The Executive Compensation Controversy: What it Means for Equity Compensation in 2012

As we approach the 2012 proxy season - the months of March, April, and May when about 70% of public companies file their proxies for this year's shareholder meeting - we provide an update on a number of significant developments. Over the past few months, a series of changes in proxy adviser policy, regulatory timelines, media coverage, and the political landscape are converging to ensure another controversial year for equity compensation.

The headlines will focus on the topic of "executive compensation" but in fact many of the issues are driven by equity compensation and will have a direct impact on companies' equity compensation granting practices in 2012.

On February 2 at 10:00 AM PST, I will be hosting a webinar covering various issues related to executive compensation, including:

• Why the second year of "say on pay" may pose more problems for companies than the first year, and how #1 issue in investors' minds is not executive pay - it's equity compensation
• How a new focus on pay-for-performance "alignment" for the CEO - a calculation driven by, and distorted by, equity compensation valuation - will force some companies to redesign their plans
• Why the headlines about "CEO pay cuts" and "record CEO pay" are rooted in misunderstanding of equity compensation values and provisions and will require proactive communication to investors...and employees
• Why the carefully constructed peer group you use for compensation comparisons may have just become irrelevant for equity compensation purposes
• How the SEC's delay in implementing the Dodd-Frank "CEO Pay Ratio" and "CEO Pay for Performance" rules has led the private sector to forge ahead with the concepts
• Why companies will need to develop more sophisticated grant allocation methods and systems to balance increasing pressure on dilution and the growing complexity of plan design

This webinar is hosted by Equity Administration Solutions, Inc. (EASi)

Register today to participate in this informative session!

About Four Years Ago

Fred Whittlesey

Compensation Venture Group, Inc.

I was updating my website this weekend, and revisited some "old" articles I had authored.  Way back in late 2007 through early 2008.

The field of equity compensation has gone through such tremendous upheaval over the past four years, I was ready to delete these links until I pondered for a moment the titles, that could have been written and be relevant just this week:

"Who are your peers?  The SEC Wants to Know"

"The New Era of Equity Compensation:  Performance Plans"

"The Return of Cash Long-Term Incentives"

Because these were all written at the time for Salary.com (now Kenexa) where I was a Fellow, whatever that is or was, I can't update them, per se.

Then I read them, and realized they hardly need updating.  In fact, the premise of each has been strengthened over the past 4 years and there are even more pressures on the three topics. Sure, the data references need to be recent and there are more inputs to the issue - primarily the new Dodd-Frank disclosures (CEO pay ratio and CEO pay-for-performance).

Consider, since 2007/2008:

• Investor, proxy adviser, and SEC scrutiny has extended from how executives are paid versus peers, to which companies are actually in the peer group and how that peer group was determined.
  
  
• Performance plans, somewhat avant garde back in 2007, are fast becoming a mandated approach in the US as we are now in the say-on-pay era - exactly the pattern we saw in the UK with the advent of say-on-pay.  Now this solution has become yet another problem, as I have written and presented on.
  
  
• And cash long-term incentives, still under the radar due to compensation survey firms' and proxy data services' inadequate tracking of them, are growing in prevalence faster than reported, due to the odd combination of shareholder concerns about dilution and many companies with large amounts of cash on their balance sheet.

Taken together, these issues create chaos for trying to understand how much an executive was "paid" so that everyone can chime in on whether the number is just too big, too big relative to the average worker, and/or too big relative to company performance.  When very different forms of compensation are awarded, we run into the issue of "granted" vs. "earned" vs. "realizable" vs. "realized"...and more.

Each of these three written pieces deserves an update, I mean a fresh authoring, which I will do over the next few weeks.  While I'd like to pat myself on the back for being prescient on these issues, I think we all should have seen these three things coming and now we have even more to discuss.

Anyone want to predict what we'll be discussing in 2015?  Yikes.

Corporate Governance and Executive Pay Across the Pond

Fred Whittlesey
Compensation Venture Group, Inc.

My monthly interview session for Keeping Up!, the podcast series sponsored by the Global Equity Organization, focused this time on the differences between corporate governance-based approaches to dealing with the executive and equity pay issues of the day. The Association of British Insurers (ABI) gave me a little Christmas present by releasing "Executive Remuneration - ABI Guidelines on Policies and Practices" on 14 December. We would have done the podcast interview the next day, but the windstorms and power outages in the Seattle area delayed us and gave me time to read and digest the document.

Why should we in the US care about what a bunch of British insurance companies think about executive pay? Because ideas about executive pay are flowing freely, like all information, across national boundaries. If you know the history of FAS123R, the relatively new accounting rule for share-based payments, you know that the term "share-based payments" comes from the UK. In the US we called it "stock-based compensation" and the Financial Accounting Standards Board proposed "equity-based compensation" until the IASB - a UK-based organization - used the new term in IFRS2, their version of our FAS123R (they of course consider FAS123R to be our version of IFRS2, which is actually more accurate). Much of FAS123R is taken from IFRS2 and if you think reading accounting rules is difficult, try reading them when originally drafted in a more formal English that we typically use in America.

But beyond the terminology issue there are important differences between the two nations' compensation cultures, and the gap is widening even as it appears that governance trends are on similar trajectories. I won't go into all of the details in this posting, but it is interesting to note some significant positions prevalent in the UK that are not (yet) found here in the US as represented by the ABI’s positions. For example:

*"Where a company seeks to pay salaries at median or above, justification is required." In the US there has been some attack on companies targeting the 75th percentile and the potential ratchet effect of everyone wanting to be "above average" - but note this says "at median." Companies that strive to pay at the middle point of the market must now "justify" that.

* "Annual bonuses should not be pensionable." That would be very disruptive to those companies in the US that still have pension plans, and supplemental executive retirement plans (SERPs) and is contrary to the notion that some of executives’ annual cash compensation should be at risk. Perhaps we should pay all salary and no bonus to executives? Or just eliminate executive pensions?

* "Contracts should not provide additional protection in the form of compensation for severance as a result of change of control." In other words, no golden parachutes. "Contracts should commit companies not to pay for failure." Here, here.

* "...inappropriate for chairmen and independent directors to receive incentive awards geared to the share price or corporate performance that would impair their ability to provide impartial oversight and advice." Cleary, stock-based compensation - excuse me, share-based payments - may not be an appropriate form of pay for boards of directors.

* "...future performance should govern the vesting of options or share awards. Performancing at point of grant is generally not considered a future alternative." (Performancing? I checked that word on Merriam-Webster's online dictionary and was told "The word you've entered isn't in the dictionary." Is that "the" dictionary or "our" dictionary? Microsoft Spell-Check didn’t like it either.) Shareholders in the UK have made it clear than any form of share-based pay to executives should be performance-contingent and not subject only to time-based vesting. Goodbye, plain vanilla stock options. Good riddance, restricted stock.

I could blog on about this and address all of the important points from the ABI's 20-page paper, but here's the point: Not only do we have ISS, Glass Lewis, CalPERS, CalSTRS, Fidelity, Dimensional, et al opining on and influencing executive pay policy, and driving shareholder voting accordingly, but we must keep our eyes and ears tuned to their counterparts in other countries as executive pay has become a global issue. We have been unable to converge on a set of policies here in the US that we can all agree are "good" and "bad" and we may find that those standards are influenced by organizations that many executives and board members have never heard of.

Cheers.