Compensation

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It may be nice to be your own boss, but setting your own compensation – and, at least arguably, giving yourself excessive pay – may get you in trouble.  A number of boards of directors have found that out, as courts have given them judicial whacks upside the head for paying themselves too much.  Not surprisingly, shareholders have gotten on the bandwagon as well.

Executive compensation – at least for public companies – has to be scrutinized and blessed by independent directors and, since the advent of Say on Pay, approved by shareholders (albeit on a non-binding basis).  In contrast, directors have long set their own pay, with little or no scrutiny and no requirement for independent review, much less approval.  (Director plans generally must get shareholder approval if they provide for equity grants, but neither the overall director compensation program nor specific awards have to be approved.)
Continue Reading Pigs and hogs — a note on director compensation

Yes, it’s that time of year again.  Turkey, Black Friday, decking the halls, office parties, and the annual issuance of ISS’s voting policies for the coming year.

To make sure I’m on Santa’s good list, I need to be honest – and, to be honest, the 2018 changes seem rather benign.  In fact, as noted below, ISS hasn’t gone as far as some of its mainstream members in terms of encouraging board diversity and sustainability initiatives.

Here’s a quick rundown on the key changes for 2018:

  • Director Compensation: Director compensation – or at least excessive director compensation – has been looming ever larger as a hot topic in governance.  ISS continues the trend by determining that a two-consecutive-year pattern of excessive director pay will result in an against or withhold vote for directors absent a “compelling” rationale.  Since the policy contemplates a two-year pattern, there will be no negative voting recommendations on this matter until 2019.

Continue Reading Tis the season

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waldryano

I don’t know when Congress decided that every piece of legislation had to have a nifty acronym, but the House Financial Services Committee recently passed (on a partisan basis) what old-fashioned TV ads might have called the new, improved version of the “Financial CHOICE Act”.  The word “choice” is in solid caps because it stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs”.

Whether and for whom it creates hope, opportunity or something else entirely may depend upon your perspective, but whatever else can be said of the Act, it is long (though at 589 pages, it is slightly more than half as long as Dodd-Frank), and it addresses a very broad swath of issues.  Here’s what it has to say about some key issues in disclosure, governance and capital formation, along with some commentary.
Continue Reading The Financial CHOICE Act – everything you’ve ever wanted, and more?

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Photo by Rachita Singh

A little over two years ago, the Council of Institutional Investors (“CII”) asked the SEC to review its proxy disclosure rules related to director compensation received from third parties, which we had blogged about here. At the time, the CII was concerned that the existing proxy rules did not capture compensation that may be paid to directors serving on the board of a public company by a third party, such as a private fund or an activist investor, which are typically referred to as “golden leashes.”

In its letter to the SEC, the CII cited concerns that compensation under golden leash arrangements is not generally covered by the existing proxy disclosure rules, but could be material to investors due to the potential conflicts of interest arising under such arrangements. We had noted many of these issues in a prior blog post discussing the performance-based compensation arrangements of hedge fund-nominated directors for the boards of Hess Corporation and Agrium, Inc. in 2013. As we predicted would be the case, nothing really transpired on this topic in the wake of the CII’s request. That is until recently, when Nasdaq filed a proposed rule change, subsequently approved by the SEC, attempting to address this issue.
Continue Reading Nasdaq-listed companies must now disclose director “golden leash” arrangements

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.Continue Reading Pay ratio disclosure: Myths and madness

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.Continue Reading  Summer doldrums in DC? Not so much!

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.Continue Reading Crazy is as crazy does – compensation run amok?

Director fiduciary dutiesA 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 those advising them on compensation-related matters.

In this case, a stockholder of Citrix, Inc. (“Citrix”) brought a derivative lawsuit against the Citrix board of directors alleging a number of things, including breach of fiduciary duty by the board of directors in awarding significant equity compensation awards. Specifically, the plaintiff alleged that restricted stock units (“RSUs”) granted to non-employee directors (who constituted eight of the nine Citrix board members) under the Citrix equity incentive plan, were excessive.

Because the non-employee directors who received the RSU grants in question constituted eight of the nine members of the Citrix board of directors, the plaintiff was successfully able to rebut the business judgement rule presumption and the defendants bear the burden of proving to the court’s satisfaction that the RSU grants were the product of both fair dealing and fair price (i.e., the “entire fairness” standard of review).

The defendants argued that
Continue Reading Chancery Court Holds Board to Heightened Fiduciary Duty Standard in Connection with Equity Awards