We are now well into the second season of Say-on-Pay voting. In today’s blog, I provide an update of the voting thus far.
Turn-Around of the Year?
It’s probably a little too early in the season to award the title for “Turn-Around of the Year,” but Umpqua Holdings looks like a strong contender. Last year, their Say-on-Pay vote received only 35% support–an emphatic message of disapprobation from their shareholders. Their vote this year was of interest to me because they were one of the companies that modified options and awards granted to their officers to be subject to performance conditions (see my April 2, 2011 blog, “Happy Birthday, Dodd-Frank“). The modification was in response to last year’s Say-on-Pay vote, so I was curious to see if this year’s vote went any better. It did–this year’s vote received 95% support.
The turnaround was not entirely attributable to the grant modifications; Umpqua also did a significant amount of outreach to its shareholders and implemented some other programs (including a policy that at least 50% of all equity awards to executive officers must be performance based), but the modifications surely were a factor. In their discussion of their response to last year’s vote, the grant modifications are the second item that Umpqua mentions.
Citigroup
The most notable failure so far has been Citigroup. The vote has caused such a splash that I feel obliged to mention it, but to be honest, I got nothin’ on it. As far as I can tell, the failure didn’t have anything to do with Citigroup’s stock compensation program, putting it squarely in the category of “things I don’t really care about.” I’ve read speculation that the failure had more to do with dissatisfaction with the banking industry than with Citigroup’s executive compensation programs.
Funny Numbers
This year’s Say-on-Pay vote for Cooper Industries may prove that it doesn’t pay to get cute with your Say-on-Pay vote. Last year, Cooper Industries reported that their Say-on-Pay vote passed with 50.4% support. But, to achieve this, Cooper chose not to count abstentions as “against” votes. This is legally permissible and handy for Cooper because if the abstentions had been counted as “against” votes, their Say-on-Pay proposal would have failed last year.
But, in the end, their decision about how to count abstentions earned them only a short reprieve–this year’s Say-on-Pay vote failed with 70.6% of the votes cast against the proposal.
The Round-Up
According to Mark Borges’ Proxy Disclosure Blog on CompensationStandards.com (my #1 source for the most recent Say-on-Pay vote tabulations), there have been seven Say-on-Pay failures in the 2012 proxy season as of yesterday. As of May 2, 2011, there had been eleven failed Say-on-Pay votes, so companies this year seem to be faring slightly better (unless there are four more failures by tomorrow). Of the seven failures this season, only one failed last year (I believe Mark is counting Cooper Industries as a failure in 2011, despite how they counted their own vote). Three of the failures (Citigroup, FirstMerit, and International Games) had received strong support (over 80%) for their Say-on-Pay votes in 2011.
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 we keep an ongoing “to do” list for you here in our blog.
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It was great to see many of you at the NASPP Conference last week. With no shortage of issues to debate, discuss and dissect, there was something meaningful for everyone.
Fresh off the conference, my mind is full of new information. I’ve narrowed my thoughts down to a couple of interesting things that I’ve seen or (over)heard.
Overheard: Say-on-Pay is Still in Infancy
I count myself among the people who were relieved (okay, surprised) to learn that only 40 companies failed to achieve a majority shareholder vote for the say-on-pay agenda item in their 2011 proxy statement. The pessimistic side of me (which is usually far more dormant than the optimistic side) thought the number would have been higher. While it’s good news that the number of say-on-pay failures was low, it’s too soon to truly know how say-on-pay will impact future proxy seasons. Last week’s Plenary Session at the NASPP Conference (“Say-on-Pay Shareholder Engagement: The Investors Speak”) was a fascinating glimpse into the minds of institutional shareholders. For those who missed this session, the panel shared insight into their say-on-pay related analysis and newly emerging policies and practices. A few things I learned included:
Aside from companies who failed to garner an affirmative say-on-pay vote from the majority of their shareholders, the next biggest concern is for those companies whose say-on-pay agenda items did receive a majority vote, but with narrow margins (which seems to be loosely defined as less than 75%). Those companies have a degree of vulnerability going into the 2012 proxy season, because there was something about last year’s disclosures, practices or proposals that created some shareholder stir. Those companies need to carefully evaluate what may be of issue and take proactive steps to work with shareholders early.
Each institution varies in their say-on-pay policies. In short, they are still evolving in determining their respective approaches in this area. This is new to them, too. As a result, there is no present ‘formula’ or magic method that will universally ensure an affirmative say-on-pay vote from the majority of shareholders. If you have concern, you need to talk to each major shareholder to understand their say-on-pay policies and how they are progressing. If your investor demographic changes, don’t assume that the newest shareholders have the same policies as your other shareholders when it comes to say-on-pay.
The institutions want to hear from companies, particularly those with prior vote challenges, and/or those with current proposals/practices that may be potentially problematic or prone to misinterpretation. The key is engaging early – most of the institutions on the panel expressed agitation over being contacted in the days leading up to the shareholder vote. The take away? Reach out early on, before proxy season if possible.
It’s clear that while the say-on-pay fallout from last year’s proxy season may have been less than anticipated, say-on-pay is still in the baby phase. As a result, keeping on top of changes in shareholder attitudes and policies is a must; more so now than ever.
Seen: Time Travel
I took a trip down memory lane this week when a white paper published by Solium crossed my desk. The paper, titled “The NASPP at 19: The Evolution of the Stock Plan Industry”, reviews the past 20 years of regulatory changes, developments, and administration practices. I know we can all attest to the fact that time flies (whether we’re having fun or not!). When I think about the evolution of our industry over the past 20 years, I feel proud of how far we all have come – from the administrators who are now dealing with far more complex stock compensation programs, to the vendors and industry resources that support them. If you want to take a nostalgic journey, view the paper in our Document Library.
The United States doesn’t have the monopoly on the demand for “pay for performance” compensation strategies for executives. In countries like Canada and the UK we also see a serious interest in whether or not executive compensation reflects the relative success of the company. The Canadian advisory firm, Global Governance Advisors (GGA), published an interactive pay for performance tool this week that allows Canadian investors–or any interested party–to see how CEO pay stacks up against different performance measures. This week there were also announcements from UK companies Vodafone and Telecoms regarding how CEO pay will be more closely linked to performance going forward.
Ride the Wave
One of the problems with limiting performance measures to internal comparisons is that overall company performance can be seriously impacted by general market performance. When the market is heading down and relative success means less dismal earnings than peer companies, don’t expect much support for failing less than the next company. In an upwardly mobile market, however, when peer companies are also realizing profit increases and positive shareholder return, just providing a more attractive financial report than in prior years may not be enough.
Relative Success
When the overall economic picture is sunny, the link between relative performance and executive compensation is more valued. Shareholders want to know that they have made the right decision to invest in your company’s stock instead of another similar stock–linking your executive compensation to the relative success of your company can provide that added assurance. If every other company in your industry is reporting 50% profit growth and your company is only reporting 10% growth, it’s not so great. Relative performance is absolutely a factor that RiskMetrics considers when making recommendations to shareholders, as CME recently felt first hand. Don’t expect to dance your way out of pay for performance, either. With the new Say on Pay requirements, determining how to align executive pay with company performance going forward is essential. Using a relative measure for performance awards gives them the extra edge when marketing pay packages to your shareholders.
NASPP Conference Pre-Session
Of course, as Barbara Baksa highlighted this week, the NASPP has many Conference sessions lined up that can help you better understand pay for performance strategies, Say on Pay and shareholder approval issues, and executive compensation best practices. But, if your company is initiating or updating performance awards this year, the one thing you won’t want to miss is the NASPP pre-conference session, Practical Guide to Performance-Based Awards on November 1. This extensive one-day program has everything you need to tackle performance awards from creating performance metrics to effective administration and even essential global considerations.
Say on pay is inevitable, but it’s difficult for stock plan managers to know exactly what that means to them. Because it’s practically unheard of for the equity compensation team to be on the decision-making side of executive compensation, it may feel easy to dismiss say on pay as an issue that can be overlooked.
However, availing yourself as a knowledgeable resource within your company elevates you as a subject matter expert. Being a part of the conversation when it comes to new policies or grant practices always helps ensure that the solutions coming down your pipeline are both effective and manageable. In that spirit, these are my top three action items for stock plan managers to prepare for say on pay:
Know what shareholders; hot buttons are for share-based compensation, including what features and provisions are likely to be unacceptable and those that increase the likelihood of acceptance. Take a good look at your company’s executive equity compensation to see how outstanding grants rate. Here are a few:
Pay for Performance – A significant majority of the bad press generated over executive compensation focuses on the disparity between executive compensation pay-outs and the relative success of the company during the same period. Pay for performance is more than simply slapping a performance condition on a grant, especially if the performance measures are not adequate to inspire long-term success. This year, we have a fantastic pre-conference program dedicated to performance awards, the Practical Guide to Performance-Based Awards. If you’re looking for ways to beef up your knowledge on performance awards, this is the program for you!
Dividend Payments – Shareholders generally don’t want to see executive compensation that pays out dividends or DERs on unvested shares. This follows right in line with pay for performance; shareholders don’t want to see that an executive will be eligible for dividends on unearned shares.
Long-term Focus – One of the hottest buttons for shareholders is whether or not executive compensation has a long-term focus. For equity compensation, this includes issues like minimum vesting periods (e.g.; at least 3 years, but preferably 5 years) and holding requirements. Increasing the length of time executives must wait before they can cash out their company shares reduces the temptation executives may feel to take excessive risks. Take a close look at your executives’ equity compensation and create a list of features or provisions that demonstrate a long-term focus.
Double-trigger – When it comes to change in control provisions in your grant agreements, shareholders (and potential acquiring companies) absolutely want to see a double-trigger for acceleration of vesting in the event of a change in control. If you haven’t already, take a close look at your grant agreements to see what your company’s change-in-control provisions look like.
Clawback Provisions – depending on how the House and Senate reconcile their final versions of their bills, clawback provisions could be required for listed companies. Shareholders generally like to see that clawbacks are not only in place, but also enforceable. Typically, clawback provisions are found in employment contracts, so have a conversation with your legal team to find out what your company’s current practice is and if that will be changing. Remember that clawback provisions can extend beyond fraud situations; they also may be part of other provisions such as non-compete requirements.
Know what your peer companies are doing and how it compares to your company. This is getting easier to do with enhanced proxy disclosure. If your company’s compensation philosophy already identifies peer companies or groups, then the difficult part has already been done for you. Check out the 2010 proxies from those companies and review their executive compensation practices. Also, keep up with the latest news on shareholder advisory votes; particularly keeping your eyes open for any executive compensation that does not garner vote of approval from shareholders.
Coordinate with your legal and compensation teams. First, it’s important to just keep the lines of communication open and be a part of the conversation. More specifically, find out if tackling say on pay (along with increased disclosure requirements) will require you to provide different or additional data and/or analysis. The earlier you know about additional data requirements, especially if they will ultimately be a periodic need, the more time you have to find the most efficient solution to providing that data.
The NASPP Conference’s Say on Pay Track
Hot off the presses! This week, we announced the “Say on Pay” track that we’ve added to our 18th Annual NASPP Conference. Don’t get left behind on decisions your company may be making in light of say on pay, join us for these essential sessions!
With so many proposed, pending, or newly finalized pieces of legislation right now, I feel a little overwhelmed trying to keep up. Fortunately, we have a couple great resources on our site to help me keep it all straight. First, there is the “Cheat Sheet” provided by OnSecurities.com (posted to the Say on Pay portal). There is also this article by Choate, which has a great chart that details the legislation and which parts of corporate governance it impacts.
Here are a couple of the latest developments, along with a little newsworthy item that caught my eye.
FASB Exposure Draft
As I’m sure you are all aware, the U.S. is moving toward the adoption of IFRS. Nobody is sure when we will adopt IFRS as the U.S. accounting standard, but we do occasionally see signs that progress is being made in that direction. The Exposure Draft issued by FASB on December 17th is a perfect example.
The Exposure Draft is a proposed clarification regarding companies that issue equity awards that are denominated in a foreign currency. If enacted, the amendment in this exposure draft won’t impact very many companies at all. This is because Topic 718 (formerly FAS123R) already addresses the more common situations of companies denominating their equity awards in a foreign currency: using the functional or the payroll currency of the foreign entity. The scenario missing from the current wording in Topic 718 is where a company denominates their equity awards in a currency that is neither the functional nor the payroll currency, but is instead the currency of the market in which a substantial amount of the company’s shares trade. This draft clarifies that such an award would also be considered an equity award, providing that it would otherwise qualify for equity treatment. (For more information, check out our alert.)
What FASB is attempting to do with the clarification offered in this proposed change to Topic 718 is create uniformity with respect to the expensing of certain equity awards. More importantly to me, however, is the fact that FASB specifically addresses how the proposed amendments compare with IFRS. The trouble is that neither Topic 718 nor IFRS currently specifically call out the situations in which this amendment would be applicable, but it is likely that if IFRS were to be updated to include this situation, it would be the same. This is because, as stated in the Exposure Draft, most companies currently reporting under IFRS already expense these awards as equity awards.
Facilitating Shareholder Director Nominations
The SEC recently reopened the comment period for the proposed rule, Facilitating Shareholder Director Nominations. The proposed rule is designed to empower certain shareholders (based on ownership thresholds and minimum holding periods) to influence (presumably to improve) corporate governance by means of introducing both director nominations and proposals to amend director nomination process or disclosure requirements.
Existing comments can be viewed here. One of the concerns being voiced are that the bar for determining which shareholders may submit nominations and proposals is set too low, which could potentially allow short-term investors (like hedge funds) to encourage inappropriate risk-taking. Another concern is the amount of time and energy boards may potentially need to divert from day-to-day business decisions in order to deal with the politicization of board elections.
Although it is unlikely that this rule, if adopted, would impact the daily responsibilities of most stock plan managers, it does highlight SEC efforts to create better corporate governance by giving shareholders more power to influence corporate business strategy. Maybe what it does mean for you stock plan managers out there is that it’s time to renew (or initiate) your relationship with your company’s investor relations group.
FAR Out!
I came across this interesting article in the Hedge Fund Law Report on the merits of granting hedge fund managers appreciation rights that would be similar to a stock appreciation right (although the article compares them to stock options), but track against the increase in the fund’s value.
Two things really struck me about this article. First, it’s encouraging and powerful to keep seeing the conviction that creating an ownership mentality improves the long-term success of a company by aligning employee interests with shareholder interests. Much like the Treasury Special Master’s determinations highlighted the preference of performance-based equity compensation over cash compensation, the idea of granting an appreciation right that pays out with the success of a hedge fund really highlights the importance of appropriate equity compensation as a motivating vehicle.
The second thing that really caught my eye is that the name “Fund Appreciation Right” (FAR) has actually been trademarked by a particular compensation administration company (Optcapital). So, it’s not that other administrators (or funds) can’t issue an equity vehicle that is in the form of an appreciation right; they just can’t call it a FAR. It makes me wonder what our conversations would sound like if someone had trademarked “stock option” or “restricted stock unit”, forcing each company to come up with their own nomenclature!
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