Bank of America Agrees to $150 Million Accord and to Hold Pay Votes
Submitted by Ted Allen, Publications
Bank of America has agreed to pay a $150 million fine and adopt governance reforms, including an annual advisory vote on compensation, to resolve the U.S. Securities and Exchange Commission’s probe over its Merrill Lynch acquisition. However, the Charlotte-based banking giant faces a new lawsuit from New York’s attorney general over its disclosures to investors before the December 2008 transaction.
The SEC settlement, announced today, appears to be the first time in years that the commission has sought specific governance reforms that go beyond existing disclosure rules.
The SEC enforcement action arose from the disclosures that Bank of America made to investors before they voted to approve an acquisition of Merrill brokered by federal officials. The SEC contends that Bank of America failed to disclose a prior agreement to pay of up to $5.8 billion in bonuses to Merrill employees and did not fully disclose the extraordinary losses that Merrill sustained in October and November 2008.
The Merrill deal also inspired two “vote no” campaigns before Bank of America’s April 2009 annual meeting and help prompt investors to approve a binding independent board chair proposal. Unable to put the controversy behind him, CEO Kenneth Lewis agreed to step down late last year.
The SEC-Bank of America settlement is subject to court approval, which isn’t guaranteed. In September, U.S. District Judge Jed Rakoff rejected a $33 million settlement and asked why the SEC didn’t seek payments from individual executives. The new settlement doesn’t call for any payments by current or former executives.
The proposed settlement would require Bank of America to maintain seven reforms for three years, including:
• Provide shareholders with an annual non-binding “say on pay” on executive compensation.
• Retain an independent auditor to perform an audit of the bank’s internal disclosure controls.
• Have its CEO and chief financial officer certify that they have reviewed all annual and merger proxy statements.
• Retain disclosure counsel who will report to, and advise, the audit committee on the bank’s disclosures, including current and periodic filings and proxy statements.
• Adopt a “super-independence” standard for all members of the compensation committee that prohibits them from accepting other compensation from the bank.
• Maintain a consultant to the compensation committee that would also meet super-independence criteria.
• Implement and maintain incentive compensation principles and procedures and prominently publish them on Bank of America’s Web site.
If the new settlement is approved, the $150 million penalty would be distributed to Bank of America investors by the SEC.
Even if Rakoff approves the revised accord, the company’s legal troubles over the Merrill transaction may be far from over. Also today, New York Attorney General Andrew Cuomo announced that he had filed suit against Bank of America, Lewis, and former CFO Joe Price.
Bob Stickler, a Bank of America spokesman, said the bank was disappointed by Cuomo’s lawsuit. “The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary obligations,” Stickler said, according to the New York Times. “The company and these executives will vigorously defend ourselves.”
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Thursday, January 28, 2010 |
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Investors Urge 17 Financial Firms to Hold Pay Votes This Year
Submitted by Ted Allen, Publications
Thirty activist investors have sent letters to 17 financial institutions urging them to conduct an annual advisory vote on executive pay during the 2010 proxy season.
The letter campaign was coordinated by the Walden Asset Management, the office of Connecticut’s state treasurer, and the American Federation of State, County, and Municipal Employees. Among the signatories are CalSTRS, CalPERS, TIAA-CREF, the United Methodist Church General Board of Pension & Health Benefits, the Council of Institutional Investors, and a coalition of religious investors, trade unions, and firms that engage in socially responsible investing.
JPMorgan Chase, Morgan Stanley, Citigroup, Wells Fargo, Bank of America, and American Express are among the firms that received the letters. Many of the companies have received “say on pay” proposals from shareholders. A few financial firms, such as Goldman Sachs and State Street, previously agreed to conduct advisory votes.
“Adopting Say on Pay is not only an idea whose time has come, it is a reasonable and modest step,” the letter states, according to a Jan. 28 press release.
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Monday, September 21, 2009 |
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Microsoft Agrees to Hold a Triennial Pay Vote
Submitted by: Ted Allen, Publications
Microsoft has become the first U.S. company to agree to hold a triennial advisory vote on executive compensation. The software giant’s example, if followed by other issuers, could put significant pressure on U.S. lawmakers to allow firms to hold triennial rather than annual “say on pay” votes.
In a Sept. 18 blog posting, Brad Smith, Microsoft’s general counsel, and deputy general counsel John Seethoff said the company’s board decided to conduct a triennial vote at the next annual meeting on Nov. 19 after receiving a triennial vote proposal from the United Brotherhood of Carpenters and a request for an annual advisory vote from Walden Asset Management and the Calvert Group.
The company lawyers said the board considered the merits of both resolutions and concluded that a triennial pay vote was preferable. Among the reasons cited by the Redmond, Washington-based company were:
- Our compensation program is designed to induce and reward performance over a multi-year period. Say-on-Pay votes should occur over a similar timeframe.
- A three-year cycle will provide investors sufficient time to evaluate the effectiveness of our short- and long-term compensation strategies and related business outcomes.
- Most compensation programs can’t be changed overnight. Triennial votes give the Board and the Compensation Committee sufficient time to thoughtfully respond to shareholders’ sentiments and implement any necessary policy changes.
- Pre-existing Board requirements to seek shareholder approval of employee stock plans and other compensation-related matters give our shareholders an opportunity to provide feedback even in years when Say-on-Pay votes do not occur.
In late July, the Democratic-controlled House of Representatives approved legislation to require U.S. issuers to hold annual pay votes, although some Republicans argued that triennial votes would be less burdensome on issuers. The Senate likely will consider the issue, along with other governance reforms, in the coming months. The Carpenters union, which had filed more than 20 triennial proposals, has withdrawn the resolutions and plans to focus on lobbying lawmakers.
Two dozen U.S. companies, including Intel and Occidental Petroleum, have agreed to hold annual votes on compensation, according to RiskMetrics Group data.
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Tuesday, May 26, 2009 |
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“Say on Pay” Gets 51% Support at XTO
Submitted by: Ted Allen, Publications
A shareholder resolution seeking an annual advisory vote on compensation received 51 percent support at XTO Energy, proponents said. The vote is the 16th majority vote for a “say on pay” proposal so far this season, up from 11 during all of 2008, according to RiskMetrics Group data.
The proposal at Fort Worth, Texas-based XTO was filed by TIAA-CREF’s College Retirement Equity Fund. Other recent “say on pay” results include 53.5 percent support at Pulte Homes, 49.6 percent at Frontier Communications, 47.5 percent at Colgate-Palmolive, and 46.5 percent at Allstate, according to proponents. A pay vote proposal also received 47 percent support at Altria, up from 37.1 percent in 2008, proponents said. The worst showing so far was a 12.6 percent vote at Ford Motor; the automaker has a dual-class equity structure that gives the Ford family 40 percent of the voting power.
Overall, pay vote proposals have averaged 46.6 percent support this year at the 44 meetings where preliminary or final results are available, according to RiskMetrics data. These results are based on the votes cast “for” and “against” and don’t include abstentions.
Also at XTO’s May 19 annual meeting, there was 49 percent support for a proposal that seeks shareholder approval of future executive death benefits, according to the proponent, the Amalgamated Bank’s LongView fund. According to the company’s proxy statement, the heirs of CEO Bob Simpson are slated to receive a $144 million package, but XTO has negotiated a new employment agreement that would reduce those benefits by $60 million after June 1.
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Thursday, April 16, 2009 |
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AFL-CIO Denounces Pay Practices
Submitted by: Ted Allen, Publications
The AFL-CIO has launched its “2009 Executive PayWatch” Web site that highlights what the labor federation views as the 10 “worst” corporate pay practices.
“Americans are rightly angered by CEOs who haven’t learned their lesson,” AFL-CIO Secretary-Treasurer Richard Trumka, said in an April 14 press release. “After driving the economy into the ground and gambling with the nation’s retirement savings, these same corporations are giving out huge bonuses for bad behavior.”
Among the pay practices criticized by the AFL-CIO are:
--SunTrust Banks’ plan to grant $7.7 million in stock options to CEO James Wells. The company has received $4.9 billion in federal support from the Troubled Asset Relief Program.
--The more than $500 million in salaries and retention payments paid by American International Group to senior employees since the company was rescued by the federal government, which has spent $170 billion to keep the insurance company operating.
--The changing of performance goalposts, such as the steps taken by homebuilder Toll Brothers after it became clear that CEO Robert Toll would not receive a bonus under the old standards. According to the AFL-CIO, the company now ties the CEO’s bonus to a percentage of its income before taxes and bonus, as well as “squishy” factors, such as “management enhancement and efficiencies, and financial market visibility and access.”
--“Lavish” perquisites, like the $400,000 in tax preparation and financial planning services provided to Ray Irani, the chief executive of Occidental Petroleum.
--“Golden coffin” benefits, such as the more than $40 million in stock, life insurance, and other benefits that the heirs of Shaw Group CEO James Bernhard would receive if he dies.
--“Golden parachute” benefits, such as the $14 million exit package that Richard L. Bond was to collect after stepping down as chief executive of Tyson Foods in January.
In addition, the AFL-CIO has filed 17 proposals this year that seek advisory votes on compensation, investor votes on death benefits, more disclosure on compensation consultants, hold-through retirement rules for equity grants, and other pay reforms, according to RiskMetrics Group data.
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Thursday, March 12, 2009 |
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“Say on Pay” Gets 62% Support at Hain Celestial
Submitted by: Ted Allen, Publications
Hain Celestial investors gave 62 percent support to a “say on pay” proposal at the natural food company’s March 11 annual meeting, according to Walden Asset Management, one of the proponents.
The vote surpassed the 45.6 percent support for “say on pay” at Hain in 2008, and is one of the best showings by a shareholder proposal seeking an advisory vote on executive compensation, trailing only the 67.5 percent vote at Sun Microsystems in November, and the 69.6 percent support at Activision in 2007.
After the Hain vote, Tim Smith, a senior vice president at Walden, said proponents will ask the Melville, N.Y.-based company to implement the proposal. Nineteen U.S. issuers have voluntarily agreed to hold annual advisory votes, while several hundred federally supported financial firms will be required to do so this year.
Hain, which took a $20.5 million restatement to account for misdated stock options from 1993 to 2005, has faced investor dissent over its pay practices. In 2008, four compensation committee members received more than 38 percent opposition.
Also this week, a Walden pay vote proposal won 42.3 percent support (based on the votes cast “for” and “against”) at Walt Disney, according to proponents. That result is comparable to the 42.7 percent average support for “say on pay” resolutions at more than 50 U.S. companies in 2008. The March 10 vote at Disney presumably would have been higher but for the media-and-entertainment firm’s relatively large (7.9 percent) insider voting block.
Recent vote results suggest that advisory vote proponents are gaining more support, but they may face a steeper climb at larger firms. Hain has a market capitalization of $476 million, and Sun Micro has a $3.4 billion market cap, while Disney has a stock value of $30.8 billion. Earlier this year, “say on pay” proposals won 44.3 percent support at Deere & Co. ($12 billion market cap) and received a 38 percent vote at Walgreen ($22 billion). However, Smith cautioned that it may be too soon to reach such a conclusion, given the small sample size and the limited proposal filings at small-cap firms.
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Tuesday, January 27, 2009 |
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Occidental Agrees to Hold Annual Pay Vote
Submitted by: Ted Allen, Publications
Occidental Petroleum, which has faced shareholder dissent over its pay practices, has agreed to hold an advisory vote on compensation at its 2010 annual meeting and support federal “say on pay” legislation.
“We welcome ongoing input from our stockholders. Oxy's Board of Directors strives to maintain an ongoing, constructive dialogue with the goal of achieving continuous improvement in all aspects of our corporate governance, including executive compensation,” Ray R. Irani, the company’s chairman and chief executive officer, said in a Jan. 26 press release.
In response to the company’s decision, the Needmor Fund and various Catholic groups agreed to withdraw their resolution seeking an advisory vote. A Needmor “say on pay” proposal received 44.4 percent support at Occidental in 2008. The AFL-CIO and the American Federation of State, County, and Municipal Employees also withdrew 2009 resolutions that seek a “hold until retirement” policy for executive equity incentives and a vote on future “golden coffin” benefits.
“Allowing shareholders to provide input on executive compensation packages is more important than ever in the current economic environment,” Daniel F. Pedrotty, director of the AFL-CIO’s Office of Investment, said in the company’s press release.
Los Angeles-based Occidental is the 14th U.S. company to agree to an annual “say on pay” vote or permit shareholders to vote to establish that process (which Hewlett-Packard plans to do). In addition, Schering-Plough has said it will survey investors on its pay practices.
In addition to the shareholder proposals, it appears that investor dissent over Irani’s past compensation may have prompted Occidental to hold an advisory vote. Pay committee members received at least 24.5 percent withhold votes last year and faced 35 percent opposition in 2007. Irani has been one of the highest-paid U.S. chief executives; he received $34.2 million in total compensation in 2007 and $59.05 million in 2006.
Investors plan to file more than 100 “say on pay” proposals this year. Those resolutions went to a vote at 79 companies in 2008 and averaged about 42 percent support, according to RiskMetrics Group data.
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Friday, January 23, 2009 |
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“Golden Coffin” Proposal Gets 42% at Johnson Controls
Submitted by: Ted Allen, Publications
In the first vote of its kind, a shareholder proposal seeking a vote on executive death benefits received 42 percent support at Johnson Controls, according to preliminary results released by the proponent, the labor-affiliated Amalgamated Bank.
Scott Zdrazil, a vice president with Amalgamated, said the vote is a “strong sign of shareholder concern.” The bank’s LongView funds, the AFL-CIO, and other labor investors have filed similar proposals targeting “golden coffin” arrangements at 13 other firms, including Shaw Group, which holds its annual meeting on Jan. 28.
The Jan. 21 vote at Johnson Controls, a Wisconsin-based maker of automotive, building efficiency, and power products, is a good showing for a first-time proposal. The vote also is comparable to the best results posted last year by investor resolutions seeking limits on tax gross-up payments.
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Friday, December 5, 2008 |
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New Study on Tax Gross-Ups
Submitted by: Carol Bowie, Head of Governance Institute
A new RiskMetrics Group study, “Gilding Golden Parachutes: the Impact of Excise Tax Gross-Ups,” by analyst Kosmas Papadopoulos, sheds light on a long obscured aspect of executive pay.
The Securities and Exchange Commission’s 2006 compensation disclosure rules lifted the veil on such benefits by requiring companies to estimate potential severance payments, including any tax gross-ups, in their annual proxy statements. These gross-ups are designed to eliminate the impact of a 20 percent penalty (excise) tax that is levied on change-in-control related severance payouts to executives that are deemed to be “excessive.”
Congress enacted the tax in 1984 in an attempt to put the brakes on what were then considered unjustifiably large payouts (though paltry by today’s standards) being made to top executives who lost their jobs after takeovers. But RiskMetrics’ study of S&P 500 companies found that, in fact, the regulation has likely spurred the growth of severance packages, as more and more companies have agreed to pay the penalty tax--and pass that expense onto shareholders. Key findings from the study include:
* A substantial two-thirds of the S&P 500 disclosed they would provide excise tax gross-ups to one or more top executives. That’s in spite of the fact that excise tax gross-ups are a costly benefit, since it generally takes at least $2.50 and as much as $4 to cover each $1 of excise tax that must be “grossed-up.”
*At 80 percent of these companies, the tax would have been triggered if the executives had received change-in-control severance at the end of the prior fiscal year--in other words, the company disclosed its estimates of the tax hit. The aggregate potential gross-up payments for all named executive officers at those companies averaged $13.9 million. And their total estimated severance, including tax gross-ups, averaged a staggering $78.4 million.
* The story was different for the one-third of companies not providing excise tax gross-ups--average total potential severance payouts to the “top five” executives at these firms was $43.9 million.
The huge gap ($34.5 million) between the average value of top executive severance packages at companies that do provide tax gross-ups, versus those that don’t, cannot be explained by the average value of the gross-ups alone ($13.9 million). This finding suggests that companies providing such gross-ups tend to pay higher change-in-control-related severance generally, likely not what Congress intended back in 1984.
Shareholders have been pretty tolerant of these arrangements, but that might change now that more details are available on a regular basis. And, although the government may appreciate the revenue stream from the penalty tax, Congress may also take note of the unintended consequences of that attempt to control executive pay.
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Monday, November 10, 2008 |
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RiskMetrics’ Governance Exchange to Hold Webcast on Say-on-Pay on November 12
Submitted by: Sarah Cohn, Communications
The debate on say-on-pay votes at U.S. companies continues unresolved. Support for the concept this year by investors voting on shareholder proposals requesting say-on-pay was virtually even with 2007, including majority votes at 10 companies. So far, 11 firms have or will put management resolutions seeking an advisory vote on pay on their ballots, but it appears the item won’t become widespread until Congress acts.
RiskMetrics Group’s Governance Exchange will discuss the likelihood and impact of such legislation in a webcast to be held on Wednesday, November 12 at 1 p.m. EST. Speakers for the webcast, include: Richard Ferlauto, Director of Corporate Governance and Pension Investment at the American Federation of State, County and Municipal Employees (AFSCME); Charles G. Tharpe, Executive Vice President for Policy at the the Center on Executive Compensation; and Christianna Wood , Chief Executive Officer of Capital Z Asset Management and H&R Block Board Member, and . In addition, the panelists will debate the effectiveness of say-on-pay votes in addressing perceived problems with U.S. executives’ compensation. Carol Bowie of RiskMetrics’ Governance Institute will moderate the webcast.
To register for the webcast, please visit here.
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Wednesday, October 29, 2008 |
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Schering-Plough Will Survey Shareholders about Pay
Submitted by: Carol Bowie, Governance Institute
Schering-Plough announced on Oct. 24, 2008 that it will conduct a shareholder survey on director and executive pay. The survey will be mailed to shareholders with the company’s 2009 proxy materials, and results will be discussed in the CD&A section of the proxy statement for the 2010 annual shareholder meeting.
Schering-Plough says the survey is intended to “inform future work of the Compensation Committee and the Board” by providing a window into shareholders’ views of the executive pay program.
“This survey is evidence of our commitment to seek and consider shareholder input, as we did in 2006 with the shareholder survey on majority voting for directors” said Pat Russo, Chair of the Nominating and Corporate Governance Committee of the Board, in the company’s press release. Indeed, the company conducted a shareholder survey on governance issues after its 2006 annual meeting, which led to inclusion of two management proposals to amend the bylaws on the ballot for the 2007 meeting: one was to eliminate certain supermajority vote requirements, and the other was to elect directors by majority vote rather than plurality. The first proposal passed, but the second did not, although the board subsequently amended the bylaws to include a director resignation policy, triggered if a nominee in an uncontested election fails to receive support from a majority of votes cast.
It appears that the 2006 survey was conducted by an independent consultant rather than being mailed to shareholders with the proxy statement. For the executive pay survey, Rich Koppes, former General Counsel of the California Public Employees’ Retirement System (CalPERS) and currently of counsel to Jones Day law firm and at Stanford Law School, will provide oversight of the process used to tabulate and report the results, according to the release. Koppes also will serve as the conduit for shareholders wishing to respond to the survey on a confidential basis.
Schering-Plough has participated in the Working Group exploring the issue of “say on pay” and presumably is hoping to head off annual votes, although the company did not indicate how often it intends to conduct its pay survey. A questionnaire should give the compensation committee more nuanced information than an up-or-down vote—and would take proxy advisors out of the equation--but with anger growing daily about extravagant pay practices in the troubled financial sector, Congress may still have advisory pay votes on its to-do list.
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Thursday, August 28, 2008 |
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Another View on Say-on-Pay Progress this Past Proxy Season
Submitted by: Tim Smith, Senior Vice President of Environmental, Social and Governance Issues at Walden Asset Management
The 2008 proxy season demonstrated strong steady support by a remarkable cross section of investors for the reform requesting that an Advisory Vote on Executive Pay be instituted by companies. Even though the number of companies where votes were held grew from 2007, the average vote remained constant around 42%.
In addition ten companies received votes of over 50% and the vast majority of votes were in the 40-49% range. For a second year resolution with a significant number of companies this is an unusually high voting plateau to reach. In addition there is a broad cross section of voting support, some very public and others more circumspect in their support, from T. Rowe price to TIAA-CREF.
With a number of financial companies the votes dropped, e.g. Citigroup, Merrill Lynch, and Morgan Stanley, which is puzzling since major compensation issues exist with those companies. It is hard to know if the reason is a change of the shareholder base because of sales and an influx of new investors. But it does not seem as though institutional investors are stepping back from their support of this reform. They tend to back it on principle, thus the confusion about voting shifts.
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From the point of view of proponents, these votes send a very strong message to company boards and management that this governance issue should be put on their agenda as a top priority for study and action. It is fascinating to see the range of responses, from companies committed to dialogue and careful study of the issue to companies which seem to hunker down and arrogantly ignore the feedback from shareowners. This is most frustrating when a resolution receives a 40 or even a 55% vote and the company refuses to talk.
Other companies are holding back to see what happens in the elections and if “say on pay” will become law. Looking forward, proponents plan to continue to raise this issue through resolutions with approximately 100 companies in 2009.
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Monday, August 25, 2008 |
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Another Majority Vote for “Say on Pay”
Submitted by: Carol Bowie, Governance Institute
Valero Energy recently disclosed results for the Advisory Vote on Compensation proposal that its shareholders voted on this year – the tally shows support of 53.7 percent (based on votes cast for and against), up from 53 percent support for the same proposal in 2007. Both years’ resolutions were submitted by the Unitarian Universalist Association of Congregations (UUA).
Valero thus becomes the tenth company on this year’s list of majority supported “say on pay” shareholder proposals. The list stopped at eight firms in 2007. Under its bylaws, Texas-based Valero counts abstentions when tallying results for shareholder proposals, and by its reckoning the measure did not pass. Valero spokesman William Day told Risk & Governance Weekly that, so far, the company has no plans to address the proposal.
In another distinction, the Valero resolution is the second to get majority backing from votes cast for two years in a row. The other was voted on at Ingersoll Rand. The measure also garnered 50.7 percent support at computer maker Apple this year after obtaining a near-majority (46.6 percent) in 2007.
While support declined somewhat at several financial firms that had the resolution on their ballots over the last two years, overall “say on pay” shareholder proposals have averaged about 42 percent support so far this year over more than 50 meetings where votes have been reported, according to RiskMetrics data – virtually the same level as 2007. Only two votes remain pending for fall meetings, at Procter & Gamble and Oracle. Proponents may currently be more focused on this year’s political election, which may give a boost to their push for advisory pay votes. According to the draft Democratic national platform released on Aug. 7, for example, party leaders “will ensure shareholders have an advisory vote on executive compensation, in order to spur increased transparency and public debate over pay packages.”
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Thursday, May 22, 2008 |
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Explorations in Executive Compensation
Submitted by: Gary Hewitt, Marketing
This week RiskMetrics Group introduced a new research initiative that looks at the always complex issues surrounding executive compensation. The project, Explorations in Executive Compensation is offered in the hopes of sparking constructive dialogue and stirring new ways of thinking about this issue - and in the process help move investors and companies towards a common language for creating, evaluating and communicating about executive pay systems.
The project initially consists two sets of white papers. The first set, Considerations, defines and puts into context the basic elements of U.S. executives' pay packages, with special attention paid to emerging key considerations for investors in evaluating pay and equity plans in particular.
The second set, Innovations, offer a pair of new methods of looking at critical issues in executive pay: peer group benchmarking and and the degree of alignment between the risks borne by investors and by shareholders.
We're excited about this opportunity to advance dialogue and transparency on compensation issues - and are eagerly seeking your feedback on the ideas put forth in the project. Explorations in Executive Compensation is posted online at www.riskmetrics.com/compensation, with an interactive executive summary and online tools to explore the new benchmarking and risk profiling methodologies. Please visit the site and let us know what you think.
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Monday, May 5, 2008 |
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Aflac’s Pay Practices Get 93% Support
Submitted by: Ted Allen, Head of Publications
In the first “say on pay” vote by a U.S. public company, Aflac investors gave 93 percent support to the firm’s executive compensation practices, according to news reports.
There was only 2.5 percent opposition at Aflac’s May 5 annual meeting. The Columbus, Georgia-based insurer decided to hold an annual advisory vote after receiving a shareholder proposal on the issue in late 2006.
Aflac CEO Daniel Amos earned a total of $14.8 million, and had approximately $70 million in stock options vest in 2007, according to the company’s compensation report. Amos’ incentive-based pay is entirely performance-based, the company says, noting that since he took the post of CEO in 1990 the firm’s total shareholder returns have exceeded 3,867 percent. Aflac’s stock price has risen about 126 percent since early 2003.
Six other U.S. companies, including Verizon Communications and bond insurer MBIA, have agreed to hold non-binding pay votes. Meanwhile, investors have filed more than 80 proposals this season asking other firms to take this step. “Say on pay” proposals have averaged 42 percent support at 21 companies so far, earning 50.7 percent support at computer maker Apple, and majority support at printer manufacturer Lexmark International, according to RiskMetrics Group data.
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Friday, May 2, 2008 |
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Analysis: Early Season Trends
Submitted by: Subodh Mishra, Governance Institute
Resolutions calling for advisory votes on pay have received less support at a number of firms this year versus last, according to a RiskMetrics Group analysis of preliminary vote results through April 30.
Governance watchers suggest that a number of factors may underlie the declining support at those firms, though the average support level for all such “say on pay” proposals correlates to that in 2007, based on tallies collected so far.
This year, pay vote proposals have averaged 42.1 percent support at 21 companies so far. That is in line with results for calendar 2007, when 52 such proposals received 42.5 percent average support. Surprisingly, however, the measure received less support at a number of financial companies this season, including Citigroup, Morgan Stanley, Wachovia and Merrill Lynch, where many observers expected the measure would fare better than last year given investor anger over subprime-related losses.
Of the 11 companies where investors voted on the resolution both this year and last, seven have seen declines in support that range from one-tenth of a point at AT&T to 9.6 percentage points at Merrill Lynch. Pay vote proposals received increased support at just five firms, meanwhile, including at Apple (Editor’s Note: this is based on an estimated vote tally of 51 percent, given that the company announced the proposal received majority support, without disclosing the specific votes or percentages; RiskMetrics has recorded a preliminary tally of 51 percent at Lexmark International for the same reason). Defense contractor Lockheed Martin and aerospace giant Boeing each saw 3.9 percentage-point gains.
To view some of the early season trends, please Download file
Continue reading "Analysis: Early Season Trends
Submitted by: Subodh Mishra, Governance Institute" »
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Friday, February 1, 2008 |
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French CEOs Have Highest Pay in Europe, Report Shows
Submitted by: L. Reed Walton, Publications
French CEOs earn the most in Europe, though their pay is still far below the average compensation for U.S. executives, according to the Hay Group, a human resources firm.
French chief executives received the highest median total direct compensation--including salary, bonus, and fair value of long-term incentive awards--according to the survey of compensation at the 50 largest European companies, “How Chief Executives Are Paid,” released by Philadelphia-based Hay Group in January. Numbers were based on the most up-to-date financial reporting figures available from each company, the study noted.
Companies in France also provide the largest long-term incentive opportunities. The most popular long-term incentive plans in Europe were stock options and performance shares, with nine of the surveyed French companies granting the former and two the latter.
The report indicated that companies in the United Kingdom pay their chief executives higher base salaries on average. The total direct pay might have been lower because, all of the U.K. companies surveyed had performance-based share plans. Less than half of those firms have stock option plans, and less than a quarter have matching bonus plans, according to the Hay Group.
Median total cash for European CEOs was about €3.3 million with total direct annual pay (total cash plus the fair value at the award date of any long-term incentive bonuses) averaging about €5 million.
German companies paid the highest bonuses in Europe, with a median payment of 185 percent of salary. U.K. firms were in second with a median bonus payment of 160 percent of salary. By comparison, the median U.S. executive receives bonuses of 300 percent of his or her base pay, the survey noted.
Seventeen European companies reported using deferred bonuses to compensate their CEOs--by which the executives’ bonus payments are held for a period then paid, most commonly in the form of shares. Two companies in the survey--both German--use deferred cash bonus plans, but none of the other European firms do.
The Netherlands had the lowest rates of total CEO compensation. However, the CEO of a Dutch company, Jeroen van der Veer of Royal Dutch Shell, received the fourth-highest total direct compensation of any European chief executive, the report notes. Arun Sarin of U.K.-based Vodafone Group had the highest, followed by executives at GlaxoSmithKline and BP, also based in the U.K.
Dutch investor advocates have warned domestic companies against upward-spiraling CEO pay. In November, the Dutch institutional investor association, Eumedion, sent a letter to the 75 largest companies in the Netherlands urging them to use U.S. companies cautiously in their pay-benchmarking peer groups.
According to the survey, the median total direct CEO compensation at the largest 50 U.S. companies by market capitalization is around €13 million (about $19.4 million). The highest-paid American CEO in the survey (Ed Whitacre Jr. of AT&T) had a total direct compensation in 2006 of about €7.3 million above Sarin, the highest-paid European CEO.
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Wednesday, January 30, 2008 |
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2008 Preview: Pay Proposals
Submitted by: Subodh Mishra, Publications
Investor calls for advisory votes on pay and other measures to reform executive compensation will resonate in 2008 as U.S. capital markets slide in the face of recession.
A network of investors, led by Boston-based Walden Asset Management and the American Federation of State, County and Municipal Employees, has so far filed more than 90 proposals calling for an advisory vote on pay, compared with 44 such resolutions at this time last year.
The network’s membership--which ranges from retail shareholders to pension fund giants including the California Public Employees’ Retirement System--also has grown from 2007. Nearly 75 investors have come together this year to file the measure at primarily large and medium-sized companies.
“Companies receiving the proposal include those where shareholders believe there has been non-performance, options backdating, and other major issues that shareowners need to address,” Timothy Smith, senior vice president at Walden Asset Management, told Risk & Governance Weekly. Abbott Laboratories, Capital One, Lexmark and Wells Fargo are among those targeted.
Spokeswomen at Capital One and Wells Fargo declined to comment on the filings, while officials are Abbott Laboratories and Lexmark did not immediately respond to requests for comment.
The proposal, dubbed “say on pay,” also will be filed at companies such as General Electric that are generally viewed positively by shareholders with respect to executive compensation and other facets of governance, according to Smith. “We believe [such companies] should provide leadership in adopting an advisory vote” on pay, said Smith, who also noted that dialogue on the issue has increased this year.
Governance watchers have in recent months called for increased communication between issuers and shareholders on a range of issues including compensation. “Improved communication and dialogue … may provide compensation committees with a broader perspective and balance in relation to the views provided by management,” wrote Weil, Gotshal & Manges attorneys Ira M. Millstein, Holly J. Gregory, and Rebecca C. Grapsas in a memo to clients earlier this month. “It may also lessen the push for an advisory vote on executive compensation.”
Last year, 20 companies and investors came together to form the “Working Group on the Advisory Vote on Executive Compensation” to study the issue.
Three companies--Par Pharmaceuticals, Verizon Communications, and Aflac—have so far taken steps to allow for advisory votes on pay following shareholder proposal filings in 2007 calling for the right. Aflac, the Georgia-based insurer, will be the first to give shareholders the vote when it holds its annual meeting on May 5. The company originally planned to allow for the vote in 2009.
Concerns over compensation in 2008 will not be limited to calls for advisory votes on pay, though. Novel proposals will include demands for companies to adopt a policy on the use of so-called 10b5-1 stock-selling plans, and those seeking to limit or bar tax gross-ups for senior executives. Another resolution seeks to place limits on executive employment agreements.
First year proposals generally do not fare as well as those in their second and third year, though this year may prove an exception.
“As the market declines, there’ll be more support for compensation reform,” notes Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “The downturn will only fuel the efforts of shareholders.”
Reports of record Wall Street bonuses at financial firms that sustained considerable losses in 2007 as a result of exposures to mortgage-related investments are likely to stimulate broad support for proposals tied to executive pay. Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns together awarded roughly $39 billion in year-end bonuses, exceeding the $36 billion distributed in 2006 when the industry reported all-time high profits, Bloomberg News reported.
CEOs at Morgan Stanley and Bear Stearns forfeited bonuses in light of bad bets on subprime mortgage-backed securities. That may mollify shareholders who are expected to vote on a range of proposals including those calling for strengthened links between pay and performance. Labor funds, led by the United Brotherhood of Carpenters’ and Joiners of America, have so far filed more than 50 such resolutions at spring annual meetings.
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Submitted by: Subodh Mishra, Publications" »
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Friday, December 7, 2007 |
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Pay Consultant Concerns Debated
Submitted by: L. Reed Walton, Publications
U.S. lawmakers this week heard testimony from investor representatives who called for more disclosure from companies about other work done by consulting firms that advise boards on executive pay.
The hearing of the House Committee on Oversight and Government Reform was called by panel Chairman Henry Waxman, a Democrat from California, to determine whether compensation consultants are likely to recommend excessive executive pay in exchange for lucrative contracts on other services for companies. The Dec. 5 hearing coincided with the release of a report by Democratic lawmakers drawing a link between egregious pay practices and the competition by pay consultants for other contracts.
Labor and state pension funds previously have expressed concern that work done by compensation consulting firms outside of advising boards on executive pay may compromise a consultant's independence. The AFL-CIO and other labor funds filed nine proposals on this topic this year--three of which went to a vote--and plan to file similar resolutions for 2008.
In testimony to lawmakers, shareholder advocates blamed rising executive pay on the Securities and Exchange Commission's failure to require U.S. companies to tell their investors what services outside of pay advice these consulting firms provide. The SEC's 2006 compensation disclosure rules do not require issuers to list the outside services provided by pay consulting firms or how much money was paid for these services.
"The SEC betrayed investors by not going far enough in their disclosure rules," said Daniel Pedrotty, director of the AFL-CIO's office of investment. "The board is relying on advice that could be conflicted," he added, "and shareholders should know about that."
Meredith Miller, assistant treasurer for policy in the Connecticut State Treasurer's Office, which oversees the state's pension funds, said corporate disclosure on pay consultants has been "woefully inadequate."
Competing for contracts that can pay much more than compensation consulting alone, Miller said, puts consultants "on the exact same path" toward being totally beholden to top management as auditors were before the accounting scandals at Enron and WorldCom.
"One of the lessons of Enron is that when an auditor has a business relationship with companies, their independence is questionable," said Rep. Elijah Cummings, a Democrat from Maryland.
Republican lawmakers criticized the comparison between audit firms that fraudulently signed off on company accounts and compensation consultants who do other projects for the company, and questioned the need for disclosure to shareholders.
"Shareholders rely on audit reports, but not on compensation consultant reports. Only directors rely on that," said Rep. Tom Davis of Virginia, ranking minority member of the committee.
Houman Shadab, a research fellow at George Mason University and a witness at the hearing, agreed. "Having companies disclose information that is not material to deciding whether to purchase securities … would flood the market with confusing information," Shadab said.
During the hearing, many Republicans questioned the need for additional disclosure when the compensation committee is already required in many instances to be free of ties to executives. Since 2003, the New York Stock Exchange has required companies to have a pay committee that is composed entirely of independent directors.
In 2004, the National Association of Corporate Directors released a report stating that firms providing pay advice to board compensation committees "should not be retained by the company in any other capacity."
Rep. Virginia Foxx, a Republican from North Carolina, said that if shareholders were truly upset about compensation consultant disclosure, they would have contacted lawmakers prior to the hearing. Democratic Rep. Peter Welch of Vermont acknowledged that he had not heard from shareholders about the issue, either.
However, Miller and Pedrotty said they have approached the SEC and individual companies. The Connecticut State Treasurer and the AFL-CIO joined 11 other institutional investors in October 2006 in writing letters to the 25 largest U.S. companies, urging them to exceed the SEC's reporting requirements on compensation consultant independence.
Miller said that 11 companies out of the 25 that received letters now have an outright ban on compensation consultants doing other services for the same company. In December 2006, General Electric agreed to provide additional disclosure in response to a proposal by the AFL-CIO.
Continue reading "Pay Consultant Concerns Debated
Submitted by: L. Reed Walton, Publications" »
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Friday, November 2, 2007 |
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Verizon Adopts "Say on Pay"
Submitted by: L. Reed Walton, Publications
In response to shareholder pressure, Verizon Communications has agreed to hold an annual advisory vote on executive compensation in 2009.
The decision by Verizon’s board comes after shareholders of the New York-based telecommunications and Internet service company gave 50.2 percent support to a resolution asking for a non-binding vote on executive pay policies at the firm’s annual meeting in May.
Verizon is the second U.S. public company to adopt an annual pay vote, known as “say on pay,” a right given to investors by law in markets such as the United Kingdom and Australia.
Insurance company Aflac received a similar resolution, but decided to adopt “say on pay” in February before the matter went to a shareholder vote. Aflac, like Verizon, will hold the first advisory vote on executive pay policies at its 2009 annual meeting.
According to a Nov. 1 press release, Verizon’s presiding director, Sandra O. Moose, said that the board’s decision will “further strengthen Verizon’s corporate governance practices.”
A number of Verizon shareholders, including the American Federation of State, County, and Municipal Employees (AFSCME), Walden Asset Management, and the North Carolina and Connecticut state pension fund officials, co-signed an Oct. 17 letter that urged the directors to consider adopting an advisory vote policy.
“Giving shareholders an opportunity to vote on executive pay is a simple and easy way to improve Verizon’s corporate governance policies,” the investors’ letter read. “Since the vote is not binding, it will give us a voice in the process without allowing us to micromanage the [c]ompany.”
The Amalgamated Bank, which invests for labor interests through its LongView funds, sent a letter on Oct. 31 that called for an annual advisory vote. The letter criticized past pay practices at Verizon, where five directors received between 7 and 11 percent opposition in May amid an AFL-CIO “vote no” campaign over CEO Ivan Seidenberg’s compensation.
The company initially objected to the “say on pay” proposal, filed by C. William Jones, president of the Association of BellTel Retirees. Verizon argued in its proxy statement that an up-or-down vote on pay would be a blunter instrument than simply communicating grievances over pay directly to the board.
After the proposal received majority support, however, the board began a dialogue with shareholders--including Jones--according to the company’s Nov. 1 press release. Aflac went through a similar process of consulting with large investors before deciding to adopt “say on pay.”
“We believe that it is important to engage in an ongoing dialogue with shareholders and others,” Verizon presiding director Moose said in the press release.
Richard Ferlauto, AFSCME’s director of pension and benefit policy, lauds the Verizon decision as “a breakthrough.” “It’s the first time a company has moved to adopt ‘say on pay’” after a vote on a shareholder proposal, Ferlauto told Risk & Governance Weekly.
The AFL-CIO (of which AFSCME is a part) is also optimistic about the possibility for an advisory vote, but the labor federation expressed some concern about the language used by the Verizon board to describe its new pay vote policy.
The company describes the new policy as providing a shareholder advisory vote “related to executive compensation,” leaving some AFL-CIO officials nervous about whether all of the company’s pay practices will really be put to a vote and whether pay disclosure will be made in a clear and meaningful way, said Heather Slavkin, the AFL-CIO’s senior legal and policy advisor.
“As we all know, the devil is in the details,” Slavkin told Risk & Governance Weekly. “We are eager to see how it actually looks when the management proposal is submitted to shareholders.”
The Verizon board also modified its policies on compensation consultant independence and executive severance pay--both in response to high support for shareholder proposals on these issues at the annual meeting.
A new policy ensures that any firm consulting on executive pay for the board is not allowed to do any other contractual work for the company. A Communication Workers of America proposal asking the company to examine the independence of its compensation consultant won 46.9 percent support in May.
According to the press release, Verizon has also implemented a revised policy that more specifically defines the types of payments that can be used in calculating a severance payment to an executive, but regulatory filings including the exact details of the new policy have not yet been released. A shareholder proposal, which asked for severance payments to be limited to 2.99 times (or less) an executive's annual pay plus bonus, received 47 percent support at the meeting.
At least one other company where a “say on pay” resolution received majority support is considering adopting a yearly advisory vote, Ferlauto reported. AFSCME, Walden, and Connecticut and North Carolina fund officials sent a similar letter urging the board at industrial equipment manufacturer Ingersoll-Rand to hold an annual pay vote. A Unitarian Universalist Association proposal on “say on pay” received 56.7 percent support at the company’s meeting in June.
According to Ferlauto, Ingersoll-Rand’s board responded by indicating that it has begun to contact major shareholders to get their views on implementing an advisory vote on pay.
And more companies may face shareholder pressure to follow suit. “Say on pay” proposals received majority support at six other firms this year in addition to Verizon and Ingersoll Rand. The latest was a resolution at Par Pharmaceutical that received 56.8 percent support on Oct. 16, according to the proponents, the New York City Public Employees' Retirement System.
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Tuesday, October 30, 2007 |
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Trends in Executive Compensation Leadership Interview
Submitted by: Sarah Cohn, Marketing and Communications
Do you want to hear about the latest developments on say on pay or compensation disclosure best practices? RiskMetrics Group has just posted an interview on trends in executive compensation with Carol Bowie of RiskMetrics Group’s Governance Institute and Stephen Deane of RiskMetrics Group’s Governance Exchange Team. The discussion covers where the say on pay issue is headed, how performance-based stock options did during the 2007 proxy season and emerging compensation trends. Stephen Deane specifically discusses best practices in compensation disclosure based on his new report, Compensation Disclosure: Best Practices and Examples.
To listen to the interview, please visit RiskMetrics Group’s 2007 Fall Leadership Interview Series web page.
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Monday, October 1, 2007 |
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Activision: A Record Vote for "Say on Pay"
Submitted by: L. Reed Walton, Publications
Investors at Activision gave 69 percent support to a shareholder resolution asking for an annual advisory vote on executive compensation (“say on pay”), according to proponents.
Conrad MacKerron, director of the corporate social responsibility program at the As You Sow Foundation, reported the result--the highest ever for a “say on pay” proposal in the United States--after the company’s annual meeting on Sept. 27.
Activision, a Santa Monica, California-based video-game maker, is now under formal investigation by the Securities and Exchange Commission in connection with the company’s past stock-option granting practices.
In May, a special subcommittee of Activision’s board found that about 63 percent of option grants made to former and current employees from 1997 to 2003 had been misdated. In many cases, grant dates reflecting the lowest or second-lowest exercise price for the month or year had been selected with the benefit of hindsight.
Even before the subcommittee presented its findings, the company replaced the director of human resources, dismissed its former outside counsel, and created a new “principal compliance officer” post. The officers and directors who had received misdated options that had already vested agreed to make up the difference in exercise price, per the subcommittee’s recommendation.
The Activision result marks the seventh time this year that advisory pay vote measures have attained majority support. The proposal--now in its second year--has averaged 42.4 percent support over 42 meetings since January.
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Friday, June 15, 2007 |
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A Closer Look at "Perks"
Submitted by: L. Reed Walton, Staff Writer
This year, as U.S. companies file proxy statements under the new compensation disclosure rules, the perquisites and other extra benefits that top executives enjoy are becoming more apparent to investors.
Before this proxy season, many executive perks were largely obscured, with a few coming to light years later during litigation or government probes. Prominent examples include the $15,000 umbrella stand and other luxury items purchased by Tyco International CEO L. Dennis Kozlowski, the personal aircraft use by former Tyson Foods Chairman Donald J. Tyson and his family, and the retirement perks received by General Electric CEO Jack Welch, which included use of an $11 million Manhattan apartment and a Mercedes. These headline-grabbing benefits helped spur investor demands for better disclosure of perks and other forms of executive compensation.
The new Securities and Exchange Commission rules mandate that companies disclose perks in aggregate of $10,000 (down from the former limit of $50,000) in the summary compensation table. The rules are causing some firms to cut back on perks, while other companies seek to defend these extra benefits by citing retention and security concerns.
Some investor advocates are not persuaded by corporate arguments that perks are still needed to retain top executives.
"Pay should be tied to long-term sustainable corporate performance, so perks can break this pay-for-performance link," Justin Levis, a senior analyst with the Council of Institutional Investors (CII), told Governance Weekly.
Levis said he "has yet to hear a convincing rationale" from companies about why they provide free personal travel on the corporate plane, club dues, home security, and other "extras."
Perks reform, said Michael Garland, director of value strategies for the CtW Investment Group, the investment arm of labor federation Change to Win, is "obviously a reform that the labor funds are highly supportive of."
"In situations where there are egregious perks," Garland told Governance Weekly, "you will see shareholders develop either ... proposals or [requests for] greater accountability of board members."
As companies file their first proxy statements under the new disclosure rules, it's not yet clear whether a significant number of firms are scaling back the perks, supplemental retirement plans, and other benefits that are not provided to regular employees. However, anecdotal evidence suggests that many firms still offer these benefits, and they now are making a greater effort to explain these practices to shareholders.
For instance, Boeing's proxy statement provides a breakdown of CEO James McNerney Jr.'s personal use of the corporate jet, which the company valued at $331,649. That total includes $63,053 for personal travel associated with relocation, $268,396 for general personal travel, and $9,160 for travel to outside board meetings. McNerney serves on two boards aside from Boeing's.
Drugmaker Eli Lilly's proxy specifies that CEO Sidney Taurel only used the company jet for personal travel to and from outside board meetings. "The company does not provide significant perquisites or personal benefits to executive officers, except that the company aircraft is made available for the personal use of Mr. Taurel and [Chief Operating Officer John] Lechleiter, where the committee believes the security and efficiency benefits to the company clearly outweigh the expense," the proxy statement reads.
While Goodyear Tire & Rubber offers top executives home security services, financial planning, tax preparation, country club dues, and annual physical exams, the company's proxy statement said the compensation committee "does not consider these perquisites to be a significant component of executive compensation."
Retention and security are the most-often cited reasons for executive officer perquisites. Morgan Stanley and eBay say in their proxy statements that perquisites (and other benefits such as bonuses and equity awards) are essential to retaining the same quality of executives that lead other firms in their revenue and industry grouping. The companies provide bulleted lists of peer companies with which they must "compete" for top executive talent.
Margaret Whitman, CEO of online auction firm eBay, received more than $1 million in personal travel on the company plane, including nearly $240,000 in reimbursements for taxes (also known as "gross-ups") owed on that travel. The company also notes that it paid finance chief Robert Swan close to $1 million in relocation fees and related tax gross-ups for "costs and expenses related to moving from Texas to the San Francisco Bay Area and the sale of his home." EBay also offers information technology support for executives' home computer systems.
Southern Union's proxy statement notes that it has a "policy that encourages [CEO George] Lindemann and his spouse to use company aircraft for all business and non-business purposes for their personal security and safety." The Houston-based natural gas company reports that Lindemann accrued $609,862 in personal travel on the company jet in 2006, not including $44,393 in tax gross-ups.
United Technologies reported $612,303 in personal airplane use by CEO George David in 2006. Like Southern Union, the United Technologies proxy statement says that the CEO and CFO "use corporate aircraft for personal travel in accordance" with the company's security policy, but no further explanation of the security policy is provided.
Meanwhile, Morgan Stanley CEO John J. Mack incurred $321,848 for personal aircraft use in fiscal 2006 and $407,762 in fiscal 2005, according to a footnote to the company's summary compensation table. At Morgan Stanley, a "board-approved policy directs the Chairman and CEO to use the [c]ompany aircraft when traveling by air."
Continue reading "A Closer Look at "Perks"
Submitted by: L. Reed Walton, Staff Writer" »
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Thursday, May 31, 2007 |
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Motorola: Third Majority for “Say on Pay”
Submitted by: L. Reed Walton, Staff Writer
A proposal asking for an annual shareholder advisory vote on executive pay won 51.8 percent support at Motorola’s annual meeting, according to a May 30 company press release. The proposal, submitted by shareholder William Steiner, went to a vote on May 7.
The result marks the third time a “say on pay” proposal has received majority support this season, according to ISS data. A similar proposal at Verizon Communications won 50.2 percent of votes cast on May 3, and another resolution at Blockbuster on May 9 received 57 percent support, the highest result so far for “say on pay.”
The issue first appeared on company ballots in 2006, and averaged 40 percent support over seven meetings last year. “Say on pay” has fared slightly better this year, averaging 42 percent support at 22 meetings where results are known.
Four proposals are scheduled to appear on company ballots in early June, including Nabors Industries on June 5, Ingersoll-Rand on June 6, Affiliated Computer Services on June 7, and Countrywide Financial on June 13.
Lawmakers continue to weigh in on the “say on pay” issue. Democratic Sen. Barack Obama of Illinois--a presidential contender--has asked Sen. Christopher Dodd of Connecticut, the Democratic chairman of the Senate’s banking committee--who is also running for president--to hold hearings on his bill that would give shareholders at all public companies an annual advisory vote on the executive pay process.
Obama put forward the bill in late April as companion legislation to a similar bill by Rep. Barney Frank of Massachusetts, chair of the financial services committee in the House of Representatives. The House approved Frank’s bill on April 20.
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Monday, May 14, 2007 |
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Two Pay Proposals Get Significant Support at Apple
Submitted by: L. Reed Walton, Staff Writer
Two proposals related to executive pay received close to 50 percent of votes cast at Apple's annual meeting on May 10, according to Cornish Hitchcock, an attorney for the Amalgamated Bank's LongView Fund, which submitted one of the proposals.
An options reform proposal won 47 percent support, while a request for an annual advisory vote by shareholders on executive pay won 46 percent, Hitchcock said.
LongView, a labor-affiliated fund, put forward the options reform proposal, which asked the company to disclose grant dates before the beginning of each fiscal year and to price options at the average of the opening and closing stock prices on the grant date. Apple has declined to adopt new policy on options, noting that it has stopped giving options to top executives in favor of restricted stock grants.
"[W]e think it's important to have a policy dealing with stock options even if they’re not currently in favor," Hitchcock told Governance Weekly.
The proposal, co-sponsored by the Connecticut Retirement Plans and Trust Funds, was one of the first to appear on corporate ballots since the U.S. options timing scandal broke last year. Apple restated its earnings in December, reflecting a loss of $105 million, to account for past option grants after an internal investigation concluded some grant dates were "intentionally selected in order to obtain favorable exercise prices."
The 47 percent vote for the option resolution is a strong showing for a first-year proposal, and the vote far exceeds the average support earned by most compensation-related proposals in past seasons, according to ISS data.
Another LongView options proposal may have received majority support at CVS/Caremark on May 9. Company officials said the vote result was too close to call at the end of the meeting. A similar measure filed by the Teamsters went to a vote at Broadcom on May 2. Broadcom officials indicated that the proposal did not pass, but they declined to disclose the percentage support before the company's next quarterly regulatory filing.
At Apple, the pay vote resolution was filed by the AFL-CIO. The proposal is the fifth on this topic to receive more than 45 percent support this season, according to ISS data. The best showing so far was the 57 percent vote for a New York City Employees' Retirement System resolution at Blockbuster on May 9, proponents said.
Overall, these "say on pay" proposals have averaged 42 percent support at 17 meetings this season. While shareholders can vote on executive pay in the U.K., Australia, and other markets, the idea is relatively new in the United States. In 2006, pay vote proposals averaged 40 percent support at seven meetings in their first year on corporate ballots.
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Friday, May 11, 2007 |
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First Majority for "Say on Pay"
Submitted by: L. Reed Walton, Staff Writer
In the first clear majority vote for the issue, a proposal seeking an annual advisory shareholder vote on executive pay received 57 percent support at Blockbuster, according to the proponent, the New York City Employees' Retirement System (NYCERS).
"We are encouraged by the high level of shareholder support and hope that Blockbuster's board of directors will act swiftly to implement the expressed will of its shareholders," New York City Comptroller William C. Thompson wrote in a press release.
The video-rental company declined to confirm the exact level of support, but company officials did indicate that the NYCERS resolution--along with another shareholder proposal asking the company to eliminate its dual-class share system--was approved at Blockbuster's May 9 annual meeting.
"[The proposals] are non-binding, so our board will take them under advisement," Angelika Torres, director of Blockbuster's investor relations division, told Governance Weekly.
The Blockbuster vote is the highest known support received by any advisory pay vote proposal. The "say on pay" initiative is relatively new, having debuted with seven proposals last year that averaged about 40 percent support. The showing at Blockbuster is noteworthy because the company has not been criticized by prominent investors over its pay practices or faced an investigation into past stock option grants.
In its supporting statement, NYCERS said it wanted an advisory vote to "provide Blockbuster with useful information about whether shareholders view the company’s senior executive compensation, as reported each year, to be in shareholders' best interests."
Management at the Dallas-based company opposed the measure, saying it already provides means by which investors can communicate with the board.
A similar resolution at Verizon Communications may have won more than 50 percent of votes cast at the company's May 3 meeting. Preliminary counts indicate the vote was too close to call at the end of the meeting, and the company said it plans to tabulate the votes and release final results in about two weeks.
At 14 companies this season, pay vote resolutions have averaged 42 percent support, two percentage points higher than in 2006. A proposal by the Needmor Fund, a religious group, won 48.4 percent at Occidental Petroleum on May 4, while a similar measure filed by the AFL-CIO got 49.2 percent support at Merck's meeting on April 24.
All other "say on pay" measures this season have received 47 percent support or lower, with the lowest support level, 30.4 percent, at Coca-Cola on April 18.
More advisory vote proposals are on corporate ballots next week, including JPMorgan Chase on May 15, Northrop Grumman and AMR on May 16, Yum! Brands on May 17, and Time Warner on May 18.
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Friday, May 4, 2007 |
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A Close Vote at Verizon
Submitted by: L. Reed Walton, Staff Writer
Investors continue to support "say on pay" shareholder proposals this proxy season, with resolutions averaging 41 percent support over 13 meetings.
A proposal at Verizon Communications may have received majority support on May 3. According to a company press release, the preliminary results "are too close to determine whether the proposal passed or was defeated." Verizon said it will report final results on its Web site and in its Form 10-Q filing for the second quarter.
Also at Verizon, proposals seeking shareholder approval for future severance agreements and greater disclosure on compensation consultants both won about 47 percent support. The AFL-CIO, which supported all three resolutions, said the results "send a strong and powerful message to Verizon that shareholders will not stand for excessive CEO compensation."
Before Verizon's meeting, the best showing for a "say on pay" proposal was a 49.2 percent vote at Merck on April 24, according to the AFL-CIO, which received that result from the company. However, it is unclear whether abstentions were included when the pharmaceutical company determined that percentage.
An advisory vote proposal won 40 percent support at Boeing on April 30, despite the company's opposition to the resolution.
"It is possible that this 40 percent is the highest so far for a say on pay proposal where a company had an aggressive vote-no campaign," said proponent and shareholder activist John Chevedden.
To review a new ISS white paper on pay votes in international markets, please visit here.
*This article ran in this week's edition of Governance Weekly.
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Wednesday, April 25, 2007 |
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ISS Publishes New Study - What International Market Say on Pay: An Investor Perspective
Submitted by: Stephen Deane, Vice President, ISS' Center for Corporate Governance
A Say on Pay shareholder proposal reportedly scored the highest level of support yet yesterday: 49.2 percent of the votes cast at Merck's annual meeting. That's still just shy of a majority vote - or is it? It isn't clear whether "votes cast" includes abstentions. If so, then support could actually have reached a majority of yes-and-no votes excluding abstentions. The company has declined to comment. Either way, with scores of shareholder proposals appearing on ballots - plus a Congressional bill that the House of Representatives passed last week - Say on Pay has become one of the hottest topics of this proxy season.
Several overseas markets - including the U.K., the Netherlands and Australia -already have legislation requiring companies to put their compensation reports or policies to shareholder votes. What lessons can we learn from their experience?
Institutional investors in those markets report positive impacts. The shareholder votes have strengthened dialogue with companies, tightened pay-for-performance links and reduced the likelihood of severance rewards for failure. It's true that there are market differences with the U.S., and votes on pay are not a panacea. But the experience abroad suggests that the practice can and should be transplanted to American soil.
Today we publish our research findings in a new study titled "What International Markets Say on Pay: An Investor Perspective."
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Friday, April 20, 2007 |
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Pay Vote Bill Passes the House
Submitted by: L. Reed Walton, Staff Writer
Members of the U.S. House of Representatives approved a bill that would give shareholders an annual advisory vote on executive pay.
Lawmakers passed H.R. 1257, the "Shareholder Vote on Executive Compensation Act," by a vote of 269-134 on April 20. With Democrats holding a 31-seat majority in the House, the vote indicates that the bill attracted some Republican support.
The bill is sponsored by the chair of the House Committee on Financial Services, Democratic Rep. Barney Frank of Massachusetts. The legislation includes a provision for a separate shareholder vote if a board approves a new severance package for executives while negotiating to sell the company.
"This is a bill to further the workings of the capitalist system of the United States," Frank said in a committee press release after the vote. "It has one very specific provision; it says that the shareholders, the owners of public corporations, will be allowed to vote every year in an advisory capacity on the compensation paid to their employees who run the companies."
Though the bill passed by a fairly wide margin in the House, the legislation's prospects of becoming law are uncertain. No similar bill has been introduced in the Senate, where Democrats hold a 51-49 majority.
While the White House released a short statement on April 17 expressing opposition to the bill, President George W. Bush has stopped short of saying he will veto the measure if it reaches his desk. The Bush administration said it "does not believe that Congress should mandate the process by which executive compensation is approved." The White House said recent governance improvements, such as the Securities and Exchange Commission’s new pay disclosure rules, "should be given time to take effect" before additional requirements are imposed.
In response, Frank and other bill supporters emphasize that bill "will not set any limits on pay." According to Frank's committee staff, the legislation will ensure that shareholders have an advisory vote on executive pay practices "without micromanaging the company."
Meanwhile, investors continue to show interest in annual advisory votes on executive pay. On April 17, shareholder proposals at Citigroup and Wachovia won about 43 percent and 40 percent support, respectively, according to the proponent, the American Federation of State, County, and Municipal Employees. The following day, a proposal filed by the Benedictine Sisters received 30.4 percent at Coca-Cola Co., the company reported. So far this season, pay vote resolutions have averaged about 39.7 percent support at six meetings.
Investors at nine companies will vote on the issue next week. Those meetings include Wells Fargo and Merck on April 24; Wyeth, Lockheed Martin, Capital One, and Valero Energy on April 26; and Abbott Laboratories, AT&T, and Merrill Lynch on April 27.
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Thursday, April 19, 2007 |
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RREV Publishes Trends in Executive Remuneration 2006
Submitted by: Sarah Ball, Director of Marketing and Communications, ISS Europe
RREV (Research Recommendations and Electronic Voting), ISS' UK corporate governance team, which applies the National Association of Pension Funds Corporate Governance Policy, has published a new report 'Trends in Executive Remuneration in 2006.' Key findings include that median salary increases for UK CEOs ranged from 8% (FTSE 100 and SmallCap) to 14% (FTSE 250). At CEO level, the largest percentage growth was at the lower quartile level, which was particularly marked at FTSE 100 companies, with an increase of 18%.
Performance related bonus payments received by UK executive directors increased by higher percentages than salaries. At CEO level, median bonus payments at FTSE SmallCap companies increased by 31%, at FTSE 250 companies by 34% and at FTSE 100 companies by 39%. In 2006 many companies have raised the maximum annual bonus potential. The data shows that bonus payments have increased as a percentage of (increased) salary across the board.
The use of performance share plans continues to account for the clear majority of new schemes in the UK. The number of new option plans and co-investment/matching plans proposed continued to decline, while the number of performance share plans remained approximately the same as in 2005.
To hear David Patterson, Director of Research, RREV and Head of Corporate Governance, National Association of Pension Funds (UK), discuss the 2006 Remuneration Report, please visit here.
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Friday, April 13, 2007 |
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Pay Votes Retain Investor Support
Submitted by: L. Reed Walton, Staff Writer
A trio of proposals asking for annual shareholder votes on executive pay averaged about 42 percent support in the first test of the issue this year. This week's proposals received slightly more support than "say on pay" resolutions did in 2006.
The American Federation of State, County, and Municipal Employees (AFSCME) reported that its proposal received 47 percent of votes cast at Bank of New York on April 10. That vote is the highest level of support ever received by a pay vote measure, according to ISS data.
The same proposal, put before Morgan Stanley investors the same day, got 37 percent support, AFSCME representatives said. A similar "say on pay" proposal submitted by the AFL-CIO won 40.3 percent at United Technologies on April 11, said Dan Pedrotty of the AFL-CIO Office of Investment.
Richard Ferlauto, director of pension benefit policy for AFSCME, is optimistic about the prospects for pay vote resolutions this proxy season. "No matter how you look at it, these are strong showings, particularly at Bank of New York. It indicates we're getting support among the mutual funds," Ferlauto told Reuters.
Seven "say on pay" proposals went to a vote last year. They averaged around 40 percent support; the best showing was 44.1 percent at Sun Microsystems in November.
The number of proposals increased dramatically this season, with over 60 filed and around 50 still pending. Other than AFSCME and the AFL-CIO, groups filing "say on pay" proposals include the New York City Employees' Retirement System, the Marianists, and the California Public Employees' Retirement System.
All three proposals voted on this week were opposed by company management. Morgan Stanley wrote in its proxy statement that a simple up-or-down vote on executive pay would be too vague for the board to tell which part of the pay package sparked shareholder concern, while Bank of New York argued that its independent compensation committee and pay consultants provided investors enough protection against "excessive" pay packages. United Technologies asserted that an advisory vote is not necessary, as the company has not faced criticism over its past option granting practices or severance payments.
Proponents contend that an annual advisory vote will force companies to be more responsive to shareholder demands to better link executive pay to company performance. Supporters tout the experience of the United Kingdom, the Netherlands, and Australia, where annual pay votes have led to greater dialogue between companies and investors on pay issues.
On April 17, investors will vote on the issue at U.S. Bancorp, where a similar proposal received 40.8 percent support last year, as well as Citigroup and Wachovia. Coca-Cola shareholders will vote April 18 on the measure.
"Say on pay" will be on the ballot April 24 at Wells Fargo and Merck, and will be voted on April 26 at Wyeth, Lockheed Martin, Capital One, and Valero Energy. The issue will be on the ballot at Abbott Laboratories, AT&T, and Merrill Lynch on April 27.
Future "say on pay" proposals may also be affected by pending legislation in the U.S. House of Representatives. A bill, H.R. 1257, would give shareholders an advisory vote on compensation and severance packages at all U.S. public companies. While the bill has received committee approval and likely will be considered by the full House this month, the legislation's prospects in the Senate are uncertain.
*This article originally appeared in this week's edition of Governance Weekly.
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Monday, April 2, 2007 |
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ISS to Hold April 4 Webcast on Say on Pay
Submitted by: Sarah Cohn, Director of Communications
ISS will hold a special Governance Forum webcast, Shareholder Vote on Compensation: What Do International Markets Say About Pay, on Wednesday, April 4 at 11 a.m. Eastern Daylight time.
With notable recent examples of "pay for failure" and an ongoing options backdating scandal, both investor groups and members of the U.S. Congress are looking to put executive compensation up for shareholder approval in the United States. While the "say on pay" idea is already in place in other markets, notably in the United Kingdom, the Netherlands and Australia, the challenge for U.S. investors is how the beneficial effects of say on pay would take root in a distinctive U.S. corporate governance environment.
Panelists John Wilcox, Senior Vice President and Head of Corporate Governance, TIAA-CREF; Ian Greenwood, Manager, Hermes Equity Ownership Ltd, London; and Rients Abma, Executive Director of Dutch investor group Eumedion, will provide an international perspective on "say on pay" and share the lessons learned in these markets with U.S. companies and their investors. Stephen Deane, ISS Vice President and Director of the Center for Corporate Governance, will moderate the panel and also discuss some of the key findings from his forthcoming study, International Views on Say on Pay.
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Friday, March 30, 2007 |
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Pay Vote Bill Clears House Panel
Submitted by: L. Reed Walton, Staff Writer
Legislation aimed at giving shareholders a greater voice in how executives at U.S. public companies are paid was endorsed by a House of Representatives panel this week.
By a 37-29 vote, members of the House Committee on Financial Services approved the "Shareholder Vote on Executive Compensation Act." The bill will likely be considered by the full House of Representatives when lawmakers return from their Easter recess in mid-April. To become law, the measure also must pass the Senate and be signed by the president.
The bill would not set any limits on pay but would allow shareholders to cast an annual advisory vote on senior executives' compensation packages. The legislation also would provide for a separate vote on severance payments for outgoing executives in the case of a merger or takeover.
"Excessive executive pay has been proven to have a significant impact on companies' profits and shareholder returns, and now the owners of the company will be given a voice on executive compensation plans." Rep. Barney Frank, the bill's primary sponsor and chairman of the financial services committee, said in a statement after the March 28 vote.
Frank, a Massachusetts Democrat, proposed similar legislation in 2005 but it stalled in the House, which was then controlled by Republicans. This week, most of the Republicans on the committee voted against sending Frank's bill to the full House. Rep. Patrick McHenry, a Republican from North Carolina who opposed the measure, said Congress should not legislate corporate salaries, Bloomberg News reported.
Shareholder advocates who have been pressing for advisory votes lauded the committee's vote.
"We're pleased and it shows that there is continued momentum behind advisory votes," said Richard Ferlauto, director of pension and benefits management for the American Federation of State, County, and Municipal Employees (AFSCME), who testified in favor of the bill at a March 8 hearing.
Ferlauto said he hopes that committee approval will embolden shareholders to support advisory vote proposals this proxy season. "I think this means we’re going to have very strong votes," he told Governance Weekly.
AFSCME has submitted 12 of the more than 60 "say on pay" proposals at U.S. companies this season. At least 40 resolutions are likely to appear on company ballots, starting with proposals at Morgan Stanley (April 10), United Technologies (April 11), Wachovia (April 17), and Citigroup (April 17).
The Council of Institutional Investors has endorsed shareholder votes on executive pay, while the California State Teachers' Retirement System--the nation’s second-largest state pension fund--sent a March 6 letter to Frank endorsing the bill.
However, some business groups argue that investors and lawmakers should wait and see how companies respond to the new executive pay disclosure rules issued by the Securities and Exchange Commission last year.
One company, Georgia-based insurer Aflac, has agreed to hold an advisory vote on compensation beginning in 2009. More than a dozen other companies, such as Tyco, Pfizer, JP Morgan Chase, and Intel, have joined AFSCME, TIAA-CREF, F&C Asset Management, Hermes, and other institutional investors in a working group to discuss the issue.
The United Kingdom has had a "say on pay" law on the books since 2002. So far, there has been just one instance of a negative investor vote. In May 2003, shareholders at pharmaceutical giant GlaxoSmithKline narrowly rejected a remuneration report that included a large potential severance package for chief executive Jean-Pierre Garnier.
Australia and Sweden also have advisory votes on compensation, and, in the Netherlands, the shareholder vote on pay is binding.
ISS is planning to hold a governance forum on the impact of advisory pay votes in these foreign markets on Wednesday, April 4 at 11 a.m. Eastern Daylight Time. To register for the webcast, please visit here.
*This article originally appeared in this week's edition of Governance Weekly.
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Monday, March 26, 2007 |
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Investor Group Endorses Advisory Pay Votes
Submitted by: Ted Allen, Director of Publications
The shareholder campaign for advisory votes on executive pay received another boost last week when the Council of Institutional Investors (CII) endorsed the idea.
The council, which represents 130 institutional investors with $3 trillion under management, approved the policy change at its spring meeting in Washington on March 20. The policy calls for annual advisory votes on compensation but leaves the details up to companies and investors to work out.
"The issue has a head of steam behind it, which will only increase during proxy season," Amy Borrus, deputy director of CII, told Governance Weekly.
Also last week, the House Committee on Financial Services held two days of hearings on H.R. 1257, a bill sponsored by Rep. Barney Frank (D-Mass.) that would provide for annual advisory votes on compensation and a separate vote on change-in-control payments. The committee was scheduled to vote on the bill on March 22, but the panel postponed the vote to March 28. Committee approval is expected as Frank's fellow Democrats hold a narrow majority on the panel. Frank said he expects the full House will approve the bill after Congress returns from its Easter recess in April, Congressional Quarterly reported.
Likewise, Richard Ferlauto, director of pension benefit policy at the American Federation of State, County, and Municipal Employees, which supports the legislation, told Reuters that he expects the House will approve the measure with some bipartisan support. However, "[the bill's] prospects in the Senate are uncertain. Then you have the prospect of a possible Bush administration veto," Ferlauto said.
Meanwhile, shareholders have filed more than 60 so-called "say on pay" resolutions this season that seek an annual advisory vote on the compensation received by senior executives. Investors in the United Kingdom, Sweden, Australia, and the Netherlands already have the right to vote each year on executive pay reports. The issue, which averaged 40 percent support at seven U.S. firms in 2006, will first appear on the ballot this season at Morgan Stanley on April 10 and at United Technologies on the 11th. One firm, Aflac, has agreed to hold an advisory vote starting in 2009.
The issue appears to be gaining support from large investors. In early March, the California State Teachers' Retirement System, one of the largest state pension funds, sent a letter to Frank that endorses his bill. The pension fund notes that the legislation would negate the need for investors to "[submit] resolutions to one company at a time" and would provide the same rights to all shareholders.
Frank also spoke about his bill at CII's meeting, where he said the measure "won't cost anyone a nickel" and questioned why anyone would oppose it. "Essentially, the argument against this is that shareholders aren't smart enough," Frank said on March 19, noting that the bill's critics generally have faith in the ability of the market to value companies.
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Monday, March 12, 2007 |
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Exit Pay: Best Practices in Practice
Submitted by: Gary Hewitt, Director of Marketing and Communications
Severance and golden parachute packages - which have been lightning rods for criticism over egregious executive pay - are likely to become even more high-profile this year. For the first time, new disclosure rules require companies to enumerate the estimated cash values of exit packages and other elements of executive pay. While the most egregious examples typically attract the most attention, the marketplace shows a range of practices - including some companies who have adopted best practices. ISS has just release a paper titled "Best Practices in Practice," which seeks to explain the issues involved, to describe the range and prevalence of practices, and to highlight specific examples of companies that engage in best practices. To read a copy of the paper, please visit here.
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Friday, March 9, 2007 |
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Lawmakers Debate Pay Vote Bill
Submitted by: L. Reed Walton, Staff Writer
While lawmakers agreed that better disclosure and more dialogue on executive pay would help U.S. companies and investors, House panel members were sharply divided on whether to give shareholders a vote on CEO pay packages.
During a March 8 hearing, scholars, investors, and shareholder advocates testified largely in favor of "say on pay" legislation that would give investors a non-binding vote on the compensation packages of corporate executives.
The new bill, introduced by Rep. Barney Frank (D-Mass.), who chairs the House Committee on Financial Services, would modify the Securities and Exchange Act of 1934 to provide an annual advisory shareholder vote on executive pay.
"Collective wisdom is better than individual knowledge," said Frank, "so I am puzzled when people tell me ... that the collective wisdom that [shareholders] bring to the process somehow evaporates when it comes to paying the people who run their company."
The bill, if passed, would also require a separate vote on "golden parachute" payments to outgoing executives after a merger or acquisition.
The issue of executive pay has been in the spotlight recently due to federal investigations of stock option grants at numerous U.S. firms, as well as investor anger over large payments to outgoing CEOs at companies such as Home Depot, Exxon, Occidental Petroleum, and drug manufacturer Pfizer.
"For years we've been concerned about executive pay and the distortion that executive pay causes in the market," Rich Ferlauto, director of pension and benefit policy at the American Federation of State, County, and Municipal Employees (AFSCME), testified at the hearing in Washington.
Last year, AFSCME and other investors submitted "say on pay" proposals at seven companies. The first-time resolutions averaged 40 percent shareholder support, according to ISS data.
Rep. Frank introduced a similar executive pay bill in 2005, but it stalled, as the House was then under Republican control. At the March 8 hearing, Rep. Spencer Bachus (Ala.), the ranking Republican on Frank's panel, applauded the bill's intent and commended insurance company Aflac for agreeing to allow an advisory vote but stopped short of endorsing the bill itself.
"Even though this is a problem, there may not be a government solution that makes it any better," Bachus said.
Stephen M. Davis, a fellow at Yale University's Millstein Center for Corporate Governance and Performance, supported the bill but said he was frustrated with U.S. lawmakers' efforts to reform corporate governance.
"Our laws essentially tie the hands of public shareholders so they cannot act as owners," said Davis, who recently completed a study on "say on pay" votes in the United Kingdom.
The U.K. has had an advisory vote rule in effect since 2002, and a study by London-based New Bridge Street Consultants of the 100 largest British companies concluded that the rule has served to slow the rise of executive pay.
In the U.S., the Securities and Exchange Commission last year unveiled new rules that require companies to better disclose the total cash-and-stock compensation received by top executives.
Continue reading "Lawmakers Debate Pay Vote Bill
Submitted by: L. Reed Walton, Staff Writer" »
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Friday, February 23, 2007 |
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Will Other Firms Follow Aflac?
Submitted by: L. Reed Walton, Staff Writer
The decision by Aflac--the insurance company known for its television commercials featuring a talking duck--to give shareholders an annual advisory vote on executive pay practices may prompt other major U.S. companies to follow suit.
Over a dozen large companies, including Tyco, Pfizer, Schering-Plough, J.P. Morgan Chase, Intel, and Prudential, have joined pension fund and investor representatives in a working group to discuss possible non-binding votes on compensation, known as "say on pay." Some of the companies involved with the group, such as Colgate-Palmolive, did not receive "say on pay" proposals this year, but still want to explore the possibility of shareholder review on compensation.
"We can say with assurance that close to a dozen companies ... believe the concept has considerable merit," said Timothy H. Smith, senior vice president of Walden Asset Management, a Boston-based fund for socially responsible investing and one of the founding partners of the working group, "but they need to do due diligence to see how it would be put to effect in the U.S. market."
The idea of an investor-issuer working group is not new. In early 2005, the United Brotherhood of Carpenters and Joiners of America, the Sheet Metal Workers International Association, and other labor pension funds founded a work group with companies like Bristol-Myers Squibb, Cinergy, Time Warner, and Chevron to address majority voting in director elections.
The United Kingdom, Sweden, and Australia already have advisory votes on executive pay, while the Netherlands has binding compensation votes. The U.K. rule has been in place since 2002 and has had a significant dampening effect on rising executive pay, according to a study of the 100 largest British companies by London-based New Bridge Street Consultants.
The idea of "say on pay" is catching on among U.S. shareholders. Last year, a first-time proposal filed by the American Federation of State, County, and Municipal Employees (AFSCME) and other investors averaged about 40 percent support at seven companies. AFSCME is one of the founding organizations in the "say on pay" working group, which also includes TIAA-CREF, the Connecticut Retirement Plans and Trust Funds, F&C Asset Management, Hermes, and the Universities Superannuation Scheme of the U.K.
This year, 52 advisory vote proposals are pending, many of them filed by a network of investors nationwide, including Walden, AFSCME, the New York City Employees' Retirement System (NYCERS), and the AFL-CIO. Four proposals so far have been withdrawn.
Georgia-based Aflac is the only U.S. company so far that has publicly said it will give shareholders a vote on executive compensation. Aflac Chairman and CEO Daniel P. Amos consulted with the board and with shareholders, including Smith at Walden, and decided to go ahead with the advisory vote after the company received a proposal from Boston Common Asset Management.
"Our shareholders, as owners of the company, have the right to know how executive compensation works," Amos said in a Feb. 14 press release.
The measure will not go into effect until 2009. By then, Aflac will have released three years of compensation data under the U.S. Securities and Exchange Commission's new rules on executive pay disclosure. The SEC approved the rules in July in an attempt to provide investors a clearer picture of companies' pay practices and related-party transactions.
"We expect that it will become easier for additional companies to embrace 'say on pay,' now that Aflac has opened the door as the first adopter of a shareholder advisory on CEO pay," Richard Ferlauto, director of investment policy at AFSCME, told Governance Weekly.
Aflac's decision may set a standard for other companies to follow, as other frontrunners in corporate governance have done in the past. "Chances are, anything [other firms] adopt now is going to be called 'the Aflac model,' kind of like how Intel and Pfizer reaped the benefits of being the early adopters" on majority voting bylaws and director resignation requirements," said Patrick McGurn, vice president and special counsel to ISS.
Apart from the companies involved in the "say on pay" working group, Smith said, corporate responses to the idea range from cautiously pessimistic to outright negative. Some companies are skeptical that an advisory vote on pay will have the same effect in the U.S. as it does abroad, owing to market differences. Other firms say that a simple up-or-down vote is not specific enough to indicate the particular pay practices (e.g., bonuses, stock option grants, or retirement benefits) that investors may object to.
Some companies, Smith said, would like to see how investors react to new compensation disclosures before committing to an advisory vote.
Continue reading "Will Other Firms Follow Aflac?
Submitted by: L. Reed Walton, Staff Writer" »
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Thursday, February 15, 2007 |
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Insurer to Give Investors Say on Pay
Submitted by: Sarah Cohn, Director of Communications
According to CFO.com today, insurance company Aflac announced yesterday it will become the first major company to provide shareholders with a non-binding vote on executive pay packages. The company reportedly came to its decision in response to behind-the-scenes discussions with union activists. The first vote will take place in 2009 since that will be the first year that the executive compensation tables in Aflac's proxy statement will contain three years of data, reflecting the Securities and Exchange Commission's new disclosure rules.
What are your views on say on pay? Do you anticipate more companies giving shareholders a say on executive pay packages? We welcome your thoughts.
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Monday, February 12, 2007 |
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Options Expensing: What Investors Need to Know
Submitted by: Gary Hewitt, Director of Marketing and Communications
What is the true impact of employee stock option expense?
Recent ISS research has found that the average S&P 500 company may report option expense under FAS 123R nearly 30% lower than calculated by ISS. As reporting season heats up, investors need consistent and timely data and analysis to help them assess the quality of companies' stock option expense disclosures.
Join ISS' Patrick McGurn and Jeffrey Mahoney of the Council of Institutional Investors on Thursday, February 15, 2007 at 1:00 pm EST for a Webcast on options expensing. The Webcast will discuss the new options expensing rules, what we've learned from the first wave of disclosures, and the implications for institutional investors.
To register for the Webcast, please visit here.
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Monday, January 22, 2007 |
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2007 Preview: Executive Pay
Submitted by: Rosanna Landis Weaver, Manager, Taft-Hartley Research
While the Securities and Exchange Commission approved new executive pay disclosure rules in July, investors are continuing their efforts to seek additional reforms at U.S. companies.
From the proposal filings so far, it appears that investors have sharpened their interest in pay disclosure and giving shareholders a greater voice over compensation decisions. This interest has been fueled in part by the stock-option timing scandal that led to internal or regulatory probes at more than 150 firms, as well as investor anger over generous packages for departing chief executives, such as Home Depot's Robert Nardelli.
Moreover, lawmakers who traditionally have advocated for greater curbs on executive pay now have a greater voice following the November elections, when control of the House Financial Services and the Senate Banking and Finance Committees shifted to the Democrats. (This week, the Senate Finance Committee approved a bill that targets a tax break received by hundreds of top corporate executives. The measure, which is attached to popular minimum-wage legislation, would bar individual taxpayers from deferring more than $1 million a year in compensation.)
One set of compensation-related proposals in 2007 likely to receive considerable attention are those seeking to give investors the right to approve compensation practices. In 2006, the American Federation of State, County, and Municipal Employees (AFSCME) filed the first U.S. proposal seeking a non-binding referendum on compensation. That proposal averaged 39.9 percent support at seven firms last year. The resolution was patterned on similar measures in the United Kingdom, Australia, and Sweden.
A growing number of investors are joining AFSCME's campaign by submitting similar proposals, dubbed "say on pay." ISS is now tracking 35 proposals filed by labor funds, and an additional 20 by other institutional investors and individual activists, including some funds that have traditionally focused on social issue advocacy. The California Public Employees' Retirement System (CalPERS) has filed such a proposal at technology company EMC, and fund officials indicate more may be filed.
The language in some of these proposals has changed slightly from that used in 2006 to reflect modifications to the SEC's pay disclosure rules. The new version of the proposal asks that shareholders be given the opportunity at each annual meeting "to ratify the compensation of the named executive officers set forth in the proxy statement summary compensation table and the accompanying narrative disclosure of material factors provided to understanding the summary compensation table (but not the compensation discussion and analysis)."
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Thursday, January 18, 2007 |
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Executive Pay Dominates Australia's 2006 Proxy Season
Submitted by: Martin Lawrence, Lead Analyst, ISS Australia
Executive pay issues dominated the 2006 Australian proxy season, the second year in which investors had the opportunity to cast an advisory vote on company remuneration reports.
In Australia, the highest profile annual general meeting was at telecommunications giant Telstra, where two issues dominated: the company's new executive pay practices and the successful attempt by the Australian government to install its board nominee, Geoff Cousins, despite 88 percent of non-government shareholders voting against his election. The vote was the state's last opportunity to exercise its majority voting power before it reduced its stake in November.
Telstra's board was also forced to rely on the government's 51-percent majority stake to ensure passage of a resolution approving the company's remuneration report. Fifty percent of minority shareholders voted against the resolution, citing concerns over the nature of executive performance hurdles, the level of bonus payments, given the company's poor performance and the low hurdles applied to incentives granted to the CEO.
No other annual meeting generated the same level of press coverage as Telstra, although high dissenting votes were recorded at a number of other meetings. Australian gambling company Tabcorp withdrew two resolutions, one concerning a proposed constitutional amendment that would have required a 75-day notice period for director nominations, and another concerning a grant of options to its CEO. Despite increasing the performance hurdles for the CEO option grant three days before the meeting, Tabcorp was forced to withdraw its resolution after a reported 60 percent of proxies were cast against it.
Other high votes against were recorded at meetings of both small and large mining companies, stemming from significant pay increases that have come in the wake of the global commodities boom.
Two small resources companies, Beach Petroleum and Kagara Zinc, recorded "no" votes of more than 20 percent and 30 percent, respectively, against option grants and other pay-related resolutions after substantial salary increases and option grants saw executives and directors at both companies profit handsomely from their companies' rocketing share prices over the past year.
Similarly, major global zinc and lead producer Zinifex recorded a 40-percent against vote on its remuneration report after increasing the pay package of its CEO by 100 percent despite the CEO holding over $20 million in vested and unvested equity incentives.
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Friday, January 5, 2007 |
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Investors Decry Rule Reversal
Submitted by: Subodh Mishra, Managing Editor
A late December move by the Securities and Exchange Commission, altering the way in which U.S. companies must report the value of executive stock-option grants, is being criticized by investors and a key lawmaker as ill-conceived and poorly timed.
The move effectively allows companies to report a lower value for option awards by disclosing values as they vest, rather than upon award. The commission's original rules, approved in July, required companies to disclose option award values at the time of the grant, thus giving investors a better idea as to the overall value the board placed on the award, according to supporters of the original provision.
"We're disappointed and feel it's a step back from full transparency for investors," Amy Borrus, deputy director at the Council of Institutional Investors, told Governance Weekly. "Investors will need to do more work to determine" the full worth of pay packages.
Commission officials argue the change will give investors a more accurate picture of executive pay packages because it will prevent the reporting of compensation that might not be realized. "The object is to report accurate numbers...reporting "phantom" pay that will never be received, is just as misleading as routinely under reporting it," SEC Chairman Christopher Cox said in a statement.
Cox also noted that the new rules will require reporting of option awards in a manner consistent with that mandated by the Financial Accounting Standards Board for corporate financial statements, thus providing "maximum clarity and consistency for investors."
The interim final rule was not subject to comment before its release and will apply to all companies filing proxy statements on or after Dec. 15, 2006, which was the same effective date for the other new disclosure rules. The SEC said it would accept public comments on the rule change for 30 days after the rule is published in the Federal Register and will make changes in February, if necessary.
Industry groups, including some like the Business Roundtable that supported the original rule, are welcoming the change, calling it a "more fair and balanced" way to report stock options, which will allow shareholders to determine what executives will receive, rather than what they may obtain.
Timing Questioned
Some investors have questioned the commission's decision to publicly announce the switch on the last business day before the Christmas holiday.
"They did it at the worst possible time, during the holiday season, with no chance for investors to respond, and they made it as a final rule," said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County, and Municipal Employees (AFSCME). "They should not be surprised to see this outrage."
SEC officials are rejecting the suggestion that the announcement was timed to avoid public scrutiny, saying the information was posted publicly as soon as it was approved by the federal agency overseeing regulatory policies. "Commissioners approved the amendment on Dec. 15, and we posted it as soon as it was cleared by the Office of Management and Budget, which just happened to be late in the day on Friday," SEC spokesman John Heine told Governance Weekly.
Ferlauto predicts the last-minute reversal and resulting outcry will translate into higher support for shareholder resolutions seeking to tie pay to performance and to give investors a greater say on pay packages. Ferlauto also said he expects these concerns will resonate on Capitol Hill, where leadership of committees now rests with Democratic lawmakers who traditionally have been more responsive to criticism from labor and other groups of "excessive" executive pay.
"[T]his slippage is regrettable both substantively and for not having been open to more public discussion," Rep. Barney Frank, the incoming House Financial Services Committee chairman, said in a statement. "Backtracking by the SEC on this important matter of stock options reinforces my determination that Congress must act to deal with the problem of executive compensation."
Frank, a Massachusetts Democrat, will hold hearings to address the growing "inequality gap" evidenced by today's executive compensation packages, committee spokesman Steven Adamske told Governance Weekly, though no schedule has been set.
Focus Remains on Options, 'Say on Pay'
The SEC's rule reversal is not the only issue serving to ensure investors remain focused on executive pay in 2007. In recent months, options backdating has generated controversy as more than a hundred companies face regulatory or internal probes over allegations that executives received awards timed to coincide with share price lows.
Most recently, the board of Apple Computer has been criticized over option awards for CEO Steve Jobs. A special committee of the board said Dec. 29 that Jobs was "aware of or recommended the selection of some favorable grant dates," but did not benefit financially, The Wall Street Journal reported.
Board members, including former U.S. Vice President Al Gore, said the committee defended Jobs and gave no indication the company would hold him accountable for grants that the Cupertino, Calif.-based firm has acknowledged were backdated.
Backdating also will remain a focus in light of proposals filed by some activist investors including the Amalgamated Bank's LongView fund, which is asking companies to permanently fix grant dates or set dates for making option awards that will be announced before a fiscal year begins. (An exception would be made for awards to executives recruited from the outside, according to the proposal text, provided that the strike price is not linked to the release of material, non-public information that could affect the stock price.)
The LongView fund, with the Connecticut Retirement Plans and Trust Funds, has filed the proposal at Apple Computer, among other firms.
Labor funds, public pension funds, and individual activists have so far filed more than 30 "say on pay" proposals that seek an advisory shareholder vote on compensation. That proposal, which was introduced by AFSCME last year, averaged roughly 41 percent support at seven companies in 2006. This week, the New York City Employees' Retirement System announced it would target Par Pharmaceutical, Blockbuster, and Home Depot with the resolution.
Home Depot, a principal target last year for investors frustrated over failures to tie pay to performance, this week announced the resignation of CEO Robert Nardelli, who leaves with a $210 million separation package that includes $20 million in cash severance.
Nardelli received roughly $225 million during his six-year tenure as the company's stock price fell and the home improvement giant lost market share to rival Lowe's, Bloomberg News reported.
Frank denounced Nardelli's severance package as a "consolation prize for bad performance,'" and said the company's example illustrates why shareholders need more power to influence corporate pay decisions, according to Bloomberg News. Frank said he would sponsor legislation to allow shareholders to vote on executive compensation packages. A similar measure proposed by Frank stalled last year when Republicans controlled Congress.
Nardelli's exit follows other high-profile CEO departures including that of Henry "Hank" McKinnell at Pfizer, and Bill Ford Jr. at Ford Motor, that, analysts say, are a growing sign that boards are heeding investor demands over performance and executive compensation.
"Boards are sensitive to these issues and are responding to shareholder concerns," said Thomas Lehner, the Business Roundtable's director of public policy.
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Thursday, December 28, 2006 |
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SEC Changes Reporting Rule for Disclosure of Option Grants
Submitted by: Sarah Cohn, Director of Communications
Last Friday, the Securities and Exchange Commission reversed a decision it had made in July and adopted a rule that would allow many companies to report lower total compensation for top executives. Yesterday's New York Times business section discusses the change to the way grants of stock options are to be explained.
What are your views on this SEC change?
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Monday, December 11, 2006 |
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Canadian Regulators Consider New Executive Pay Rules
Submitted by: Tad Kopinski, Staff Writer
The Canadian Securities Administrators (CSA), a forum for the 13 securities regulators of Canada's provinces and territories, is considering new executive compensation disclosure rules, similar to those instituted by the U.S. Securities and Exchange Commission earlier this year.
"The desired outcome is to develop new compensation rules for Canada that are not 400 pages long, recognize we are principles-based not rules-based, and provide complete and useful disclosure of the value of executive compensation," Bill Mackenzie, a member of the Ontario Securities Commission's (OSC) Continuous Disclosure Advisory Committee (CDAC), told Governance Weekly. Mackenzie also is president of ISS Canada.
Among the CSA proposals will be a new requirement for companies to tally the total value of all compensation--including the cash value of all stock options and share units granted to executives in the prior year, as well as the value of their pension gains--in a chart. Pay for directors would also have to be tallied in a similar chart.
The CDAC committee convinced the CSA to drop plans to include requirements for compensation disclosure in the management section of the annual report. The CDAC argued to include such narrative compensation information in the proxy circular.
Other changes under consideration by the CSA are a new requirement to disclose executive perks and a stock-option valuation methodology that is the same as that used in financial reporting. The vast majority of Canadian issuers have used the Black-Scholes valuation method when reporting options.
"The priority is quite high for this initiative, and many issuers have already bitten the bullet, giving it a high chance of becoming law," Mackenzie said. "That said, it will likely be effective no sooner than the 2008 proxy season."
Canada has no national securities commission, so regulators in the 13 provinces and territories would oversee the new disclosure standards once they are finalized by the CSA and approved by provincial lawmakers, Mackenzie said. The CSA plans to publish a draft of the proposed rules and a request for comment in early 2007, according to OSC legal counsel Elizabeth Topp.
OSC Chairman David Wilson said it has been 12 years since compensation disclosure has been reformed, and that it is time to modernize practices. "The disclosure regime is kind of long in the tooth ...The world has evolved," he noted in comments to The Globe and Mail.
Some major firms, such as Canadian National Railway, Canadian Imperial Bank of Commerce, and Sun Life Financial, have voluntarily adopted many of the proposed standards. The Canadian Coalition for Good Governance (CCGG), an association of 50 institutional investors with more than $1 trillion under management, has actively lobbied for disclosure reforms.
On Nov. 7, the CCGG released a study by the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management that looked at compensation disclosure by the 208 companies in the Toronto Stock Exchange index (excluding income trusts and funds).
The study concluded that just 23 companies had thorough and complete disclosure. Thirty-eight firms had disclosure that was within an "acceptable" range. Conversely, there were 147 companies that had work to do, the study said.
"This scorecard is not about levels of compensation, but about disclosing the process of how compensation is determined. Transparency is essential when it comes to communicating the compensation of senior executives to investors," Doug Pearce, CCGG's board chairman, said in a recent statement.
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Monday, October 30, 2006 |
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Politicians Express Concern About Executive Pay
Submitted by: Ted Allen, Director of Publications
With U.S. mid-term elections less than two weeks away, both Democratic and Republican politicians are expressing outrage over executive pay practices.
On Oct. 24, Democratic lawmakers released a study that found that the proportion of corporate earnings that is used for top executive pay has doubled from 5 percent in 1993-1995 to 10 percent in 2001-2003. "In addition to hurting shareholder returns, this dramatic increase in executive compensation has had a detrimental effect on America's rank-and-file workers," the Democrats on the House Financial Services Committee said in a press release.
"It is amazing to me that executive pay continues to increase at extraordinary levels," said U.S. Rep. Barney Frank of Massachusetts.
Frank is the ranking Democrat on the Financial Services Committee and is poised to become chairman of the panel if his party wins control of the House. He introduced legislation in November 2005 to give shareholders a vote on company pay plans, but the bill languished without support from House Republicans.
Last week, President George W. Bush voiced concern about executive pay practices. In an Oct. 23 interview with CNBC, the Republican president said he is "astounded" by some pay packages and urged investors to press companies to tie salaries to performance measures.
"These compensation packages can get out of hand," Bush said in the CNBC interview, according to Bloomberg News. While incentives for executives are necessary, Bush stressed that companies should "make sure the incentive pay is rational."
"I don't think government should control salaries," the president said, "but I would hope shareholders would take a close look at some of these compensation packages."
In July, the Securities and Exchange Commission adopted new pay disclosure rules that will apply to firms when they file their 2007 proxy statements. The rules call on companies to explain the methodology they use for determining pay and short-term incentives.
Meanwhile, investors have given greater support to shareholder proposals calling for performance targets. As of June 30, those proposals had averaged 36 percent support, up from 30 percent in 2005 and 19.2 percent in 2004. Also this year, a new proposal calling for annual advisory votes on compensation reports averaged 39 percent support at four firms.
Executive pay also is an issue in the election for Minnesota's governor, according to Bloomberg News. The state's Democratic party is running a television advertisement that criticizes Gov. Tim Pawlenty over the stock-option grant practices at UnitedHealth Group.
The Republican governor, one of four state officials who oversees Minnesota's pension funds, abstained from the vote on whether to withhold support from CEO William McGuire and three other directors. Two board members received 28 percent withhold votes at UnitedHealth's annual meeting in May after disclosure that McGuire had received option grants worth $1.6 billion, including those with grant dates that coincided with quarterly stock price lows.
The governor abstained from the vote on UnitedHealth because he had received campaign contributions from McGuire. A spokesman for the governor said Pawlenty acted properly and since has returned all the contributions from UnitedHealth executives, according to Bloomberg News. The company announced Oct. 15 that McGuire will step down as CEO by Dec. 1.
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Thursday, October 12, 2006 |
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Directors Say CEO Pay is Too High
Submitted by: Sarah Cohn, Director of Communications
CFO.com has an interesting article today by Stephen Taub about CEO Pay. According to a new Corporate Board Effectiveness Study, nearly 40 percent of directors believe that pay of chief executive officers is "too high in most cases," and 81 percent of the board members favor increasing the link between CEO pay and performance.
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Monday, September 18, 2006 |
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Improving Pay Practices
Submitted by: ISS International Research Analysts
With the new Securities and Exchange Commission rules to enhance disclosure of executive compensation at U.S. companies, many domestic and international institutional investors are sharpening their focus on pay policies, practices, and disclosure requirements in overseas markets.
What they are finding is that while many markets lag far behind U.S. standards of compensation disclosure, some are, arguably, more advanced because, analysts believe, shareholders have a say on compensation policies.
Continue reading "Improving Pay Practices
Submitted by: ISS International Research Analysts" »
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Wednesday, July 26, 2006 |
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Summary of Today's SEC Webcast on the New Executive Compensation Disclosure Package
Submitted by: Sarah Cohn, Director of Communications
Investors calls for increased disclosure on executive compensation were answered today as the Securities and Exchange Commission (SEC) adopted an extensive and wide-reaching executive compensation disclosure package. The new rules are intended to advance the interests of shareholders through better disclosure.
The Commission's new rules require new tally sheet disclosure that will provide the first in focus snapshots of the total annual compensation packages paid to senior executives at U.S. companies. Clear and meaningful disclosure in "plain English" is now going to be required in the areas of pensions, deferred compensation, severance and perquisites. The staff also corrected many of the problems that investors had raised concerning the original proposal.
Shareholders called upon the Commission to keep compensation committee members on the hook for their decisions related to pay. The staff neatly accomplished this difficult task by creating a new slimmed-down Compensation Committee Report that will accompany the new beefed-up Compensation Discussion and Analysis (CD&A) section prepared by management. The staff also fixed the most glaring problems with the so-called Katie Couric rules by proposing to limit its application to highly-paid, senior-decision makers. The extended comment period on this provision should provide some additional fine-tuning.
The Commission's new rules are also asking for greater transparency on option grant programs and plans. Essentially, the new rules relating to option grant practices will look at 1) timing practices and, 2) practices involved in establishing exercise practices.
What do these new rules mean for investors? Since companies will be required to present an accurate picture as to why and how compensation decisions are made, investors can now better evaluate the actions of board members and will have access to more sophisticated tools to oversee their investments.
We welcome your thoughts to today's approved SEC's Executive Compensation and Disclosure Package.
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ISS Comment on SEC's Executive Compensation Disclosure Package
Submitted by: Patrick McGurn, Executive Vice President and Special Counsel
Rockville, Maryland; July 26, 2006: We applaud the Commission's substantive work and its unanimous decision to upgrade the disclosure of executive and director compensation. Shareholders and board members should receive immediate benefits next proxy season from the new tally sheets providing information on the total annual compensation packages paid to senior executives at U.S. companies. Additionally, we would expect abuses in the pensions, deferred compensation, severance and perquisites areas to dry up now that light will finally reach those previously dark recesses of the compensation landscape. The Commission also demonstrated its willingness to respond to public comment by making important adjustments to its original proposal. As a bonus, the staff also included enhanced disclosure provisions for stock option grant practices that should boost transparency regarding backdating and spring loading practices. Congratulations to Chairman Cox and his staff. Now, its up to shareholders and board members to put this information to good use.
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Monday, May 22, 2006 |
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Did anyone hear a "pop?" Executive compensation and shareholder proposals at real estate companies
Submitted by: Rosanna Weaver, ISS Governance Research Service Analyst
Some shareholders advocate performance-based options as a potential tool to link pay to performance. But -- since no one disputes that a company's market price may be influenced by many factors beyond management control --the trick is how to make sure the performance being rewarded is the performance of the executives being rewarded. Funds affiliated with the Laborers Union decided last year that the residential homebuilding industry provided "a good vehicle" to consider some of the questions around pay for performance, according to Richard Metcalfe, the Laborer's director of corporate affairs. "Is management adding value or riding up a bubble?" asks Metcalfe, noting that the fund was interested in having discussions with companies on executive compensation. The fund filed proposals at a number of residential construction companies, including two proposals on performance-based options. Proponents report that this year 5.7 percent of shareholder at Lennar and 51.7 percent of shareholders at Pulte voted in favor of performance-based options.
Not surprisingly shareholder return performance graphs of these companies closely track graphs of home prices over the same period, a line moving sharply higher. Investors who had the foresight to see the looming decline of the NASDAQ in November 2000 and invest $100 in the Dow Jones Homes Construction Index would have been rewarded with $454 five years later. Executives, of course, reaped extraordinary rewards as well.
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Wednesday, May 10, 2006 |
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Establishing Responsible Executive Compensation Practices
Submitted by: Broc Romanek, CompensationStandards.com Editor,
CEO pay levels have been set for over a decade using a process that clearly is malfunctioning. This broken process has led to skewed results, for both performing and underperforming companies. And, while good CEOs can make a difference, it still can't hide the fact that some CEOs received their windfalls due to side affects caused by this broken process.
For example, CEOs were provided megagrants of options on an annual basis throughout the 1990s, primarily because boards began to think of option grants as part of the annual routine of reviewing a CEO's pay package - rather than the original purpose of them as one-time grants to proper incentive (we have now called on boards to use "wealth accumulation charts" so they can keep better track of outstanding equity grants and not "overly incentivize" a CEO).
Another example - now widely recognized - is that the commonly used peer benchmark has led to an incredible racheting up of CEO pay as each CEO wants to be paid in the top quartile; thus, creating inflation each year in the benchmark as everyone scrambles to be in the top 25%. Over 15 years, that inflation has gotten quite high. There are many other process elements that are askew, as we have laid out in three issues of The Corporate Counsel, freely available on the right side of www.CompensationStandards.com.
CEO pay is not set like your pay or mine. The process often lacks any real negotiation with the board of directors and CEOs can quite easily get what they ask for. Just because a company has performed well for the past 20 years (as has the entire stock market) doesn't necessarily entitle a CEO to name his or her price. Comparison of CEO pay to big-name entertainment stars has been widely discredited; their pay levels are set by the market - CEO pay levels are not.
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Establishing Responsible Executive Compensation Practices
Submitted by: Broc Romanek, CompensationStandards.com Editor,
CEO pay levels have been set for over a decade using a process that clearly is malfunctioning. This broken process has led to skewed results, for both performing and underperforming companies. And, while good CEOs can make a difference, it still can't hide the fact that some CEOs received their windfalls due to side affects caused by this broken process.
For example, CEOs were provided megagrants of options on an annual basis throughout the 1990s, primarily because boards began to think of option grants as part of the annual routine of reviewing a CEO's pay package - rather than the original purpose of them as one-time grants to proper incentive (we have now called on boards to use "wealth accumulation charts" so they can keep better track of outstanding equity grants and not "overly incentivize" a CEO).
Another example - now widely recognized - is that the commonly used peer benchmark has led to an incredible racheting up of CEO pay as each CEO wants to be paid in the top quartile; thus, creating inflation each year in the benchmark as everyone scrambles to be in the top 25%. Over 15 years, that inflation has gotten quite high. There are many other process elements that are askew, as we have laid out in three issues of The Corporate Counsel, freely available on the right side of www.CompensationStandards.com.
CEO pay is not set like your pay or mine. The process often lacks any real negotiation with the board of directors and CEOs can quite easily get what they ask for. Just because a company has performed well for the past 20 years (as has the entire stock market) doesn't necessarily entitle a CEO to name his or her price. Comparison of CEO pay to big-name entertainment stars has been widely discredited; their pay levels are set by the market - CEO pay levels are not.
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Thursday, March 30, 2006 |
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ISS Supports the SEC's Efforts to Improve Compensation Disclosure
Submitted by: Dr. Martha Carter, ISS Senior Vice President and Managing Director
ISS' SEC Comment Letter on Compensation Disclosure
March 28, 2006
Ms. Nancy M. Morris
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington DC 20549-9303
Re: File Number S7-03-06
Dear Ms. Morris:
Thank you for the opportunity to provide feedback on the proposed amendments to the SEC's disclosure rules for executive and director compensation. The comments and suggestions in this letter reflect the views of ISS and do not necessarily reflect the views of our clients.
ISS Supports the SEC's Efforts to Improve Compensation Disclosure
ISS supports improvements in executive compensation disclosure. Current requirements, which have been static during the past decade, are out of step with the growing complexities in executive pay packages. Shareholders' frustrations with the lack of disclosure on retirement plans, change-in-control arrangements, and many forms of stealth compensation have led to a growing compensation lexicon, such as "tally sheets" and "holy cow" meetings. The proliferation of multiple pay vehicles and the increase in shareholder concerns over compensation arrangements necessitate change to the current disclosure system. Overall, the SEC's proposed rules are a positive step to mandate improved disclosure, create clarity for shareholders, and underscore the accountability of directors to ensure that shareholders' assets are used wisely.
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Monday, March 6, 2006 |
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Linking Pay to Performance: A Best Practice Example
Submitted by: Cheryl Gustitus, ISS Senior Vice President of Marketing and Communications
When GE's Jeff Immelt delivered his keynote speech at ISS' 2005 corporate governance conference, he talked about his strong belief in tying a CEO's pay to company performance. As Chairman and CEO, he was talking about tying his own pay to his company's performance.
In GE's recent proxy filing, we learned that Mr. Immelt put his money where his mouth is by requesting that his bonus be paid in performance shares tied to GE's financial and stock-market results. His ensuing share grant of 180,000 shares is valued at $6 million, but GE's cash flow from operations must increase by 10% annually the next two years for Mr. Immelt to keep half the shares, and must outperform the Standard & Poor's 500-stock index over the same period to retain the other half. Of course, this is nothing new to Mr. Immelt as his pay has been directly tied to performance since he took the helm of General Electric in 2001.
In GE's recently released annual report, Mr. Immelt said that he asked for the performance shares in lieu of cash to be "totally aligned" with shareholders. How refreshing.
Many of us at ISS sit across the table from America's CEOs on a regular basis. In representing over 1600 institutional investors, we understand that the level of a CEO's integrity has a direct and tangible impact on the way in which investors interact and support a company through good performance and bad.
As chairman and CEO, Jeff Immelt runs GE externally, the same way he runs it internally and that's why shareholders trust him and investors believe in him. He doesn't say one thing in speeches and annual shareholder meetings and another thing behind boardroom doors. We applaud you, Mr.Immelt, for embracing not just the letter of good corporate governance, but the spirit.
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Wednesday, March 1, 2006 |
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MarketWatch Interview: "Proxy Season: In the Hedge Fund Crosshairs"
Submitted by: Sarah Cohn, Director of Communications
On Tuesday, February 28, ISS' Pat McGurn appeared in a MarketWatch segment titled "Proxy Season: In the Hedge Fund CrossHairs." The discussed centered around what's on the horizon for hedge fund activism and executive compensation in the 2006 proxy season. To watch the interview, please click here.
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Monday, February 27, 2006 |
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2006 Preview: Continental Europe
Submitted by: Thaddeus C. Kopinski, International Editor
Efforts to facilitate proxy voting, improve executive compensation disclosure, and to limit the use of takeover defenses will likely dominate continental Europe's corporate governance debate this proxy season.
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Friday, February 24, 2006 |
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Constructive Dialogue Improving Executive Pay Practices in the UK
Submitted by: Sarah Ball, ISS Europe Communications Director
Communication between companies and shareholders over executive remuneration has improved, both in terms of numbers of companies approaching shareholders and the quality of dialogue, according to RREV, the UK corporate governance body, jointly owned by the National Association of Pension Funds and ISS.
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