While normally ISS’ annual release of policy updates is a relatively exciting, blog-worthy event, this year’s release feels anti-climatic (at least with respect to their compensation policy–maybe there’s some really hot updates to their policies on, say, hydraulic fracturing and recycling–I wouldn’t know) because they previewed the changes several weeks ago (see my Nov 15 blog, “ISS Previews Policy Changes“).
As far as I can tell, the final policy doesn’t really differ much from the proposed policy. In fact, given the short comment period on the proposal and the quickness with which the final policy was released, I have to wonder if they received many, if any, comments and if they did much with the comments. Unlike the IRS, FASB, and the SEC, ISS doesn’t publish/summarize the comments they received or address how those comments were taken into consideration.
Policy Changes for Stock Compensation
As summarized in my previous blog, really the only policy change that directly impacts stock compensation is that when newly public companies first submit a stock plan for shareholder approval for Section 162(m) purposes, ISS will now conduct a full review of the plan. In the past, they basically rubber-stamped these proposals.
This might be big news for LinkedIn, Yelp, Groupon, Zynga, and other recent and anticipated IPOs (and their compensation consultants), but for most of my readers, who have been public for a while now, this isn’t that groundbreaking.
Pay-for-Performance
The changes with regards to how ISS evaluates pay for performance also seem to have been adopted largely as proposed. ISS will now determine peer groups based on market capitalization, revenue, and GICS codes, rather than just relying on GICS codes. This could make it difficult for companies to determine who is in their ISS peer group on their own, thus making it hard for companies to predict how they’ll compare against their peers.
ISS will compare a company’s TSR and CEO pay rankings in the peer group and the CEO’s total pay relative the peer group median. Where merited, ISS will also perform a qualitative analysis. This will include a number of factors, the most interesting of which to me is that ISS will look at the ratio of performance to time-based equity awards (I assume this is limited to awards issued to the CEO, but this isn’t completely clear to me from ISS’ summary of the updates). As my readers know, there were several companies this year that modified time-based awards held by their CEO’s to vest based on performance conditions (see my May 3 blog, “Eleven and Counting“). I have to believe these two developments are connected and we can expect ISS to push for more performance-based vesting–at least for CEOs–in the future.
Burn Rates
The updated burn rate tables are not included in the summary of the changes–last year ISS didn’t release these until mid-December so I guess that’s when we’ll get them this year. Is it just me, or does it seem like ISS is releasing these tables later and later?
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 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.
Did It Pass? Understanding Shareholder Voting Issues By Keith Bishop of Allen Matkins
Because we live in a democracy, we are likely to feel that we have a good understanding of voting. The basic principle is that whoever or whatever gets the most votes wins. Voting, however, is a far more complicated subject than many governance professionals may realize.
When determining whether a proposal has passed, the first step is to determine the applicable voting rule. This will be a function of state corporate law and the corporation’s charter documents. For Delaware corporations, Section 216 provides a general (there are some exceptions) default rule for matters other than the election of directors – the affirmative vote of the majority of the shares present and entitled to vote present in person or by proxy at the meeting. However, this default rule is not immutable. It can be changed by the certificate of incorporation or the bylaws. Some Delaware corporations, for example, have adopted a majority of the votes cast rule for shareholder action. Thus, it is important to review a company’s charter documents when determining whether a matter has been approved.
What’s the difference between these two rules? Under Delaware’s default rule, broker non-votes are not counted as votes against because they are not considered present and entitled to vote. Under a “votes cast” standard, abstentions and broker non-votes aren’t counted as votes against because neither is a vote against.
But wait, there’s more. In determining whether a proposal has passed, it is critical that companies ask the question “why are we seeking shareholder approval?” If shareholder approval is being sought to meet listing, tax or other requirements, additional, and even conflicting, voting requirements may come in to play.
For example, the New York Stock Exchange (Rule 303A.08) generally requires listed companies to obtain shareholder approval of equity compensation plans. The requisite standard for approval appears to be similar to a majority of the votes cast standard – “the minimum vote which will constitute shareholder approval for listing purposes is defined as approval by a majority of votes cast on a proposal in a proxy bearing on the particular matter, provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal.” Rule 312.07. However, the NYSE treats abstentions as votes cast regardless of their treatment under state law. Consequently, a measure may pass as a matter of state law and yet fail to meet the NYSE’s requirement.
Determination of whether a proposal has passed is not as easy as it may seem. It requires an understanding of applicable state law as well as other applicable listing and legal requirements.
Don’t Miss the 19th Annual NASPP Conference The 19th Annual NASPP Conference will be held from November 1-4 in San Francisco. With Dodd-Frank and Say-on-Pay dramatically impacting pay practices, you cannot afford to fall behind in this rapidly changing environment; it is critical that you–and your staff–have the best possible guidance. The NASPP Conference brings together top industry luminaries to provide the latest essential–and practical–implementation guidance that you need. This is the one Conference you can’t afford to miss. Don’t wait–the hotel is filling up fast; register today to make sure you’ll be able to attend.
I often hear that liberal share counting–i.e., allowing shares tendered to the company for net exercises and tax withholding–is a deal-breaker with ISS. Turns out, this isn’t always the case. For full value awards, allowing shares tendered for taxes to return to the plan is okay. Moreover, if you don’t have a flexible share reserve (or a cap on the number of shares that can be issued as full value awards), liberal share counting is also okay.
This is because the only impact of a liberal share counting provision is that ISS will treat all options and SARs as full value awards in their shareholder value transfer analysis. But full value awards are already treated as full value awards in that analysis, so there’s no reason not to use liberal share counting for these awards. And without a flexible share reserve or a cap on the number of shares that can be issued as full value awards, ISS assumes that all shares under the plan will be issued as full value awards.
Black-Out Periods and Post-Exercise Grace Periods
It is possible for stock plans to provide that, where a black-out period occurs during the post-termination exercise period for stock options, the exercise period is automatically extended. This ensures that all former employees have the same amount of time to exercise their options without having to modify the options (and perhaps take an accounting hit) at the time of termination. I imagine it also might head off lawsuits that might be filed if former employees aren’t able to exercise due to a company-imposed blackout. (Of course, in no event, should the extension allow the option to be exercised beyond the original contractual term of the option.)
Shareholder Voting Bias
One consideration in the decision to amend vs. adopt a new plan is that shareholders might have a slight bias for new plans. Just a slight bias–when considering this decision, W.W. Grainger was advised that approval rates for new plans were maybe 1% to 2% higher than for plan amendments–but still, every little advantage helps.
Majority for NYSE Companies
For stock plan proposals, NYSE companies need a majority not just of the votes cast but of their total votes outstanding. That’s a much higher bar to acheive and, since brokers can’t vote on stock plan proposals without receiving direction from shareholders, could be a challenge for companies with high levels of lackadaisical shareholders, e.g., retail investors and probably even employees. When stock plan proposals are in your proxy statement, make sure employees are aware of them and vote.
You’re Not Getting Away With Anything
You may have some older plans with a lot of unused shares still available for grant–maybe even an non-shareholder approved plan that you slipped in before Nasdaq and the NSYE tightened up those requirements–and you (or your execs) may think those plans are flying below the radar. Not so. Your shareholders, particularly institutional investors, and their advisors, are aware of those plans (after all, you are disclosing these plans under Item 201(d) in the proxy statement) and these plans are likely to impact how shareholders will vote on current stock plan proposals. If you aren’t using these plans, maybe it’s time to get rid of them.
The Early-Bird Gets the Vote
You might have been thinking that this webcast was timed oddly–really too late to do anything about stock plan proposals for this year’s proxy season. But, in fact, the webcast was timed just about right for getting started on next year’s proposals. If you expect to go out to shareholders with a proposal that is significant enough that it warrants consideration of amending an existing plan vs. adopting a new plan, you want to start that process about a year ahead of time. Even better would be to start two years ahead of time and get the proposal into your proxy statement a year early, so you have another chance if the proposal fails.
These were just a tiny portion of the many great practical tips presented during the webcast. If you missed it, the audio archive is now available and the transcript will be posted in a couple of weeks.
Online Financial Reporting Course–Only a Few Days Left for Early-Bird Rate There are only a few days left to receive the early-bird rate for the NASPP’s newest online program, “Financial Reporting for Equity Compensation.” This multi-webcast course will help you become literate in all aspects of stock plan accounting, including the practical considerations and technical aspects of the underlying principles. Register by this Friday, April 29, for the early-bird rate.
2011 Domestic Stock Plan Administration Survey The NASPP is excited to announce the launch of our 2011 Domestic Stock Plan Administration Survey, covering administration and communication of stock plans, ESPPs, insider trading compliance, outside director plans, and ownership guidelines. You must participate in the survey to receive the full survey results. Register to complete the survey today–you only have until May 20 to complete it.
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
Register for the NASPP’s newest online course, “Financial Reporting for Equity Compensation.” Don’t wait; the early-bird rate is only available until this Friday, April 29.
I was thinking that we might be dealing with a shutdown government this, which, while otherwise not such a good thing, would have provided some interesting fodder for my blog. But it appears to be business as usual at the IRS and SEC, so today I blog about something completely different: burn rate guidelines.
Burning the Candle at Both Ends: Burn Rates and Stock Compensation “Burn rate,” also referred to as “run rate,” is a mechanism for measuring how much equity a company grants to employees on an annual basis as compared to the equity held by shareholders. It’s a way for shareholders to guage how much their equity is being diluted annually through stock programs in a worst-case scenario (i.e., ignoring any offsets to that dilution, such as forfeitures and repurchase programs).
There’s no legal definition of burn rate, so every investor, proxy advisor, and survey has their own calculation, but the basic formula is the number of shares granted during the year divided by the total shares of common stock outstanding.
Fidelity Investments Announces Use of Burn Rates
Fidelity Investments, a large institutional investor with holdings in many public companies, has announced that it will begin using a burn rate analysis in determining whether to vote for stock plan proposals. The policy establishes the following acceptable maximum burn rates:
1.5% for a large-cap company
2.5% for a small-cap company
3.5% for a micro-cap company
Fidelity will vote against new stock plans and share authorizations if a company’s three-year burn rate exceeds the relevant maximum, unless Fidelity believes there is a compelling justifcation for the high burn rate.
ISS (formerly RiskMetrics, formerly ISS–how many times can one company change their name) has used a burn rate analysis for as long as I can remember. (I confess, these days, that time period isn’t as long as it used to be, but, in this case at least, is many, many years. 10 points to anyone who knows when ISS first started using their burn rate analysis in evaluating stock plan proposals.)
There are a few key differences between the ISS burn rate analysis and Fidelity’s new policy:
ISS burn rates are published by industry and by whether or not the company is in the Russell 3000 index, so ISS has a more than just three burn rate categories.
ISS applies a multiplier to full value awards, so one award share granted counts as greater than one share in the burn rate calculation. The multiplier is based on the volatility of the company’s stock.
Where a company’s burn rate exceeds ISS’s guideline, the company can still get ISS to recommend voting for their stock plan proposal by making a commitment to keep their average burn rate for the next three years within the higher of: a) 2% of the company’s common shares outstanding or b) the mean plus one standard deviation of its applicable industry burn rate.
Higher Burn Rates Equals More Generous Grants? Not So Fast
ISS’s acceptable burn rates were generally higher this year than last year, so companies may be feeling like they can be a little more generous with this year’s grants. Keep in mind, however, that ISS uses a three-year average in its analysis. Granting more shares this year means that, three years down the road, your average will be higher and, by then, the ISS guidelines for burn rates may be lower.
Online Fundamentals Starts on Thursday–Don’t Miss It! The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins this Thursday, 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 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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
Attend your local NASPP chapter meetings in Denver, NY/NJ, and San Francisco. I will be at the Denver and San Francisco chapter meetings (that’s two out of three this week); I hope to see you there!
ISS (formerly RiskMetrics, which was formerly ISS–how many times can one company change its name) released updates to its corporate governance policy in late November.
In the spirit of no news is good news, most of my readers will be relieved to hear that the policy doesn’t seem to change much with respect to stock compensation. ISS introduces a cap on the amount that burn rate maximums can change (up or down) from year to year; changes will be limited to a maximum of 2 percentage points difference from the prior year’s maximum burn rate. This is nice, but unless I’m missing something here, it doesn’t seem that significant.
Problematic Pay Practices and Say-on-Pay
ISS identifies a number of “problematic pay practices.” If a company employs these practices, in the past, ISS might have recommended voting against or withholding votes for compensation committee members or voting against a company’s stock compensation plan. Now, however, ISS has another weapon in its arsenal: Say-on-Pay. Problematic pay practices may now result in ISS recommending that shareholders vote against the company’s executive compensation proposal.
Stock compensation-related practices that ISS specifically identifies as problematic include:
Paying dividends on unvested performance awards
Multi-year guarantees for stock awards or other equity compensation
Repricing or otherwise exchanging underwater stock options without shareholder approval
Tax gross-ups on restricted stock
Past governance policy updates have specifically mentioned mega grants as problematic as well. While these grants aren’t mentioned this year, I expect that they are still a concern for ISS. I’m sure you all remember how I feel about mega grants.
In another significant change, where companies have problematic pay practices, ISS has revised its policy to no longer allow companies to avoid a negative recommendation by merely committing to eliminate them in the future.
Burn Rates–An Opportunity?
ISS has not released the maximum burn rate tables yet for 2011. Where a company’s average burn rate for the past three years exceeds the maximum allowable for its industry (or 2%, if higher), ISS will recommend against proposals for new stock plans or allocations to existing plans.
Once the burn rate tables are released (expected any day now), companies will know whether their three-year average is coming in low or high. If low, I wonder if this might be an opportunity to make some quick grants. For example, let’s say a company is planning to ask for more shares next year–enough that it doesn’t expect to have to request another allocation for at least three years. If the company realizes that its three-year average burn rate is low, would it make sense to accelerate some of next year’s grants into this year (assuming the company has enough shares available, of course), so the grants won’t be included in the average four years down the road, when the company might conceivably need to ask for more shares?
I’m just throwing the idea out there; I admit that, in practice, a lot of stars would have to align perfectly for this to make sense. It probably isn’t that realistic of a strategy for most companies.
Post Press Releases to the NASPP Website I’m excited to announce that we have enhanced the online NASPP vendor hall to allow our online exhibitors to post press releases. The press releases will appear on the NASPP home page and in the vendor hall. We already have our first press released posted by Morgan Stanley Smith Barney! For more information, contact naspp@naspp.com.
Just a Couple of Weeks Left to Get your Free Conference Session Audio 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! Don’t wait any longer–the new year will be here before you know it!
This offer is also available to anyone the joins the NASPP before December 31–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.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify to receive the audio of one NASPP Conference session for free.
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.
The Obama Administration’s regulatory reform agenda has been moving forward. Recently, the SEC proposed changes to proxy disclosure and solicitation requirements and the Treasury issued its Interim Final Rule consolidating restrictions for TARP fund recipients. Last week I mentioned that all companies should be keeping an eye on the TARP fund recipient requirements, as the government is likely to push at least part of these requirements to all companies.
Well, last Thursday, the Treasury issued proposed legislation, the Investor Protection Act of 2009, which requires a non-binding shareholder vote on executive compensation as well as provides for truly independent compensation committees.
For proxies or shareholder meetings on or after December 15, 2009, the proposed legislation requires that a separate, non-binding shareholder vote be cast to approve the executive compensation as it is disclosed in the proxy statement.
Shareholder Approval of Golden Parachute Payments
The Treasury’s proposal also includes a requirement that any proxy or solicitation material on corporate transactions (acquisitions, mergers, etc.) include in tabular format any executive compensation relating to the corporate transaction, including the aggregate total of that compensation. Additionally, it calls for a separate, non-binding shareholder vote on executive compensation relating to the corporate transaction.
Under the proposal, compensation committee members must remain truly independent, other than their involvement in the company as non-employee directors (with potential exemptions for smaller reporting issuers). To be considered independent, members of the compensation committee may not accept any fees from the company for any activity other than their involvement in the board of directors, compensation committee, or other board committee. The SEC will direct national securities exchanges to include these enhanced independence criteria in listing requirements and may direct exchanges to prohibit the listing of the securities of companies found to not be in compliance.
Compensation Consultants and Independent Legal Counsel
The Treasury feels that the involvement of compensation consultants puts compensation committees at a disadvantage, encouraging them to approve excessive compensation for CEOs and other executives. To help level the playing field, the proposed legislation requires that compensation committees be permitted (and provided funding) by the companies to retain their own compensation consultants. These independent consultants would report only to the compensation committee rather than to the company.
Additionally, compensation committees must be permitted (and provided funding) by companies to retain independent legal counsel or other advisors at the discretion of the compensation committees.
Disclosure
In the spirit of greater transparency, the proposed regulations will require companies to disclose whether or not their compensation committees retained a compensation consultant. If a compensation committee chooses not to retain the services of a compensation consultant, the justification for that decision must be disclosed.
This proposal will almost certainly mean that stock plan administrators will find themselves working more closely with compensation consultants. Don’t miss our Conference session “Wagging the Dog: Stock Plan Administrator Meets Compensation Consultant” for ideas on how to be proactive on your involvement in compensation decisions!
A class-action lawsuit was recently filed against Novatel by two pension funds that had invested in Novatel stock alleging that several executives engaged in insider trading. Each executive named in the suit claims to have been trading exclusively under a Rule 10b5-1 trading plan, so what went wrong? Although there were Rule 10b5-1 trading plans in place, these plans were allegedly modified to increase the sale of shares prior to a public disclosure of the loss of Novatel’s contract with Sprint (which resulted in a sharp decline in share price).
Sound familiar? Last October, I blogged on Rule 10b5-1 trading plans. I stressed the fact that entering into a Rule 10b5-1 plan does not inherently protect an individual from the risk of prosecution for insider trading. The most prominent illustration of this at the time was the ongoing SEC investigation of Countrywide CEO, Angelo Mozilo, who is also accused of modifying his Rule 10b5-1 trading plan to increase sale amounts prior to a sharp decline in share price.
Remember that Rule 10b5-1 trading plans must be properly administered in order to provide protection to the individual. The top ways Rule 10b5-1 plans may be misused are:
1. Entering into a plan with transactions that take place immediately
2. Cancelling a plan to prevent a transaction from taking place
3. Modifying an existing plan to increase or decrease sales
Take some time now to review your company’s policy on Rule 10b5-1 trading plans.
Getting Shareholder Approval
In other news, the CEO of Keynote Systems, Umang Gupta agreed to cancel his 400,000 share option grant (currently underwater) in exchange for a ‘yes’ vote from shareholders to extend the expiration date for Keynote’s equity incentive plan. In the original appeal to shareholders, Gupta attempted to assuage misgivings stemming from the ISS/RiskMetrics recommendation against the extension. The main concern voiced by ISS/RiskMetrics was the high number of options outstanding. Gupta explained that the reason so many options remain outstanding is that 90% of the grants are currently underwater–and that the company cannot do an option exchange without shareholder approval. Shareholders originally took ISS/RiskMetrics’ advice and rejected the extension. However, after Gupta agreed to relinquish his grant, shareholders voted to extend the equity plan expiration date. Ultimately, the 400,000 share grant wasn’t the only option cancelled by Umang Gupta. He also cancelled an additional grant for 300,000 shares; one that was even more underwater than the negotiated grant. Obtaining this expiration extension from shareholders means that Keynote can continue to offer equity compensation to current (or potential) employees without having to ask for shareholder approval on a completely new plan.
If this down market finds your company courting shareholder approval for a new plan or additional shares under an existing plan, consider what you can do to improve your odds for shareholder approval. Maybe your CEO isn’t ready to cancel his or her outstanding grants, but you can still take steps to help garner shareholder approval. For the top ways to improve your stock plan proposal, check out this article by Compensia.com on the NASPP Practice Alerts, “Five Tips for a Successful Employee Stock Plan Proposal”.