Executive Compensation Disclosure, Including a Say on Pay Update. June 2, 2009

Transcription

1 Executive Compensation Disclosure, Including a Say on Pay Update June 2, 2009 Patrick Quick Foley & Lardner LLP Bryan Ortwein Towers Perrin Foley & Lardner LLP Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL To ask a question using the question pane Click the Q&A tab at the top of your screen Enter your question into the text area and click Ask The presenter will address your question shortly 2 1

2 Need assistance? Contact Live Meeting Customer Support US / Canada: International: lmhelp@microsoft.com Web: 3 Today s Speakers Bryan Ortwein Principal, Towers Perrin Member of the Executive Compensation practice Experience covers executive, director, and management compensation Clients include public and private companies and partnerships in a wide variety of industries Extensive experience with annual and long-term incentive design, pre-ipo compensation, change of control and bankruptcy 4 2

3 Today s Speakers Patrick Quick Partner, Foley & Lardner LLP Focuses practice on corporate law, with an emphasis in securities law compliance, acquisitions, and takeover defense Counsels public companies concerning compliance requirements and governance matters Has participated in complex acquisition transactions representing both buying and selling parties Represents clients doing advance takeover preparedness planning and has counseled clients who have received unsolicited takeover proposals 5 Today s Moderator Brendan Sheehan Executive Editor, Corporate Secretary Editorial mission: To provide innovative and insightful analysis for corporate secretaries, general counsel and compliance officers Corporate Secretary is the leading source of information on matters relating to the SEC, Sarbanes-Oxley, D&O insurance, shareholder communications, proxy solicitation and voting, director education and compensation, listing requirements and entity management 6 3

4 Overview Executive Compensation Disclosure Increasing focus from shareholders, regulators and public on executive compensation Changes to executive compensation practices (in response to economic conditions, best practice trends and regulatory requirements) Say on pay 7 Context for Current Disclosure Framework Corporate scandals of early 2000s All means all in 2004 New rules proposed in January 2006 and final rules effective in December 2006 (Item 402 of Regulation S-K and Item 5.02 of Form 8-K) Initial Securities and Exchange Commission ( SEC ) comment letters now publicly available - and SEC report issued in latter part of 2007 Updated Compliance and Disclosure Interpretations in 2008 followed by periodic additions; ongoing comment letters; and informal SEC guidance in speeches and in interactions with individual companies 8 4

5 Ongoing Areas of SEC Focus True Analysis Performance Targets Benchmarking 9 Analysis SEC staff in October 2008 stated that the how and the why were missing from proxy statements in explaining connection between companies philosophies and processes and the numbers companies presented in their tabular disclosures SEC encouraged companies to: explain and place in context each of the specific factors considered when approving particular pieces of each named executive officer s compensation package; 10 5

6 Analysis (Continued) analyze reasons why the company believes that the amounts paid are appropriate in light of various factors it considered in making specific compensation decisions; and describe why or how determinations with respect to one element impacted other compensation decisions Suggested that, in preparing Compensation Discussion & Analysis ( CD&A ), companies should be carefully considering if and how recent economic and financial events have affected their compensation programs and should not merely be marking up last year s disclosure. 11 Performance Targets Second-largest area of SEC comment in 2008 Current year targets required if material unless disclosure would cause competitive harm; completed year targets often less controversial Individual performance measures and targets also required if material 12 6

7 Benchmarking Question of whether company is genuinely benchmarking as defined by the SEC (using compensation data about other companies as a reference point on which either wholly or in part to base, justify or provide a framework for a compensation decision) or merely reviewing or considering a broad-based third-party survey for a more general purpose Focus on rationale for choosing the component companies Problem of broad-based surveys and variation of benchmarks for certain positions Need to list 500 companies? Can company list them? 13 Issues Arising from Economic Downturn Missed performance targets (payment in spite of the miss or adjustment of targets) Changes required or inspired by regulatory changes (e.g., limitation or elimination of bonuses, elimination of golden parachute arrangements, risk assessment, clawback policies) Risk assessment: Compensation committee identification of material risks faced by the business (often with the input of an officer charged with monitoring such risks) and interaction of such risks with compensation practices, and/or of compensation structures that do not appropriately internalize risks (e.g., insufficient long term incentives or plans with very asymmetrical rewards/risks) Risk assessment in connection with compensation decisions may need to be disclosed in proxy statement 14 7

8 Issues Arising from Economic Downturn (Continued) Prospective modifications (more discretion in bonus arrangements, shorter performance periods and/or use of relative performance measures) Underwater stock options (new grants or option exchange programs) Voluntary or involuntary pay reductions (Form 8-K disclosure as well as proxy statement disclosure) Including Whose idea was it? and Are the reductions permanent? Special retention arrangements 15 Other Trends in or Affecting Disclosure Hold til retirement or hold through retirement policies, longer vesting periods and/or mandatory pay deferrals Seen by some as a means to encourage internalization of long-term impact of decisions and align incentives with interests of shareholders Change in control arrangements implemented only on an ad hoc, temporary basis and potentially with reduced benefits More frequently in response to specific hostile threats General trend away from single trigger arrangements including equity awards 16 8

9 Other Trends in or Affecting Disclosure (Continued) Limitation and/or elimination of tax gross ups of any kind and certain perquisites Use of wealth accumulation and internal pay equity analyses and tally sheets -- disclosure may be required in CD&A and be of interest to voting advisory services (e.g,. RiskMetrics group considers internal pay disparity a potential poor pay practice ) Alternative presentations of executive compensation supplemental to disclosure required by SEC (e.g., alternative summary compensation tables, especially to indicate the grant date fair value of awards rather than the expense for the year) 17 Other Trends in or Affecting Disclosure (Continued) Increased selling of compensation programs and decisions in disclosure (e.g., highlighting or explaining performance in executive summary, justifying peer groups) Disclosure in termination payment section of walk away numbers -- i.e., disclosure á la Starbucks and others of the total payment an executive would receive on departure from the company including the payout of already vested benefits such as deferred compensation and vested stock options Disclosure of executive roles in setting compensation 18 9

10 Troubled Asset Relief Program ( TARP ) Rules Limits on compensation that exclude incentives for senior executive officers ( SEOs ) to take unnecessary and excessive risks that threaten the value of the TARP recipient (if the same as prior to the amendments effected by the American Recovery and Reinvestment Act of 2009 ( ARRA ), this will require the compensation committee of a TARP recipient to meet with the TARP recipient's senior risk officers, identify the features in the TARP recipient's incentive compensation arrangements for SEOs that could lead SEOs to take unnecessary and excessive risks that threaten the value of the TARP recipient, and limit any such features). Maintenance of a clawback policy (must recover any bonus, retention award, or incentive compensation paid to an SEO or any of the next 20 most highly compensated employees of the TARP recipient based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate). 19 TARP Rules (Continued) A prohibition on any golden parachute payments to SEOs or any of the next five most highly compensated employees (defined as any payment for departure from a company for any reason, except for payments for services performed or benefits accrued ). A prohibition on bonuses, retention awards, or incentive compensation, other than certain restricted stock (this would apply to at least the five most highly compensated employees of certain TARP recipients)

11 TARP Rules (Continued) A prohibition on compensation plans that would encourage manipulation of reported earnings. Appointment of a compensation committee composed of independent directors (must meet at least semi-annually to discuss and evaluate employee compensation plans in light of an assessment of any risk posed to the TARP recipient from such plans). Tax non-deductibility of annual compensation in excess of $500,000 for the chief executive officer (CEO), chief financial officer (CFO), and three other most highly compensated officers of certain TARP recipients. 21 TARP Rules (Continued) The CEO and CFO of each TARP recipient must certify compliance with the executive compensation provisions (to the SEC if publicly traded). The board of directors of each TARP recipient must adopt a policy concerning excessive or luxury expenditures. Advisory shareholder vote on executive compensation effective now for publicly traded companies subject to it. Treasury will review retroactively the bonuses, retention awards, and other compensation paid to the SEOs and the 20 most highly compensated employees of all companies that received TARP aid prior to the enactment of ARRA

12 Potential Regulatory Changes Potential application of TARP rules to non-tarp companies SEC may mandate disclosure concerning risk management and compensation consultant independence and/or additional disclosure on overall compensation approach (Mary Schapiro speech on April 6, 2009) Compensation consultant independence: Is the compensation committee s consultant permitted to provide other services to the company and/or its management? Henry Waxman committee report in 2007 Several companies have included proxy disclosure and/or adopted a policy (e.g., Time Warner, UnitedHealth Group) 23 Potential Regulatory Changes (Continued) Other potential legislation The Shareholder Bill of Rights Act of 2009 (S. 1074) Would require say on pay and corporate governance measures not directly related to executive compensation The Excessive Pay Shareholder Approval Act (S. 1006) Would require a 60% shareholder vote to approve a compensation structure under which any employee is paid more than 100 times more than the average employee of that company and related proxy disclosure of lowest-paid and highest-paid employees, along with the average paid to all employees and the compensation paid to employees who are paid more than 100 times the average employee compensation

13 Potential Regulatory Changes (Continued) The Excessive Pay Capped Deduction Act of 2009 (S. 1007) Would limit the federal income tax deductibility of compensation paid to executives to 100 times average employee compensation and require filing of a report disclosing information on pay similar to the proxy disclosure that would be required by the Excessive Pay Shareholder Approval Act. 25 Background Say on Pay is an advisory vote on a company s executive compensation program With an increased spotlight on executive pay, more shareholder groups are submitting Say on Pay shareholder proposals to companies Faced with earlier shareholder proposals or discussions with proponents, some companies have voluntarily agreed to hold a Say on Pay vote The economic downturn, including the requirements of TARP legislation (which requires an advisory vote on pay) have fueled interest in Say on Pay 26 13

14 Background The considerations behind the adoption and implementation of a Say on Pay vote are both complex and evolving This document provides an overview of recent activity and our perspective on this increasingly visible topic 27 What is Say on Pay? The term Say on Pay is used in the U.S. to describe the concept of an advisory (non-binding) vote on a company s executive compensation program Activist investors have encouraged companies to voluntarily conduct such votes through shareholder proposals 28 14

15 What is Say on Pay? The greatest focus is on the proxy s CD&A and Summary Compensation Table; shareholder proposals can address any or all of the following: Pay philosophy Compensation plan payouts (retrospective) Current year packages (prospective) 29 What is Say on Pay? Say on Pay proposals have been sponsored by a wide range of proponents in 2009, including pension funds and other investors In earlier proxy seasons, labor unions took a lead role in filing such proposals, however the 2009 proxy season finds unions playing a somewhat smaller role This shift from being union driven is a result of various shareholder groups discussing this topic and pooling their efforts to reach a larger number of companies 30 15

16 Companies adopting Say on Pay Fifteen companies have voluntarily adopted a Say on Pay vote, starting in 2008 or 2009: Aflac H&R Block, Inc. Intel MBIA Par Pharmaceuticals Alaska Air Group Verizon Jackson Hewitt Motorola RiskMetrics Group Blockbuster Ingersoll-Rand Co. Littlefield Zale Tech Data Eight companies intend to put forward a Say on Pay vote in 2010 or 2011: Charming Shoppes Lexmark International Inc. Hewlett-Packard Ameriprise Financial PG&E Corp. Valero Energy Apple Inc. Occidental Petroleum 31 Say on Pay shareholder proposals are on the rise Under new regulations signed by President Obama, companies that have received TARP funds are required to include a non-binding, managementsponsored Say on Pay proposal at their 2009 annual meeting All but one of the TARP recipient companies that had received a Say on Pay shareholder proposal had the proposal withdrawn in light of this requirement 32 16

17 Say on Pay shareholder proposals are on the rise In the 2009 proxy season (to date), RiskMetrics (RMG) has recommended votes against 30% of the management Say on Pay proposals reviewed Preliminary vote results show average support above 80% 33 Proponents identify several benefits of Say on Pay Proponents of shareholder proposals have identified several benefits for an advisory vote including: Provides a voice for shareholders to weigh in on a topic that has drawn increased scrutiny over the last few months Increased communication and transparency between a company and its shareholders Current pay programs will be viewed more critically to ensure an adequate link between pay and performance Increases the likelihood that incentive plans will be aligned with shareholder interests 34 17

18 Proponents identify several benefits of Say on Pay Despite increasing voting support, not all shareholders have voted favorably on these shareholder proposals Some institutional investors have stated a preference for such votes to apply to all companies, rather than the targeted approach of those filing shareholder proposals, and have not voted in favor of the shareholder proposals 35 Questions surround the need or effectiveness of a Say on Pay vote Will up or down votes on pay as a whole (as opposed to specific elements or features) provide much insight into investors concerns? Would votes be a distraction and a drain on the time of directors and executives? 36 18

19 Questions surround the need or effectiveness of a Say on Pay vote Are shareholders properly equipped to evaluate, understand and engage with each of their portfolio companies, especially in the compressed proxy season? Why are votes necessary for companies that already maintain regular channels for their investors to express opinions about compensation? 37 Questions surround the need or effectiveness of a Say on Pay vote Would shareholder votes encroach on the proper role of the board? What is the relevant threshold (e.g., percentage of negative votes) that should compel a board to take action, and what liability exists if a board fails to take action? 38 19

20 Experience in the U.K. provides us with important lessons The U.K. has conducted advisory votes on remuneration since 2003 It is accepted practice in the U.K. to lobby shareholders in support of a resolution, often with the remuneration committee chairman directly involved In the U.S., by contrast, companies cannot formally seek shareholders support of a particular plan or program outside of the normal proxy solicitation process 39 Experience in the U.K. provides us with important lessons Institutional shareholders in the U.K. have been active in issuing voting guidelines and conducting dialogues with companies for many years, but labor unions have had very little direct involvement In the U.S., labor unions have traditionally taken the lead in submitting shareholder proposals concerning executive compensation, however this is changing U.K. institutional shareholders focus mainly on program design, rather than pay levels U.S. investors do not restrict their comments to any particular subject 40 20

21 Experience in the U.K. provides us with important lessons U.K. companies tend to have far fewer investors than U.S. companies and most investors are fairly concentrated in key financial centers (London and Edinburgh) Share ownership is typically not as concentrated in the U.S. As with accounting, the U.K. adopts more of a principles-based approach, in contrast with the rules-based approach traditionally used in the U.S. 41 What does a world with Say on Pay look like? (Lessons from earlier adopters U.K., Australia, Sweden) Changing role of the Compensation Committee/Chair and/or Board Chair/Lead Independent Director Focus on pay design and effectiveness May require road shows to sell the program to investors The CD&A could become even more extensive, shifting tone from explaining to defending 42 21

22 What does a world with Say on Pay look like? (Lessons from earlier adopters U.K., Australia, Sweden) Potential for cookie cutter programs to avoid negative reactions Similar plan designs Similar performance measures across programs Greater focus on relative performance 43 Even without new legislation, the situation is expected to change Expectations remain that a Say on Pay vote will be required at all U.S. companies as early as 2010 as regulators and politicians continue to advocate an advisory vote Sen. Charles Schumer introduced The Shareholder Bill of Rights Act of 2009, which included a required Say on Pay vote (among other corporate governance items) passage is uncertain at this point, but certain ideas are likely to survive The AFL-CIO has called for the passage of a shareholder bill of rights to include an advisory vote 44 22

23 Even without new legislation, the situation is expected to change More companies are voluntarily adopting Say on Pay to control the process and rules of engagement (e.g., offer a vote on compensation structure, not levels) Say on Pay requirements from major exchanges? Unlikely, but who knows what may result from possible legislation 45 Even without new legislation, the situation is expected to change Potential No votes for compensation committee members when Say on Pay shareholder proposals pass and companies ignore the outcome or when concerns expressed by proxy advisors (RMG) or shareholders are not addressed Shareholders continue to press for the adoption of Say on Pay 46 23

24 Thank you for your participation For more information on the Corporate Wavelength web conference series, visit Foley.com/corporatewavelength Patrick Quick Bryan Ortwein Foley & Lardner LLP Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL