executive compensation

Image by JayJayV from Pixabay

As noted in a prior post, every now and then the SEC Enforcement Division likes to remind companies of the requirement to disclose personal benefits, or perquisites.  I’d even hazard a guess – completely unsubstantiated by research – that enforcement actions regarding perquisite non-disclosure make up a significant percentage of enforcement actions concerning proxy statements.

And yet, companies seem to keep forgetting about perks disclosure.  In some cases, the companies’ disclosure controls may not capture perquisites, but my hunch – again, unsupported by research, but this time supported by experience – is that companies and, in particular, their executives, manage to persuade themselves that the benefits in question have a legitimate business purpose and thus are not personal benefits at all.  Over the course of my career, I’ve heard hundreds if not thousands of reasons why a seemingly personal benefit should be treated as a business expense.  Here are just a few:
Continue Reading When it comes to perquisites, caveat discloser

Image by succo from Pixabay

About two years ago, I wrote a post about director compensation, quoting the old saw that pigs get fat but hogs get slaughtered. Given what I’ve been reading of late, I think it’s time for a refresher, but this time I’m discussing executive, rather than director, compensation.

With the onset of the COVID-19 pandemic, a number of companies or their executives took action to reduce pay.  In some cases, salaries were reduced to $1 a year or eliminated entirely.  So far, so good.  However, there were also cases in which the executives were given so-called mega-grants of equity to make up for their sacrifices.  That may have raised a few eyebrows, but the eyebrow-raising may have been mitigated or overlooked because the grants were made when the stock markets had dropped precipitously and many companies’ shares were trading at 52-week lows.

Of course, what goes down must come up, so when the stock markets rallied (and, in general, have continued to rise to levels that seem absurd in the face of what’s going on these days), the noble executives who sacrificed pay made out like bandits. Or hogs.  No sane person would argue that the stock markets have any rational connection to corporate performance generally, much less to that of a particular company.  However, the rising tide has floated a number of boats, including the holders of those mega-grants.
Continue Reading Of shields and swords, pigs and hogs

Since the beginning of this month (July 2018), the SEC has brought two enforcement cases involving perquisites disclosure – one involving Dow Chemical, and one involving Energy XXI.  As my estimable friend Broc Romanek noted in a recent posting, over the past dozen years, the SEC has brought an average of one such case per year.  It’s not clear why the SEC is doubling down on these actions, but regardless of the reasons, it makes sense to pay attention.

The SEC’s complaint in the Dow Chemical case is an important read, as it summarizes the requirements for perquisites disclosure.  Among other things, it’s worth noting the following:

  • While SEC rules require disclosure of “perquisites and other personal benefits”, they do not define or provide any clarification as to what constitutes a “perquisite or other personal benefit.” Instead, the SEC addressed the subject in the adopting release for the current executive compensation disclosure rules, and it has also been covered in numerous speeches and other statements over the years by members of the SEC staff.
  • For those of you who prefer a principles-based approach to rulemaking, you win. Specifically, the adopting release stated as follows:

“Among the factors to be considered in determining whether an item is a perquisite or other personal benefit are the following:

  1. An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
  2. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

The SEC has also noted on several occasions that if an item is not integrally and directly related to the performance of the executive’s duties, it’s still a “perk”, even if it may be provided for some business reason or for the convenience of the company.


Continue Reading Doubling down (literally) on perquisites disclosure

No, this is not a riff on Hamlet’s soliloquy.  It’s about the current kerfuffle (one of my favorite words) about stock buybacks.  In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:

  • Plowing all that cash into buying back stock means that it’s not going into plant and equipment, R&D or other things that facilitate longer-term growth and job creation.
  • Companies are using the windfall from the 2017 tax act to buy shares back rather than to make investments that will create jobs and longer-term growth.
  • Stock buybacks artificially inflate stock prices and earnings per share, which contributes to or results in additional (i.e., excessive) executive compensation.
  • By reducing the number of shares outstanding, buybacks mask the dilutive effects of equity grants to senior management.

And now there’s another concern.  Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above.  And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.


Continue Reading To buy or not to buy

No, I’m not referring to my age (I’m old, but not THAT old).

Rather, I’m referring to the supermajority shareholder votes that ISS has required, and that Glass Lewis now requires, for various matters.  Specifically, for the past several years, ISS policy has looked askance at any company whose say-on-pay proposal garnered less than 70% of the votes cast.  More recently, Glass Lewis has adopted a policy stating that boards should respond to any company proposal, including say-on-pay, that fails to receive at least 80% shareholder approval or any shareholder proposal that receives more than 20% approval.

Putting aside the irony that ISS and Glass Lewis have long railed against supermajority voting requirements imposed by companies, one wonders what the rationale is for upping the ante.  One possible reason is frustration that, despite negative voting recommendations from proxy advisory firms, the overwhelming majority of say-on-pay proposals pass – and by relatively large margins.  However, my hunch is that the real frustration is that companies don’t usually respond to shareholder proposals that don’t pass, and most shareholder proposals don’t pass.


Continue Reading 80 is the new 50

With Chair Jay Clayton and Corp Fin Director Bill Hinman now in office for several months, the SEC seems to be gaining traction in a number of areas of interest to
public companies.

Pay Ratio Disclosures

As we noted in a Gunster E-Alert, on September 21, the SEC issued interpretations to assist companies in preparing the pay ratio disclosures called for under Item 402(u) of Regulation S-K.  The consensus (with which we agree) is that the interpretations will make it much easier for companies to prepare their ratios and related disclosures and hopefully to reduce litigation exposure associated with those disclosures.


Continue Reading Your tax dollars at work (at the SEC)

back-to-school-954572_1280My last post was a re-posting of Adam Epstein’s great piece on the importance of the proxy statement.  I promised that I would follow up on Adam’s thoughts with some recommendations of my own.  Here goes.

General

  • Manage your proxy statement “real estate” to maximize user-friendliness and create an optimal flow: Think about where things go.  For example, if your company is owned largely by institutions (and perhaps even if it’s not), should you lead off with an endless Q&A about the annual meeting and voting, discussing such exciting topics as the difference between record and beneficial ownership and how to change your vote?  Some of it is required, but consider taking out what’s not required and moving what is required to the back of the book.
  • Use executive summaries: Investors like them, and even the SEC has more or less endorsed their use. Think of it this way – whatever you think of ISS, it does a great job of summarizing your key disclosures, albeit not with your company’s best interests in mind.  Why pass up an opportunity to convey your key disclosures with those interests in mind?


Continue Reading Required reading (Part 2)

waldryano
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?

Pay ratio disclosures
Photo by Brian Talbot

After much foot dragging, I have finished reading the adopting release for the new pay ratio disclosure rules.  Yes, the release is long (300 pages or so), but adopting releases are always long.  The real reason why it took so long is that the whole concept of pay ratio disclosure just seems silly to me (and apparently to Bob Lamm as well) so I just hoped it would go away.

I am not against finding ways to strengthen the middle class.  Just like I am not against ending the sale of certain minerals in Central Africa that end up funding deadly conflict.  The problem I have is that public companies should not have to bear the complete burden of fixing social ills.  Less than 1% of the 27 million companies in the United States are publicly traded.  And there are plenty of private companies that are larger than most publicly traded companies.  Thus, while we may not agree whether the social goals are worth achieving, I think we can all agree that there are better ways to achieve them than selective enforcement (particularly since the SEC itself has said that the pay ratio will not be comparable from one company to another).  The Securities Edge  has been criticizing the social disclosure movement for some time, but we haven’t yet seemed to have stopped Congress from continuing to go down that path.

So, unless Congress acts to reverse its mandate for public companies to disclose their pay ratios before 2018 (the first year of required disclosure), I suppose we should all start learning how to comply.  Leading practices for calculating the ratio and providing narrative disclosure will develop over the next couple of years, but I have summarized the important parts of the rules in this post:

What is the required disclosure?

Registrants must disclose:

  • The median of the annual total compensation of all employees of the registrant (excluding the CEO)
  • The annual total compensation of the CEO; and
  • The ratio of the median to the CEO’s compensation.

The ratio needs to be expressed as X:1 or X to 1 where “X” represents the CEO’s total compensation and “1” represents the median employee’s salary.  The ratio can also be expressed in narrative form such as: “The CEO’s annual total compensation is X times the median employee’s annual total compensation.”  You can’t
Continue Reading Pay ratio (unfortunately) coming to public company filings soon

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