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Category Archives: Compensation

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Pay ratio disclosure: Myths and madness

Posted in Bob's Upticks, Compensation, Corporate Governance, Disclosure Guidance, SEC

It’s done. On August 5, the SEC adopted final rules that will require publicly traded companies to disclose the ratio of the CEO’s “total compensation” to that of the “median employee.” We’re still wending our way through the massive (294 pages) adopting release, but one piece of good news (possibly the only one) is that it appears that pay ratio disclosures won’t be needed until 2018 for most companies.

I’ve already posted my views on this rule (see “CEO pay ratios: ineffective disclosure on steroids”), so it’s no surprise that I’m not happy. However, what is surprising are the myths and madness that the mandate has already created. First, there’s the “median employee,” who may be a myth in and of him/herself. But that’s not all; the media (notably The New York Times) have begun to tout the rule and make all sorts of predictions about how it will impact CEO pay, many of which involve myths and madness of their own.

Myth: In an August 6 column, Peter Eavis wrote about the rule, saying “the ratio, cropping up every year in audited financial statements, could stoke and perhaps even inform a debate over income inequality”. Really? In the audited financial statements? I haven’t finished reading the rule, despite its being such a page-turner, but I didn’t see that in there and don’t think I will. Someone better tell the audit firms – and also tell Mr. Eavis that the ratio is not auditable.

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Bob

 Summer doldrums in DC? Not so much!

Posted in Accounting, Bob's Upticks, Compensation, Disclosure Guidance, PCAOB, SEC

For those who think nothing ever gets done in Washington, last week must have been a challenge. From outward appearances, both the SEC and the PCAOB seem to be working overtime, possibly in order to ruin our holiday weekend or at least lay some guilt on us for not spending the weekend reading what they’ve put out.

First, on July 1 the SEC published rule proposals on the last of the so-called Dodd-Frank “four horsemen” (or, as the SEC Staffers called them, the “Gang of Four”) compensation and governance provisions – specifically, clawbacks. It’s too soon for even nerds like me to have gone over the proposed rules in any detail, but at first blush they disappoint in a few respects. Among other things, they appear to call for mandatory recoupment of performance-based compensation whenever the financials are restated, without regard to fault or misconduct; even a “mere” mistake will trigger the clawback. Moreover, neither the board, nor the audit committee, nor the compensation committee will have any discretion or any ability to consider mitigating circumstances. Last (for now), they do not seem to provide any exemptions or relief for small companies, emerging growth companies or the like. Interestingly, equity awards that are solely time-vested will not be considered performance-based compensation for purposes of the proposed rules. Of course, these are only proposed rules, and they will eventually take the form of exchange listing standards rather than SEC rules, but the basic approach is absolute and draconian, and it’s difficult to envision them changing very much.

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Bob

Crazy is as crazy does – compensation run amok?

Posted in Bob's Upticks, Compensation

As we approach the end of the 2015 peak proxy season, the annual parade of articles and studies of executive compensation has begun. To no one’s surprise (at least not mine), the numbers keep going up, and some investors and media types are looking for someone to blame.   Companies and their boards or compensation committees are obvious targets (in some cases, quite justifiably), and some have criticized investors themselves, who continue to overwhelmingly support say-on-pay proposals whether or not their support seems warranted.

If you accept that one symptom of insanity is to repeat the same behaviors over and over again while expecting different results, then it appears we’re in the midst of an epidemic of compensation craziness. Why did anyone seriously think that say-on-pay votes would cause executive compensation to decrease? (Parenthetically, there are people who think that disclosure of CEO-to-median employee pay ratios will lead to a reduction in executive pay. Talk about crazy.) I learned a long time ago – from the mouth of Pearl Meyer herself – that every attempt to rein in executive pay by legislation, regulation or disclosure (i.e., shame) has failed. Why did anyone think this would be different? In other words, limiting executive compensation is like what Mark Twain said (or not) about the weather – everybody talks about it, but nobody does anything about it. At least nothing that works.

Well, maybe not. It seems that Dan Price, the CEO of a company called Gravity Payments in Seattle, who’s been making over “a million-dollar salary,” decided this year that he would do something about it. Specifically, he cut his compensation and decided that everyone in his company would make at least $75,000 per year. You’d think that he’d be given laurel wreaths or maybe a ticker-tape parade, at least in some circles of compensation-land, but you’d be wrong. There have been articles (i.e., screeds) written by some in the industry that he’s going about it all wrong, that it’s not a solution that can be applied on a broad base, and so on. He’s even been referred to as crazy.

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Bob

Chancery Court Holds Board to Heightened Fiduciary Duty Standard in Connection with Equity Awards

Posted in Compensation

A recent case out of the Delaware Court of Chancery could result in heightened scrutiny of equity award grants to non-employee directors. Although this decision was rendered at the procedural stage of the case and the merits of the claims have yet to be fully analyzed, this case potentially affects directors of Delaware companies and… Continue Reading

The third horseman leaves the paddock

Posted in Bob's Upticks, Compensation, Disclosure Guidance

It shouldn’t come as a surprise to anyone nerdy enough to be reading this blog that the Dodd-Frank Act mandated SEC rulemaking in four areas relating to the disclosure of executive compensation:

  • pay ratio,
  • hedging,
  • clawbacks, and
  • pay-for performance.

These items have been variously referred to as the “four horsemen” (as in apocalypse) or the “gang of four” (as in Chairman Mao’s evil wife and her evil friends).

Up until now, the SEC has been moving at a rather leisurely pace to get the horsemen – er, rules – out. In fact, the SEC’s failure to adopt final pay ratio disclosure rules has generated some criticism (see my recent UpTick). Perhaps for that reason, the SEC seems to be moving forward to propose the remaining rules at a somewhat faster pace. Just about 10 weeks ago, the SEC proposed rules on hedging.

And now the SEC has scheduled an open meeting on April 29 at which it will consider proposing rules for pay-for-performance disclosure. You can find the SEC’s Sunshine Act notice of this meeting here. It’s anyone’s guess what the proposed rules will look like, but the proposals will definitely generate lots of interest. So, for the time being, all I can suggest is “watch this space.” We’ll let you know once we have a chance to see what emerges from the open meeting.

Bob

CEO pay ratios: ineffective disclosure on steroids

Posted in Bob's Upticks, Compensation, Disclosure Guidance

On Sunday, April 12, the Business section of the New York Times led with an article by Gretchen Morgenson taking the SEC to task for not having adopted rules requiring disclosure of CEO pay ratios. This follows similar complaints by members of Congress, most recently in the form of a March letter by 58 Democratic congressmen to Chair White. And going further back – specifically, to Chair White’s Senate confirmation hearing in March 2013 – Senator Warren told Chair-Designate White that SEC action on this rule “should be near the top of your list.”

Really?

I’ve given this a great deal of thought since Congress mandated pay ratio disclosure in the Dodd-Frank Act, and I’ve yet to figure out why – aside from political considerations – so many people think this disclosure is so important or what it will achieve. In fact, when I coordinated a comment letter on the rule proposal as Chair of the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals, I told a number of people that it was the hardest comment letter I’d ever worked on, and I believe that was the case because it was hard to comment on a proposal that struck and continues to strike me as ill-advised and unnecessary in its entirety.

Ms. Morgenson’s article proves my point. It provides pay ratio data for a number of companies, as determined by a Washington think tank. But at the end of the article, all the data demonstrate is that the CEOs of the companies in question make a ton of money. The ratios don’t tell us anything more than that; Disney had the highest ratio, but does anyone need a ratio to know that its CEO makes lots of money? Ditto Oracle, Starbucks and the others – in all cases, the ratio is far less informative than the dollar amounts, which of course are and have for many years been disclosable.

The ratios might – but only might – be more meaningful if we knew what the underlying facts are; for example, what is the mix of US to non-US employees? To what extent are the employees part-time or seasonal? But of course the article doesn’t reveal this information, and neither would the proposed SEC rules. And the SEC Staff has indicated the final rules are not likely to allow companies to exclude non-US, part-time or seasonal employees. In other words, we won’t be able to distinguish between two companies with the same pay ratios regardless of the fact that one may have vast numbers of employees in the third world while the other’s employees are located in major industrialized countries.

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Bob

Oops, they did it again – ISS proposes new voting policies

Posted in Bob's Upticks, Compensation, Corporate Governance

Britney Spears has nothing on Institutional Shareholder Services, better known as ISS.  ISS is rolling out proposed new voting policies for the 2015 proxy season.  ISS often uses more words to tout how transparent it is than to explain its voting policies clearly, and the draft policies being considered for 2015 are no different.

One new proposed policy addresses voting on shareholder proposals on independent board chairs.  ISS proposes to expand the list of factors that will be considered in developing a voting recommendation and to look at these factors in a more “holistic” manner.  (The current policy is to support the proposals unless the company meets all of the criteria.)  So this seems like a good thing.  However, ISS indicates that the new policy is not expected to change the percentage of independent chair proposals that it will support.  The obvious question is, then, how will the new policy really work?  Your guess is as good as mine (which frankly isn’t very good).

The other new proposed policy provides additional information regarding the “scorecard” that ISS will use to evaluate equity plans.  Like the independent chair policy above, some more criteria are laid out, but it’s impossible to tell how the factors – or, indeed, the new scorecard, will be weighed or will work – thus assuring that companies seeking shareholder approval of equity plans will have to continue to use ISS’s consulting service to find out whether a new plan will pass muster.

I could just as easily have referred to Yogi Berra as to Britney Spears, because if this isn’t déjá vu all over again, I don’t know what is.

Your thoughts?

Bob

Executive compensation disclosure is too great a burden for issuers

Posted in Compensation

Although you may have missed the fireworks and the parade, we celebrated the one year anniversary of the JOBS Act on April 5th.  Of course you wouldn’t have been alone if you missed the big celebration because, unfortunately, despite the initial hype surrounding the JOBS Act, not much has happened.  The media has chastised the… Continue Reading

Will director compensation be the next target?

Posted in Compensation

Since 2007, executive compensation practices of public companies have been at the forefront of activist shareholders’ and shareholder rights groups’ agendas. Mandatory say-on-pay proposals, enhanced executive compensation disclosure, compensation committee and compensation consultant independence rules are just a few of the recent significant changes to the laws and regulations applicable to public companies in the… Continue Reading

Securities Law 101 (Part IV): Paying employees with stock – Don't get tripped up!

Posted in Compensation

This is the fourth part of our Securities Law 101 series.  Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management… Continue Reading

Securities Law 101 (Part IV): Paying employees with stock – Don’t get tripped up!

Posted in Compensation

This is the fourth part of our Securities Law 101 series.  Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management… Continue Reading

Say-on-pay litigation: Round 2

Posted in Compensation

Why doesn’t the plaintiffs’ bar believe Congress means what it says? The Dodd-Frank Act could not have been more clear that the outcome of the mandatory say-on-pay advisory vote for public companies does not create or imply any change to the fiduciary duties of board members. However, as we have discussed in previous blog posts,… Continue Reading

Are your compensation committee members independent?

Posted in Compensation

Compensation committees remain on the hot seat.  Stemming from the Dodd-Frank Act, the SEC has adopted rules directing each national securities exchange to require companies with listed equity securities to comply with new compensation committee and compensation advisor requirements. Among other things, these new rules require national securities exchanges to implement listing standards that require… Continue Reading

Binding say-on-pay: Is it coming to a public company near you?

Posted in Compensation

Following the recent financial crisis and government bailouts of major U.S. financial institutions, the federal government has gradually facilitated a power shift from companies and their officers and boards of directors to their shareholders. A prime example of this is the recently enacted “say-on-pay voting” requirements. Through provisions of the Dodd-Frank Act which was passed… Continue Reading

Has New Life Been Given to Derivative Suits Based on Failed Say-On-Pay Votes?

Posted in Compensation

Section 951 of the Dodd-Frank Act states that the results of a shareholder say-on-pay advisory vote will not trigger or imply a breach of fiduciary duty. Because Congress went out of its way to be explicitly clear on this point, most legal commentators felt that shareholder derivative suits based on failed say-on-pay votes, without more,… Continue Reading

Will Dodd-Frank Mandated Executive Compensation Disclosures and Related Items Apply to the 2012 Proxy Season?

Posted in Compensation

On August 2, 2011, the Securities and Exchange Commission (the “SEC”) released a revised Dodd-Frank rulemaking calendar. The new calendar indicates that rulemaking pertaining to the following sections of the Dodd-Frank Act will be delayed until the first half of 2012: §§953 and 955: Adopt rules regarding disclosure of pay-for-performance, CEO pay ratios, and hedging… Continue Reading

IRS Clarifies 162(m) Deduction Requirement

Posted in Compensation

The IRS recently issued proposed regulations under Internal Revenue Code Section 162(m) relating to the deduction limitation for certain employee remuneration in excess of $1,000,000, which if passed, will have a significant impact on the design of equity based compensation plans for existing public companies and privately-held companies that ultimately become publicly held. Under Code… Continue Reading

Are the Say-on-Pay Votes “Advisory” After All?

Posted in Compensation

When Congress passed the Say-on-Pay provision in Dodd-Frank, there was some concern whether the required vote, even though advisory, would increase the risk for Boards.  As it turns out, the risk is real.  Approximately 35 companies have received a vote of less than 50% in support of their executive compensation programs.  Of these 35 failed… Continue Reading

SEC Adopts New Rules Concerning Use of Compensation Consultants and Conflicts of Interest

Posted in Compensation

 Last week, the SEC proposed new rules required by Section 952 of Dodd-Frank Act.  Under the proposal, compensation committees may engage a compensation consultant or other advisor, including legal counsel, only after taking into consideration the following factors, and any other factors determined by the national securities exchanges: 1) provision of other services to the… Continue Reading

National Securities Exchanges to Adopt New Listing Standards to Ensure Independence of Compensation Committees

Posted in Compensation

Last Wednesday, the SEC proposed new rules required by Section 952 of Dodd-Frank Act.  Under the proposal, each national securities exchange will be required to adopt new listing standards to prohibit the listing of any issuer that is not in compliance with the exchange’s independence requirements for compensation committees.  While compensation committees will need to… Continue Reading