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.
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!
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 Restoring American Financial Stability Act of 2010, passed by U.S. Senate on May 20th, contains provisions that apply to all public companies. Fortunately, you won’t need to read the daunting almost 1500 pages of the bill to weed out the pieces that could impact stock plan managers because we’ve posted the corporate governance and executive compensation portions, courtesy of Davis Polk. Here are the main sections that I think you should be aware of.
Say on Pay and Majority Voting
This bill, like the corresponding House bill, does include a required non-binding shareholder vote to approve executive compensation. Unlike the House bill, this legislation does not require a shareholder advisory vote on golden parachute payments. This provision would take effect six months after enactment of the bill. This does mean that say on pay for all public companies is eminent. Additionally, there is a provision that requires majority voting by shareholders in uncontested board elections that would require any board member who does not receive a majority vote to submit his or her resignation.
These two provisions mean that companies will need to prepare for the voting process, but also get a game plan together on how to address the possibility that shareholders will reject either uncontested board members or executive compensation. In both scenarios, the company can still choose to do what it wants–the executive compensation vote is non-binding and the board can reject a resignation letter. On that note, the CorporateCounsel.net blog this week covers three companies that are already grappling with how to respond to a shareholder rejection of executive pay packages; Motorola, Occidental Petroleum, and KeyCorp. I’ll definitely be tracking this blog to see how say on pay pans out! If you’re looking for more help with executive compensation, don’t forget that the 7th Annual Executive Compensation Conference is included with your 18th Annual NASPP Conference Registration.
Proxy Disclosures
Although this version of the bill does not require the chairman of the board and the CEO to be separate individuals, it does require companies to disclose the reasons they have chosen to keep these positions separate or combine them. In addition, there are a host of required disclosures regarding the company’s compensation committee and executive compensation. This includes a discussion of the relationship between executive compensation and financial performance as well as how the amount of executive compensation compares to the company’s financial performance or investor-return.
Clawbacks
The bill requires the SEC to direct exchanges to prohibit the listing of any company that does not adopt certain clawback policies. This provision is not included in the House bill. Stock plan managers should pay particular attention to this part of the bill. If it is enacted, you will need to work with your legal team to determine if your grant agreements need to be updated and nail down a policy on how to respond to financial restatements that trigger compensation recovery.
Get Smart
As you know, we’ve rolled out our NASPP Question of the Week. I’m really excited about this new challenge for NASPP members! What you may not know is that if you missed out on our first announcement, you still have the unique and never-to-come-again opportunity to catch up. The first four quiz questions will remain available at the full point value until the second month of our contest. So, don’t feel like you’re starting at a disadvantage–you can still work toward that number one position. Create your screen name and get started now!
Over the past week the final verdict came in for two of the cases I blogged about on April 15th.
First, former CEO of KB Home, Bruce Karatz, was convicted for concealing the company’s backdating scheme and faces up to 80 years in federal prison. Mr. Karatz was found guilty on four counts including making false statements on a quarterly report filed with the SEC and making false statements to the company’s outside accounting firm, but was acquitted of 16 other counts including three counts of securities fraud (the most serious charges against him). Mr. Karatz, in pleading non-guilty to all charges, had claimed that he was falsely targeted as part of the governments crack-down on illegal back-dating. With only four out of 20 charges resulting in a conviction, it looks like even the testimony against him from the former KB Homes HR Director, Gary Ray, wasn’t enough for the SEC to get the big win they were looking for on this one. (See thisRueters article.)
Alternatively, former Maxim Integrated Product’s CFO, Carl Jasper was found guilty on eight out of 11 counts against him. Mr. Jasper had claimed that the backdating scheme was above his pay grade (so to speak) and that former CEO, Jack Gifford, was an unstoppable force heading up the practice. (See thisBusiness Journal article.)
Both Mr. Karatz and Mr. Jasper intend to challenge their convictions.
Options Prevail!
Almost exactly one year after rejecting a proposal to ban stock options to senior executive officers (See thisAssociated Press article.), Pfizer shareholders got a second opportunity to vote on a very similar proposal. Once again, the proposal to eliminate all future option grants to executive officers was overwhelmingly rejected.
This year, the proposal was being brought by activist shareholder Evelyn Y. Davis, who obviously favors restricted stock over options, blaming the recent fluctuations in the market on “shenanigans” stemming from the granting of stock options. Coincidentally, shareholders did vote to give themselves an advisory vote on executive compensation, adding Pfizer to the list of companies engaging in some type of “say on pay.” (See thisYahoo! Finance article.)
I was thinking about this vote when I saw our own Broc Romanek’s April 17th Advisor’s Blog entry on CompensationStandards.com. He brought it to my attention that the Council of Institutional Investors published a checklist of the “Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Compensation”. On that list is a call for stock options to be linked to performance, an approach to granting options that Ms. Davis seems to have missed.
If you’re looking for the best information available on executive compensation, you’ll be excited to know that your registration for the 18th Annual NASPP Conference includes a special bonus access to the 7th Annual Executive Compensation Conference! If you aren’t already registered, don’t miss out on the $200 discount that we are offering through May 14th. Register today!
In April I wrote about how the current environment is renewing an interest in shareholder votes on executive compensation. The Obama administration has made it clear that “say on pay” is an integral part of efforts to reform corporate governance. On June 10th of this year, the Administration released a “Say on Pay” Fact Sheet outlining President Obama’s perspective on the need for non-binding shareholder votes on executive compensation and golden parachute payments.
The Treasury has already proposed legislation, the Investor Protection Act of 2009 that I wrote about in July, which would require a non-binding shareholder vote on executive compensation, golden parachute payments, and improve compensation committee independence.
If enacted, this bill will impose the following Say-on-Pay standards:
Annual non-binding shareholder approval of executive compensation
Disclosure (in simple tabular format) of compensation to principal executives relating to corporate transactions as well as the aggregate total for such compensation
Separate non-binding shareholder approval of disclosed compensation to principal executives related to corporate transactions
Compensation Committee Independence
In addition, it includes the following requirements to facilitate compensation committee independence:
In order to be considered independent, members of the compensation committee may not receive any compensatory fees from the company and cannot be affiliated with the company in any other way.
Companies must allow compensation committees to engage independent compensation consultants and legal counsel as well as provide funding to do so.
In their proxies, companies must disclose whether or not their compensation committees engaged the services of a compensation consultant and if not, then provide an explanation.
Further Restrictions for Financial Institutions
Additionally, the House bill would give regulators the authority to prohibit any compensation arrangement that encourages “inappropriate risks” by financial institutions which could have “serious adverse effects on economic conditions or financial stability”. Since the bill only instructs Federal regulators to come up with appropriate legislation to prohibit this type of compensation, it is not yet clear how it will be defined or what penalties may be imposed. It does reinforce that the Administration clearly feels that the compensation structures within financial institutions were at least partially to blame for the economic crisis. Although this is a small part of the bill, I think it’s worth keeping an eye on. If financial institutions are ultimately subject to this type of scrutiny, then all public companies should take note and consider keeping their own compensation policies within the guidelines set for financial institutions and banks.