the brave new world of say on pay - global equity · 2019. 12. 13. · ted ginsburg (440) 289 -...
TRANSCRIPT
SESSION 1.4
The Brave New World of Say on Pay
Ted Ginsburg (440) 289 - 2212 • [email protected]
Ana Rodriguez, Molex Incorporated (630) 527 - 4294 • [email protected]
Mary K. Samsa, Seyfarth Shaw LLP(312) 460 - 5873 • [email protected]
Ted Ginsburg (440) 289 - 2212 [email protected]
Ana Rodriguez, Molex Incorporated (630) 527 - 4294 [email protected]
Mary K. Samsa, Seyfarth Shaw LLP (312) 460 - 5873 [email protected]
SESSION 1.4 The Brave New World of Say on Pay
Presenters
Ted Ginsburg (440) 289 – 2212 [email protected]
Ana Rodriguez, Molex Incorporated (630) 527 – 4294 [email protected]
Mary K. Samsa, Seyfarth Shaw LLP (312) 460 – 5873 [email protected]
Agenda Say on Pay
• Philosophy of Say on Pay • Past and Current Legislative Endeavors • 2009 Statistics on Say on Pay • What if it is enacted? What questions do companies put forth
to the shareholders? Pros and cons • The issues surrounding a negative shareholder vote
Proxy Changes • Risk Assessment of Equity Compensation
Molex Incorporated: A Case Study
Philosophy of Say on Pay
UK first introduced in 2002 In Other Countries
• Australia, Sweden, Netherlands • European Commission
In the U.S. • No officially sanctioned code of corporate governance • Shareholder resolutions to adopt ‘Say on Pay’ were
successfully filed at: • 5 publicly traded companies in 2006 • over 50 in 2007 • over 80 in 2008 • over 100 in 2009
Philosophy of Say on Pay Continued
Benefits of “Say on Pay” in the UK* • improved communication between shareholders and boards,
enhancing their respective roles in corporate governance • provides directors with additional information on how the
marketplace views a company's remuneration practices • allows shareholders to send a message to boards without
throwing qualified directors off the board at companies where a majority vote standard has been adopted for director elections
• encourages boards to focus greater attention on succession planning
* Shareholder Say on Pay – Ten Points of Confusion, Keith L. Johnson & Daniel Summerfield
Philosophy of Say on Pay Continued
Opponents of “Say on Pay” in the US* • has not stopped the increase in executive pay in Europe • gives shareholders who may be unsophisticated, emotional or
inattentive too much influence over the process (as opposed to the compensation committee who is charged with administering the issue)
• the US has had less experience than other markets with direct communication between shareholders and directors resulting in a lack of mutual respect and understanding
• shareholders can already vote against directors to protest executive compensation practices
• shareholders have so many different viewpoints - it would be difficult to know what a negative vote means
* Shareholder Say on Pay – Ten Points of Confusion, Keith L. Johnson & Daniel Summerfield
Philosophy of Say on Pay Continued
What should be the main focus of “Say on Pay”? • Excessive compensation?
• Seems to focus on cash more than anything else • Pay for performance, without concern for the absolute size of
compensation awards? • Anticipate a move back toward equity in an effort to keep the
executives whole • How much wealth is enough?
• Total wealth creation – similar to tally sheets • Exit strategies
• Change of control/severance payments • Succession planning
Philosophy of Say on Pay Continued
Alternatives to “Say on Pay” Advisory Vote • On-line surveys (Amgen, Prudential) • Individual or group meetings with shareholders (Home
Depot)
Past and Current Legislative Endeavors
It all began with… • American Recovery and Reinvestment Act of 2009
• Troubled Asset Relief Program (“TARP”) participants must give shareholders an opportunity to cast an advisory vote on their executive compensation programs (proxies filed after 2/17/09)
Past and Current Endeavors Continued
RiskMetrics Group • adopted a policy for management "say on pay" proposals in
2008 • published a report in March 2009 to provide more detailed
guidance to investors about how to evaluate compensation programs in order to determine an appropriate vote
Stock Exchange Shareholder Approval • mechanism already in place under NYSE and NASDAQ rules
to secure shareholder approval in equity compensation plan offering (shareholder approval required for equity compensation plans pursuant to which stock may be acquired by directors, officers, employees or consultants; use of repurchased shares to fund existing plans; one-time stock option grants to directors, officers, employees or consultants; de minimis grants or awards of equity compensation)
Current Legislative Endeavors Continued
Congressional Activity • Rep. Frank: Corporate Financial Institution Compensation
Fairness Act • Sen. Dodd: Restoring American Financial Stability Act of
2009 • Rep. Peters: Shareholder Empowerment Act • Rep. Ellison: Corporate Governance Reform Act • Sen. Schumer: Shareholder Bill of Rights • Sen. Durbin: Excessive Pay Shareholder Approval Act &
Excessive Pay Capped Deduction Act of 2009
Current Legislative Endeavors Continued
Common theme in all the legislation – Shareholder Say on Pay • Give shareholders an annual advisory vote on executive
compensation disclosed in the proxy materials • Give shareholders separate advisory vote on golden
parachutes for CEO • Compensation committee independence • Compensation consultants (and legal counsel) independence • Clawback on incentive pay for three year period if financial
are restated • Separation of CEO and Chairman of the Board positions
2009 Statistics on Say on Pay
Russell 3000 Summary (prepared by Towers Watson) • 58 Say of Pay Proposals voted “against” or “down” by majority of
the shareholders (generally approved by 38% - 45% of shareholders) – 2009 filings related to 2008 pay practices • Abbott • Bristol Myers Squibb • Colgate Palmolive • Deere & Co. • Exxon Mobil • Fedex • GE • McDonald’s • Northrop Grumman • Oracle • Pepsico • Raytheon • The Proctor & Gamble Company • United Health Group Incorporated • Wellpoint, Inc.
2009 Statistics on Say on Pay Continued
Russell 3000 Summary (prepared by Towers Watson) • 19 Say of Pay Proposals voted “for” or “up” by majority of the
shareholders (generally approved by 50% - 60% of shareholders) – 2009 filings related to 2008 pay practices • Apple Inc. • CVS Caremark Corp • General Mills • Pfizer, Inc. • The Dow Chemical Company • Yum Brands, Inc.
2009 Statistics on Say on Pay Continued
RiskMetrics Group Postseason Report (October 2009) • Dramatic increase in the number of management “say on
pay” proposals • Pay-for-performance • Excise tax gross-ups • Single triggers on Change of Control
Enactment: What will it mean?
What programs are submitted to the shareholders? • The entire pay packages for the NEOs? • The entire pay package for the CEO? • The company’s executive compensation philosophy or
policies? • New programs only (i.e., a new equity program)?
What should the shareholders be voting on? • The entire package (yes or no)? • Specific programs (i.e., incentive programs)? • Compensation committee methodology and/or philosophy?
Enactment: What will it mean? Continued
In the event of a “no” vote, how do you get feedback so that any changes made will satisfy the shareholders? • Specific issues submitted for shareholder vote • Investor relations department meetings with key and/or
dissident shareholders
How do you let shareholders know that the Board has take action in this regard? • Publicity relating to discussion at annual meetings • Directors speaking at public events • Timing of disclosures – should you wait until the next proxy
or act before
Enactment: What will it mean? Continued
Should directors behave any differently as a result of “say on pay”? • For Board, as a whole
• More compensation committee meetings • More communication with shareholders as a whole about
executive pay deliberations • More frequent rotation between committee assignments
• For directors standing for re-election • A “platform” discussing their outlook on the company’s
executive pay • Commitment to the “say on pay” process
• Impact of proposed legislation limiting director terms
Enactment: What will it mean? Continued
Reevaluating performance metrics (what types, which ones and measured how) • Shareholders are concerned with driving operating performance
and improving corporate valuations • Balance growth of the corporation and returns to the awardees • Cash flow measures (cashflow can affect profitability) • Focus on margin percentages (rather than absolute volume of profit) • Incorporate non-financial metrics (such are market share) • One year or multiple years
• Goal Settings • Shorten the measurement year (to adjust to rebounds) • Using moving averages • Expand the performance zones (to take into account the difficult
economy)
Issues Surrounding a Negative Vote
What does it mean? Do you ignore? How do you respond? Do you revote?
Proxy Disclosure: Risk Assessment
On 12/16/09 SEC finalized new rule changes affecting proxy disclosure and other related areas
Effect of Compensation Practices on Risk • Broadens scope of CD&A to include discussion and analysis
of employee compensation policies and practices generally (not just for executives) if risks arising from those policies and practices may have a material effect on the company • Response to concerns that compensation structures fueled
financial crisis by encouraging excessive risk taking to achieve short-term goals at expense of long-term interests
• Unstated concern: Executives are getting paid too much • Overriding goal: Long-term is better than short-term
Risk Assessment: What to Consider
Review compensation practices and policies at a business unit: • That carries a significant portion of company’s risk profile • That maintains a significantly different compensation structure than
other units within the company • That is significantly more profitable than others in the company • Where compensation expense accounts for a significant percentage
of a unit’s revenues • That vary significantly from the company’s overall risk and reward
structure (such as bonuses paid upon accomplishment of an objective while income and risk to the company for the task extend over a significantly longer period)
Risk Assessment: What to Consider Continued
Review certain types of compensation arrangements which are suspect on their face: • Total annual compensation consists of very low (or
nonexistent) base pay and high short-term incentive • Incentive programs are tied primarily to revenue goals • Incentive programs with uncapped upside opportunities • Equity incentive programs that:
• Are highly-leveraged and performance-vested • Have no retention requirement
• Incentivized behavior does not fit company goals
Conducting a Risk Assessment
Basic Steps • CREATE multi-disciplinary working group of internal and
external resources • DETERMINE standards for materiality and define risk • INVENTORY all programs and policies governing them • SELECT those programs which could potentially cause a
material adverse risk to the company • REVIEW selected programs for these issues:
• Design (including fit with company’s objectives) • Documentation • Administration • Comparability to the marketplace
• DOCUMENT results and report to Board
Risk Assessment: What to Evaluate If disclosure is triggered, may need to discuss and analyze:
• Risk assessment or incentive considerations used, if any, in structuring, awarding and paying compensation
• How compensation policies relate to risks in long and short-term compensation, such as claw backs or holding periods
• How compensation policies are adjusted to address changes in company’s risk profile
• Material adjustments that company has made to its compensation policies due to changes in risk profile
• Extent to which compensation policies are monitored to determine if risk management objectives are being met
Risk Assessment: Board Role Board Leadership Structure and Role in Risk Management
• Disclose Board’s role in the risk management process and how the Board implements and manages the risk management function
Risk Assessment: Next Steps Identify and Reduce Excessive Risk-Taking
• Risks must be assessed by all companies • Businesses must balance the need to motivate appropriate risk taking
without rewarding excessive risk taking • Risk tolerance will vary with industry and the company’s business
strategy/operating model • Determine appropriate level of risk for your company
Risk Assessment: Next Steps Continued
Compensation committee should develop a framework for conducting compensation risk assessment • A senior risk officer (SRO) should be briefed by HR, legal, and the
compensation committee • The SRO should review the risks of the business, evaluate the risks
associated with the compensation programs, and identify the features of the compensation programs that could promote excessive short and long-term risks
• After consulting with HR and legal, the compensation committee and the SRO should determine if compensation program changes are appropriate
• The compensation committee should report its findings to senior management and then to the full board
Risk Assessment: Next Steps Continued
Take remedial action • Is the pay mix (fixed/variable) appropriate? • Do programs encourage short-term thinking? • Are performance goals too aggressive? • Are payments uncapped or too high?
Molex Incorporated: A Case Study
Risk Assessment
QUESTIONS?