executive compensation disclosure, including a say on pay … · 2019. 4. 17. · explaining...

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©2009 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

Executive Compensation Disclosure, Including a Say on Pay Update

June 2, 2009

Patrick QuickFoley & Lardner LLP

Bryan OrtweinTowers Perrin

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Today’s Speakers

Bryan OrtweinPrincipal, Towers Perrin

Member of the Executive Compensation practiceExperience covers executive, director, and management compensationClients include public and private companies and partnerships in a wide variety of industriesExtensive experience with annual and long-term incentive design, pre-IPO compensation, change of control and bankruptcy

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Today’s SpeakersPatrick QuickPartner, Foley & Lardner LLP

Focuses practice on corporate law, with an emphasis in securities law compliance, acquisitions, and takeover defense Counsels public companies concerning compliance requirements and governance matters Has participated in complex acquisition transactions representing both buying and selling partiesRepresents clients doing advance takeover preparedness planning and has counseled clients who have received unsolicited takeover proposals

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Today’s Moderator

Brendan SheehanExecutive Editor, Corporate Secretary

Editorial mission: To provide innovative and insightful analysis for corporate secretaries, general counsel and compliance officersCorporate Secretary is the leading source of information on matters relating to the SEC, Sarbanes-Oxley, D&O insurance, shareholder communications, proxy solicitation and voting, director education and compensation, listing requirements and entity management

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Overview – Executive Compensation Disclosure

Increasing focus from shareholders, regulators and public on executive compensation Changes to executive compensation practices (in response to economic conditions, “best practice”trends and regulatory requirements) “Say on pay”

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Context for Current Disclosure Framework

Corporate scandals of early 2000s “All means all” in 2004 New rules proposed in January 2006 and final rules effective in December 2006 (Item 402 of Regulation S-K and Item 5.02 of Form 8-K) Initial Securities and Exchange Commission (“SEC”) comment letters – now publicly available - and SEC report issued in latter part of 2007 Updated Compliance and Disclosure Interpretations in 2008 followed by periodic additions; ongoing comment letters; and informal SEC guidance in speeches and in interactions with individual companies

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Ongoing Areas of SEC FocusTrue Analysis Performance Targets Benchmarking

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AnalysisSEC staff in October 2008 stated that “the ‘how and the why’” were missing from proxy statements in explaining connection between companies’philosophies and processes and the numbers companies presented in their tabular disclosures SEC encouraged companies to:

explain and place in context each of the specific factors considered when approving particular pieces of each named executive officer’s compensation package;

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Analysis (Continued)analyze reasons why the company believes that the amounts paid are appropriate in light of various factors it considered in making specific compensation decisions; and describe why or how determinations with respect to one element impacted other compensation decisions

Suggested that, in preparing Compensation Discussion & Analysis (“CD&A”), companies “should be carefully considering if and how recent economic and financial events” have affected their compensation programs and “should not merely be marking up last year’s disclosure.”

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Performance TargetsSecond-largest area of SEC comment in 2008 Current year targets required if material unless disclosure would cause competitive harm; completed year targets often less controversial Individual performance measures and targets also required if material

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BenchmarkingQuestion of whether company is genuinely “benchmarking”as defined by the SEC (using compensation data about other companies as a reference point on which – either wholly or in part – to base, justify or provide a framework for a compensation decision) or merely reviewing or considering a broad-based third-party survey for “a more general purpose”Focus on rationale for choosing the component companies Problem of broad-based surveys and variation of benchmarks for certain positions

Need to list 500 companies? Can company list them?

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Issues Arising from Economic DownturnMissed performance targets (payment in spite of the miss or adjustment of targets) Changes required or inspired by regulatory changes (e.g., limitation or elimination of bonuses, elimination of golden parachute arrangements, risk assessment, clawback policies) Risk assessment:

Compensation committee identification of material risks faced by the business (often with the input of an officer charged with monitoring such risks) and interaction of such risks with compensation practices, and/or of compensation structures that do not appropriately internalize risks (e.g., insufficient long term incentives or plans with very asymmetrical rewards/risks) Risk assessment in connection with compensation decisions may need to be disclosed in proxy statement

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Issues Arising from Economic Downturn (Continued)

Prospective modifications (more discretion in bonus arrangements, shorter performance periods and/or use of relative performance measures)Underwater stock options (new grants or option exchange programs) Voluntary or involuntary pay reductions (Form 8-K disclosure as well as proxy statement disclosure)

Including “Whose idea was it?” and “Are the reductions permanent?”

Special retention arrangements

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Other Trends in or Affecting Disclosure“Hold ‘til retirement” or “hold through retirement” policies, longer vesting periods and/or mandatory pay deferrals

Seen by some as a means to encourage internalization of long-term impact of decisions and align incentives with interests of shareholders

Change in control arrangements implemented only on an ad hoc, temporary basis and potentially with reduced benefits

More frequently in response to specific hostile threats General trend away from “single trigger” arrangements including equity awards

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Other Trends in or Affecting Disclosure (Continued)

Limitation and/or elimination of tax gross ups of any kind and certain perquisites Use of wealth accumulation and internal pay equity analyses and tally sheets -- disclosure may be required in CD&A and be of interest to voting advisory services (e.g,. RiskMetrics group considers internal pay disparity a potential “poor pay practice”) Alternative presentations of executive compensation supplemental to disclosure required by SEC (e.g., alternative summary compensation tables, especially to indicate the grant date fair value of awards rather than the expense for the year)

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Other Trends in or Affecting Disclosure (Continued)

Increased “selling” of compensation programs and decisions in disclosure (e.g., highlighting or explaining performance in executive summary, justifying peer groups) Disclosure in termination payment section of “walk away”numbers -- i.e., disclosure á la Starbucks and others of the total payment an executive would receive on departure from the company including the payout of already vested benefits such as deferred compensation and vested stock options Disclosure of executive roles in setting compensation

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Troubled Asset Relief Program (“TARP”) Rules

Limits on compensation that exclude incentives for senior executive officers (“SEOs”) to take “unnecessary” and “excessive” risks that threaten the value of the TARP recipient (if the same as prior to the amendments effected by the American Recovery and Reinvestment Act of 2009 (“ARRA”), this will require the compensation committee of a TARP recipient to meet with the TARP recipient's senior risk officers, identify the features in the TARP recipient's incentive compensation arrangements for SEOs that could lead SEOs to take unnecessary and excessive risks that threaten the value of the TARP recipient, and limit any such features). Maintenance of a clawback policy (must recover any bonus, retention award, or incentive compensation paid to an SEO or any of the next 20 most highly compensated employees of the TARP recipient based onstatements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate).

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TARP Rules (Continued)A prohibition on any “golden parachute payments” to SEOsor any of the next five most highly compensated employees (defined as “any payment for departure from a company for any reason, except for payments for services performed or benefits accrued”). A prohibition on bonuses, retention awards, or incentive compensation, other than certain restricted stock (this would apply to at least the five most highly compensated employees of certain TARP recipients).

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TARP Rules (Continued)A prohibition on compensation plans that would encourage manipulation of reported earnings. Appointment of a compensation committee composed of independent directors (must meet at least semi-annually to discuss and evaluate employee compensation plans in light of an assessment of any risk posed to the TARP recipient from such plans). Tax non-deductibility of annual compensation in excess of $500,000 for the chief executive officer (CEO), chief financial officer (CFO), and three other most highly compensated officers of certain TARP recipients.

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TARP Rules (Continued)The CEO and CFO of each TARP recipient must certify compliance with the executive compensation provisions (to the SEC if publicly traded). The board of directors of each TARP recipient must adopt a policy concerning “excessive or luxury expenditures.”Advisory shareholder vote on executive compensation –effective now for publicly traded companies subject to it. Treasury will review retroactively the bonuses, retention awards, and other compensation paid to the SEOs and the 20 most highly compensated employees of all companies that received TARP aid prior to the enactment of ARRA.

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Potential Regulatory ChangesPotential application of TARP rules to non-TARP companies SEC may mandate disclosure concerning risk management and compensation consultant independence and/or additional disclosure on overall compensation approach (Mary Schapiro speech on April 6, 2009)

Compensation consultant independence: Is the compensation committee’s consultant permitted to provide other services to the company and/or its management? Henry Waxman committee report in 2007 Several companies have included proxy disclosure and/or adopted a policy (e.g., Time Warner, UnitedHealth Group)

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Potential Regulatory Changes (Continued)

Other potential legislation The Shareholder Bill of Rights Act of 2009 (S. 1074)

Would require “say on pay” and corporate governance measures not directly related to executive compensation

The Excessive Pay Shareholder Approval Act (S. 1006) Would require a 60% shareholder vote to approve a compensation structure under which any employee is paid more than 100 times more than the average employee of that company and related proxy disclosure of lowest-paid and highest-paid employees, along with the average paid to all employees and the compensation paid to employees who are paid more than 100 times the average employee compensation.

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Potential Regulatory Changes (Continued)

The Excessive Pay Capped Deduction Act of 2009 (S. 1007)

Would limit the federal income tax deductibility of compensation paid to executives to 100 times average employee compensation and require filing of a report disclosing information on pay similar to the proxy disclosure that would be required by the Excessive Pay Shareholder Approval Act.

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BackgroundSay on Pay is an advisory vote on a company’s executive compensation programWith an increased spotlight on executive pay, more shareholder groups are submitting Say on Pay shareholder proposals to companies Faced with earlier shareholder proposals or discussions with proponents, some companies have voluntarily agreed to hold a Say on Pay vote

The economic downturn, including the requirements of TARP legislation (which requires an advisory vote on pay) have fueled interest in Say on Pay

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BackgroundThe considerations behind the adoption and implementation of a Say on Pay vote are both complex and evolvingThis document provides an overview of recent activity and our perspective on this increasingly visible topic

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What is “Say on Pay”?The term “Say on Pay” is used in the U.S. to describe the concept of an advisory (non-binding) vote on a company’s executive compensation program

Activist investors have encouraged companies to voluntarily conduct such votes through shareholder proposals

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What is “Say on Pay”?The greatest focus is on the proxy’s CD&A and Summary Compensation Table; shareholder proposals can address any or all of the following:

Pay philosophyCompensation plan payouts (retrospective)Current year packages (prospective)

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What is “Say on Pay”?Say on Pay proposals have been sponsored by a wide range of proponents in 2009, including pension funds and other investors

In earlier proxy seasons, labor unions took a lead role in filing such proposals, however the 2009 proxy season finds unions playing a somewhat smaller roleThis shift from being “union driven” is a result of various shareholder groups discussing this topic and pooling their efforts to reach a larger number of companies

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Companies adopting Say on PayFifteen companies have voluntarily adopted a Say on Pay vote, starting in 2008 or 2009:

Eight companies intend to put forward a Say on Pay vote in 2010 or 2011:

Tech DataRiskMetrics GroupPar Pharmaceuticals

ZaleMotorolaMBIA

LittlefieldJackson HewittIntel

Ingersoll-Rand Co.VerizonH&R Block, Inc.

BlockbusterAlaska Air GroupAflac

Occidental PetroleumPG&E Corp.Lexmark International Inc.

Apple Inc.Ameriprise FinancialCharming Shoppes

Valero EnergyHewlett-Packard

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Say on Pay shareholder proposals are on the rise

Under new regulations signed by President Obama, companies that have received TARP funds are required to include a non-binding, management-sponsored Say on Pay proposal at their 2009 annual meeting

All but one of the TARP recipient companies that had received a Say on Pay shareholder proposal had the proposal withdrawn in light of this requirement

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Say on Pay shareholder proposals are on the rise

In the 2009 proxy season (to date), RiskMetrics(RMG) has recommended votes against 30% of the management Say on Pay proposals reviewed

Preliminary vote results show average support above 80%

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Proponents identify several benefits of Say on Pay

Proponents of shareholder proposals have identified several benefits for an advisory vote including:

Provides a voice for shareholders to weigh in on a topic that has drawn increased scrutiny over the last few monthsIncreased communication and transparency between a company and its shareholdersCurrent pay programs will be viewed more critically to ensure an adequate link between pay and performanceIncreases the likelihood that incentive plans will be aligned with shareholder interests

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Proponents identify several benefits of Say on Pay

Despite increasing voting support, not all shareholders have voted favorably on these shareholder proposals

Some institutional investors have stated a preference for such votes to apply to all companies, rather than the targeted approach of those filing shareholder proposals, and have not voted in favor of the shareholder proposals

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Questions surround the need or effectiveness of a Say on Pay vote

Will up or down votes on pay as a whole (as opposed to specific elements or features) provide much insight into investors’ concerns?Would votes be a distraction and a drain on the time of directors and executives?

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Are shareholders properly equipped to evaluate, understand and engage with each of their portfolio companies, especially in the compressed proxy season?Why are votes necessary for companies that already maintain regular channels for their investors to express opinions about compensation?

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Would shareholder votes encroach on the proper role of the board? What is the relevant threshold (e.g., percentage of negative votes) that should compel a board to take action, and what liability exists if a board fails to take action?

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Experience in the U.K. provides us with important lessons

The U.K. has conducted advisory votes on remuneration since 2003It is accepted practice in the U.K. to lobby shareholders in support of a resolution, often with the remuneration committee chairman directly involved

In the U.S., by contrast, companies cannot formally seek shareholders’ support of a particular plan or program outside of the normal proxy solicitation process

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Institutional shareholders in the U.K. have been active in issuing voting guidelines and conducting dialogues with companies for many years, but laborunions have had very little direct involvement

In the U.S., labor unions have traditionally taken the lead in submitting shareholder proposals concerning executive compensation, however this is changing

U.K. institutional shareholders focus mainly on program design, rather than pay levels

U.S. investors do not restrict their comments to any particular subject

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U.K. companies tend to have far fewer investors than U.S. companies and most investors are fairly concentrated in key financial centers (London and Edinburgh)

Share ownership is typically not as concentrated in the U.S.

As with accounting, the U.K. adopts more of a principles-based approach, in contrast with the “rules-based” approach traditionally used in the U.S.

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What does a world with Say on Pay look like? (Lessons from earlier adopters – U.K.,

Australia, Sweden)Changing role of the Compensation Committee/Chair and/or Board Chair/Lead Independent Director

Focus on pay design and effectivenessMay require “road shows” to sell the program to investors

The CD&A could become even more extensive, shifting tone from explaining to defending

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What does a world with Say on Pay look like? (Lessons from earlier adopters – U.K.,

Australia, Sweden)Potential for “cookie cutter” programs to avoid negative reactions

Similar plan designsSimilar performance measures across programsGreater focus on relative performance

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Even without new legislation, the situation is expected to change

Expectations remain that a Say on Pay vote will be required at all U.S. companies as early as 2010 as regulators and politicians continue to advocate an advisory vote

Sen. Charles Schumer introduced “The Shareholder Bill of Rights Act of 2009”, which included a required Say on Pay vote (among other corporate governance items) – passage is uncertain at this point, but certain ideas are likely to surviveThe AFL-CIO has called for the passage of a “shareholder bill of rights” to include an advisory vote

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More companies are voluntarily adopting Say on Pay to control the process and rules of engagement (e.g., offer a vote on compensation structure, not levels)Say on Pay requirements from major exchanges?

Unlikely, but who knows what may result from possible legislation

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Potential “No” votes for compensation committee members when Say on Pay shareholder proposals pass and companies ignore the outcome or when concerns expressed by proxy advisors (RMG) or shareholders are not addressedShareholders continue to press for the adoption of Say on Pay

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©2009 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

Thank you for your participation

For more information on the Corporate Wavelength web conference series, visit

Foley.com/corporatewavelength

Patrick [email protected]

Bryan [email protected]

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