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Just Compensation

Focusing on Issues and Trends in Corporate Governance and Executive Compensation

Catalog of ISS Quickscore compensation factors

Posted in ISS/Institutional shareholders

In January, ISS updated its scoring model for evaluating companies’ corporate governance practices, Quicksore 2.0. A list of the compensation-related factors for the U.S. market is set forth below, with changes for 2014 marked by an asterisk (*):

*What is the degree of alignment between the company’s annualized Three-year pay percentile rank, relative to peers, and its Three-year annualized TSR rank, relative to peers?

*Did the most recent Say-on-Pay proposal receive shareholders’ support below the industry-index level?

What is the degree of alignment between the company’s cumulative 3-year pay percentile rank, relative to peers, and its 3-year cumulative TSR rank, relative to peers? (*informational purposes only)

What is the degree of alignment between the company’s cumulative one-year pay percentile rank, relative to peers, and its one-year cumulative TSR rank, relative to peers? (*informational purposes only)

What is the size of the CEO’s one-year total pay, as a multiple of the median total pay for company peers? (multiples greater than 2.33 get flagged)

What is the degree of alignment between the company’s TSR and change in CEO pay over the past five years? (measures below -30% get flagged)

What is the ratio of the CEO’s total compensation to the next highest paid executive?

Are any of the NEOs eligible for multiyear guaranteed bonuses?

What is the ratio of the CEO’s non-performance-based compensation (All Other Compensation) to Base Salary? (ratios greater than 75% get flagged)

Do the company’s active equity plans prohibit share recycling for options/SARS?

Do the company’s active equity plans prohibit option/ SAR repricing?

Does the company’s active equity plans prohibit option/ SAR cash buyouts?

Do the company’s active equity plans have an evergreen provision?

Do the company’s active equity plans have a liberal CIC definition?

Has the company repriced options or exchanged them for shares, options or cash without shareholder approval?

Does the company grant equity awards at an excessive rate, according to ISS policy?

Did the company disclose a claw back or malus provision?

What are the minimum vesting periods mandated in the plan documents for executives’ stock options or SARS in the equity plans adopted/amended in the last three years?

What are the minimum vesting periods mandated in the plan documents, adopted/amended in the last three years, for executives’ restricted stock?

What is the holding period for stock options (for executives)?

What is the holding period for restricted shares (for executives)?

What proportion of the salary is subject to stock ownership requirements/guidelines for the CEO? (less than 3x gets flagged)

Does the company disclose a performance measure for the short term incentive plan (for executives)?

What is the level of disclosure on performance measures for the latest active or proposed long-term incentive plan?

What’s the trigger under the change-in-control agreements?

Do equity based plans or long-term cash plans vest completely on change in control?

What is the multiple of salary plus bonus in the severance agreements for the CEO (upon a change-in-control)? (more than 3x gets flagged)

What is the basis for the change-in-control or severance payment for the CEO?

Does the company provide excise tax gross-ups for change-in-control payments?

What is the length of employment agreement with the CEO?

Has ISS’ qualitative review identified a pay-for-performance misalignment?

Has ISS identified a problematic pay practice or policy that raises concerns?

SEC staff recommends review of exec comp disclosure requirements

Posted in Compensation Disclosure

As reported in this McGuireWoods news item, the SEC staff recently issued a study recommending a comprehensive review of Regulation S-K, including the executive compensation disclosure requirements. Although a process and timeframe for the review have not yet been determined, such a review could result in important changes to the current disclosure regime. The staff’s specific recommendations with respect to executive compensation disclosure were as follows:

Executive compensation requirements. The staff recommends an evaluation of executive compensation disclosure to confirm the information is useful to investors in light of concerns that this area generally contains complex, lengthy, technical disclosure. The review could also evaluate whether further scaling is appropriate.

Golden parachute approvals up

Posted in Golden parachutes, ISS/Institutional shareholders

Shareholders approved a higher percentage of non-binding “golden parachute” proposals in M&A deals in 2013 than in 2012, despite ISS’s increasing resistance to such proposals, according to this report in the WSJ from Monday.

There have been a total of 141 votes on executive compensation packages linked to company takeovers, and 86% passed, according to FactSet SharkWatch. That’s up from 82% the prior year on 113 votes.

The increase runs counter to direction from proxy adviser Institutional Shareholder Services, which is making more negative recommendations on pay perks for executives who sell their companies.

ISS advised shareholders to vote against 28% of golden parachute proposals between February and the end of October, according to compensation consultants Pearl Meyer & Partners. That was a big jump from negative recommendations in 20% of all votes held through the end of 2012.

WSJ examines impact of new ISS standard for board responsiveness

Posted in ISS/Institutional shareholders

In a recent article, the Wall Street Journal highlighted a change in the standard that ISS will use to gauge the responsiveness of boards of directors to majority-supported shareholders starting in 2014.

Under the previous standard, ISS would potentially recommend against or withhold votes on directors if a board failed to respond sufficiently to a shareholder proposal that was supported either by a majority of the outstanding shares in the preceding year or by a majority of the votes cast in two out of the three preceding years. (Prior to 2013, the standard was just a majority of shares outstanding in the preceding year.)  As ISS announced last year and recently confirmed, starting in 2014 the standard will switch to majority of votes cast in the preceding year. As the WSJ reports, this subtle change could have a big impact:

Starting in 2014, Institutional Shareholder Services Inc. is changing its guidelines to recommend ousting directors who don’t implement a shareholder proposal that got a majority of the votes cast at the 2013 meeting. Previously, ISS recommended “no” votes on directors only if the proposal received a majority of all the shares outstanding—a more forgiving standard for directors because many shares go uncast….

At least two dozen of the largest 1,000 public U.S. companies will potentially be affected by the ISS change in the coming months because of shareholder initiatives that passed in 2013 with a majority of votes cast but short of the tougher standard, according the Conference Board, which tracks corporate voting habits.

Volcker Rule’s Impact on Bank Incentive Compensation Arrangements

Posted in Bank Compensation

On December 10, 2013, the SEC, FDIC, OCC and Federal Reserve jointly approved the so-called Volcker Rule, prohibiting banking entities and certain nonbank financial institutions (collectively, “banks”) from engaging in proprietary trading or owning interests in or sponsoring certain hedge funds or private equity funds. The rules go into effect on April 1, 2014, but banks will have until July 21, 2015 to come into full conformity with the new rule.

The new rule provides that banks may engage in certain trading activities — specifically, underwriting, market-making and risk-mitigating hedging activities — without violating the rule, provided that (among other things) the bank designs its incentive compensation arrangements for employees engaged in such activities so as not to reward or incentivize prohibited proprietary trading. The agencies state that their goal is not to prohibit employees from being rewarded when these activities generate trading profits for a bank, so long as the the riskiness of the activity is appropriately taken into account in the arrangement and so long as the primary purpose of the arrangement is to reward client service (for underwriting and makret-making activities) or risk reduction (for hedging activities), not speculation in or appreciation in the value of the underlying securities. The agencies have generally adopted a principles-based approach for determining what types of incentive arrangements might violate the rule, rejecting calls to adopt specific vesting requirements for compensation related to such activities or other bright-line standards.

The new rule also exempts certain compensatory profits interests from the general prohibition on banks (or their employees) being able to own interests in hedge funds or private equity funds and allows banks to hold ownership interests in covered funds as a risk-mitigating hedge with respect to compensation arrangements between the bank and employees who provide services to the fund, provided certain requirements are met.

In light of the new rule, banks should begin to review the incentive compensation arrangements covering employees engaged in underwriting, market-making and hedging activities to ensure that these arrangements comply with the new requirements before the July 2015 full implementation deadline.

Nasdaq to Allow Consulting Fees for Compensation Committee Members

Posted in Board Independence, Compensation Committee, Compensation Committee Pay, Director Compensation, Dodd-Frank Act, Exhanges/SROs

Nasdaq is changing its listing rules to allow compensation committee members to receive compensatory fees from a company when those fees are not for board service.  By allowing compensation committee members to be paid for consulting, advisory and other services, Nasdaq rules will be in line with those of other exchanges. The new rules will require that any fees be considered in evaluating the independence of the compensation committee member.   The new rules take effect on December 26, 2013 so that they will be in place for the election of directors during the 2014 proxy season.

The Nasdaq rules will be helpful to smaller companies, such as financial institutions with advisory boards whose members are paid small fees.  We anticipate that boards will be sensitive to the potential effects of fees on the perceived independence of compensation committee members and take a cautious approach when determining the independence of compensation committee members who receive these other fees.


ISS issues modest policy updates for 2014

Posted in ISS/Institutional shareholders

On November 21, ISS issued its proxy voting policy updates for 2014, including some modest changes to its policies regarding executive compensation.

  • First, in response to investor feedback that its 2013 policy was too strict, ISS will now make recommendations on director nominees of companies that fail to implement majority-supported shareholder proposals on a “case by case” basis, and will also take into account the board’s explanation for failing to implement a proposal as a factor in the recommendation. Although most compensation-related proposals fail to garner majority support, a clawback proposal at McKesson Corporation won majority support earlier this year.
  • Second, to reduce the emphasis on one-year TSR under the “relative alignment” prong of its ”pay-for-performance” methodoogy for evaluating CEO pay, ISS will now compare CEO pay rank vs. TSR rank within a company’s peer group over a trailing three-year period alone, instead of (as previously) over both trailing one- and three-year periods (weighted 40%/60%, respectively). One of the ways in which this change should be helpful to companies is by reducing the potential impact of an equity award made at the start of the prior year, before the company’s TSR performance for the year is known.

The updates are effective for shareholder meetings to be held on or after February 1, 2014.

CEO Pay Ratio Disclosure – Comments to the SEC

Posted in Dodd-Frank Act

The SEC has received more than 30,000 comments on the proposed rules for pay ratio disclosure comparing a company’s CEO with the company’s “median” paid employee.  Mostof those are form letters expressing support for the disclosure without any substantive comments on the rules.

McGuireWoods has submitted comments to the SEC on the proposed rules that focus on the operational aspects of the pay ratio calculations.

Like most commentators, we believe that the most expense and effort will involve identification of the one individual who is the median employee.  Our recommendations include:

  • The median employee could be determined by using statistical sampling based on a definition of compensation other than “annual total compensation” under Item 402 of Regulation S-K.
  • Companies should not take into account leased employees, independent contractors or other individuals who are not statutory employees to determine the median employee.
  • Companies should be able to use a date other than the last day of the company’s most recent completed fiscal year for identifying the company’s employees for purposes of determining the median employee.

We also anticipate that the pay ratio is likely to vary substantially from year to year, due to changes in the compensation of the CEO.  We recommend that the rules allow companies to provide additional information to help shareholders understand the pay ratio disclosure.  This information might include a comparison of the current pay ratio with the pay ratio for prior years.  It might also include an explanation for the variance in the pay ratio from prior years, such as changes resulting from pension plan interest rate movement.

As others submit substantive comments of particular interest, we will note them here.