns raised by companies relative to their disclosures. Namely, questions around putting supplemental income in context (e.g. if you pay a bonus in January that was earned prior to December 31, when do you disclose it?). According to Director Cross, the SEC needs to make sure these scenarios are interpreted consistently (my interpretation: don’t be surprised if down the road some interpretive guidance is issued.) Another area of concern for companies is the reporting of realized vs. realizable income. There’s no industry definition for this, so Director Cross’ advice is to approach it consistently year-over-year.
Reminders
On a final note, Director Cross had a few reminders for companies:
402(s) disclosures (how compensation practices relate to risk management) – companies need to remember that even if compensation practices haven’t changed, the company’s approach to risk management may have changed. For this reason, companies need to assess both practices annually.
Performance Targets – remember that if a performance target isn’t met, this could be material, and the SEC expects companies to have related discussion in the CD&A disclosure in the proxy.
Say-on-Pay – companies should view their proxy statement as an advocate for their pay practices, and a means to communicate with their shareholders.
It certainly was a treat to have Director Cross’ participation in the Proxy Disclosure pre-conference session, and hopefully this summary has provided an inside view into some of the SEC’s agenda, concerns, and radar.
ISS has issued a draft of proposed updates to its corporate governance policies for the 2013 proxy season.
Speak Your Mind–But Be Quick About It
If you have an opinion on the draft that you’d like to express to ISS, you need to get your comments in by October 31. I know you’re thinking that maybe I could have mentioned this a little sooner, but actually, I couldn’t have. The draft was just released last week, after my blog was published. If you follow the NASPP on Twitter or Facebook, however, you at least knew about the draft by last Thursday, when we posted an NASPP alert on it.
You Probably Don’t Have a Lot to Say Anyway
The quick turnaround time for comments probably isn’t a problem because my guess is you aren’t going to have much to say about the proposed changes. ISS is proposing only three changes on their policies relating to executive compensation and only one of those changes relates directly to stock compensation. Here are the proposed changes:
New methodology for determining peer groups
Qualitative analysis will consider how “realizable pay” compares to grant date pay
Allowing executives to pledge company stock will be considered a problematic pay practice
Peer Groups
ISS’s determination of peer groups is critical to their analysis of whether CEO pay aligns with company performance. ISS puts together a peer group of around 14 to 24 companies (I have no idea why 14 to 24 and not, say, 15 to 25–that’s just what ISS says): if your CEO’s pay outpaces the peer group by more than the company’s performance, ISS perceives a possible pay-for-performance disconnect. As noted in my blog “Giving ISS an Earful” (August 14, 2012), the peer group methodology was already an anticipated target for change in this year’s policy.
Up to two years ago, ISS based peer groups solely on GICS codes. Last year, ISS updated it’s policy to base peer groups on revenue and market capitalization, in addition to GICS codes. This year, ISS is further refining peer identification to take into account the GICS codes of the company’s self-selected peers.
Realizable Pay vs. Grant Date Pay
If you follow Mark Borges’ Proxy Disclosure Blog on CompensationStandards.com, you know that a number of companies have been comparing the grant date pay disclosed in the Summary Compensation Table to “realizable pay.” Grant date pay, is, of course, the fair value of awards at grant. Realizable pay is a calculation of how much the executives could realize from their awards as of a specified point in time (usually the end of the year). As I’m sure my reader’s can imagine, the values are usually very diffferent.
Where ISS perceives a pay-for-performance disconnect, it will perform a more in-depth qualitative analysis of the CEO’s pay. In this year’s policy, ISS is proposing to include “realizable pay compared to grant pay” in that analysis.
ISS doesn’t provide any further information, such as what might be considered a favorable comparison or even how “realizable pay” will be determined. In taking a quick gander at the realizable pay disclosures Mark has highlighted recently in his blog, it seems that there is significant variation in practice as to how companies calculate this figure. Some look at pay realizable only from options and awards granted during the current year, others look at all outstanding options and awards, and others look at options and awards granted within a specified range (e.g., five years). I’m not sure whether ISS will perform its own realizable pay calculation (and whether it would have sufficient information to do so) or just accept the number disclosed by the company (assuming a company chooses to make this voluntary disclosure).
More Information
For more information on ISS’s proposed policy updates, including their discussion of the policy around pledging and proposed changes to their policy for Say-on-Parachute-Payment votes, see the NASPP alert “ISS Draft of 2013 Policy Updates.”
Our 20th Annual Conference is over, and, I’ll admit, I’m still recovering from the buzz. When I say buzz, I mean the literal energy and enthusiasm that seems to vibrate throughout every conference. It was great to engage with so many members, as well as listen in on sessions that are so timely and relevant to the challenges we face today. Having been to a dozen conferences over the years, I’d rank this year’s conference as our best ever. I won’t recap the full conference in today’s blog (you’ll have to wait for our next Advisor edition for that), but I wanted to share my observation on some of the top topics trending in our world of stock compensation based on things seen and overheard.
The Unofficial Top 5
1.Performance Plans and associated Valuation Strategies: Performance plans are migrating from plainer vanilla (I can’t use the term plain vanilla, because I don’t know of a performance plan that was that simple to administer) to more creative approaches (things like the use of relative TSR). In conjunction with new pay for performance models, the relative accounting impact and considerations are worth understanding.
2.Say-on-Pay: As we’ve passed through the peak of the second annual proxy season since the implementation of Say-on-Pay, it’s still a very much a hot topic. With more companies receiving negative Say-on-Pay votes from shareholders in 2012 than 2011, companies are more invested in ensuring their disclosures will withstand shareholder scrutiny.
3.Global Administration and Mobility: Learning to navigate the intricate nuances of managing global and mobile employee populations continues to be top priority for stock plan professionals. Sessions on global administration always rank highly on our conference attendance lists, and this year was no different.
4. Executives, Executives, and Executives: Handling tricky issues and situations relatives to executives and their compensation ranks high on the interest scale. Things like terminations and pay for performance top the list.
5. Stock Ownership Guidelines: I’ve heard many people talking about the rapid trend towards adopting stock ownership guidelines. If you work for an issuer (or a vendor who provides direct support to issuer stock plan administrators) and are asking “what are stock ownership guidelines?”, you’d better find out quick (in short, they are guidelines implemented by a company regarding minimum amounts of share ownership certain employees must attain and retain.) The vast majority of public companies report having such guidelines in place, and, in my opinion it’s a matter of “if” and not “when” for the stragglers who haven’t implemented guidelines yet.
Many of you likely have some or all of these topics on your radar list. These are definitely trends to observe in the coming months; areas where we’ll likely see lots of activity, new ideas, and administration challenges.
It’s been a little while since I’ve heard much of anything about Say-on-Pay. I can’t say that I’ve been disappointed about that, either. It’s nothing against those who spend their time working on and following that topic, but with the overdrive of talk and discussion on Say-on-Pay over the last couple of years, it’s been nice to focus some thoughts elsewhere. I was nearly asleep (at least in terms of monitoring Say-on-Pay) when some interesting information on the subject crossed my desk last week.
2012 Failures Higher than 2011
According to Ed Hauder in his Say-on-Pay blog, 55 companies have reported failed SOP votes thus far in 2012. That’s higher than the 44 companies who failed to obtain a passing vote in 2011. This surprises me a bit, as I had assumed the numbers would continue to decline as more companies refined their Say-on-Pay practices. Or, maybe I thought shareholders would lessen their vigor as time moved on. It seems I was wrong about both assumptions. The list of companies is published in Ed’s blog, and they aren’t no-name companies either. Companies like Abercrombie & Fitch, KB Home, Chesapeake Energy, Citigroup and Pitney Bowes all made the list.
It does seem that Say-on-Pay is working as intended. I note that Apple had no trouble gaining approval for CEO Tim Cook’s $378 million dollar compensation package, but that gives credence to the thought that when the company is performing well, shareholders don’t mind compensating top management. That’s not to say that doing well gives a company a “get-away-with-say-on-pay” card, but it does seem to be true that companies who are under-performing are more targeted than those that are meeting or exceeding expectations. It kind of reminds me of playing blackjack in a casino. Have you ever watched someone who is winning big? As long as they’re winning, they have no trouble plinking down big bets and tipping the dealer handsomely. Watch that same person hit a bad run of cards and enter a losing streak: the tips disappear and the size of the bet shrinks.
Not Yesterday’s News
The message seems to be that it’s not time to get too secure in expecting a passing Say-on-Pay vote. Companies that have yet to enter their 2012 proxy seasons should take note that shareholders haven’t forgotten about Say-on-Pay; it is still very relevant and has not faded like yesterday’s news.
Looking forward, I think there is a lot more about Say-on-Pay that we’ve yet to hear about. Last month Britain unveiled its own proposed version of Say-on-Pay, with far more stringent items on the table, like binding votes on compensation and the ability to vote on the ratio between fixed and variable compensation.
What to Do?
While we as stock plan professionals may not be the primary drivers of initiatives that fall under the Say-on-Pay umbrella, we’re certainly involved in administering or managing aspects of compensation. As compensation strategies are discussed and brought to the table, we can and should ensure that Say-on-Pay is and remains an important part of the discussion.