Radford Review: 2014 Say-on-Pay Results and Governance Trends in the US Technology Sector. One Firm. Complete Solutions.

Transcription

1 Radford Review: 2014 Say-on-Pay Results and Governance Trends in the US Technology Sector One Firm. Complete Solutions.

2 Summary Findings 2014 Say-on-Pay Voting Results In the fourth year of mandatory Say-on-Pay voting, results for technology sector companies have declined slightly as the sector s financial performance trailed the general Russell 3000 index Negative votes continue to be driven largely by negative proxy advisor recommendations, which are often the result of the advisors quantitative pay-for-performance assessments Compensation Governance Trends Amidst the context of meaningful proxy advisor activity on pay-for-performance and Say-on-Pay, and with SEC regulations delayed but still pending, the technology industry is proactively embracing the relatively low hanging fruit of compensation governance Stock ownership guidelines are now widely implemented and match Fortune 100 levels Executive compensation recovery (clawback) policies are increasingly prevalent, despite continued SEC delays CD&A disclosures increasingly expressly describe insider trading policies and restrictions on the hedging and/or pledging of company stock We observe, for the first time in 2014, a meaningful number of companies discussing how their Board/Compensation Committee have digested prior year Say-on-Pay votes and what steps are being taken to solicit investor input on executive pay Say-on-Pay Results and Governance Trends in the US Technology Sector

3 2014 Say-on-Pay Results

4 2014 Say-on-Pay Results Snapshot Overall Russell 3000 Index Results Among Russell 3000 companies with Say-on-Pay votes occurring between September 1, 2013 and June 15, 2014, 2.1% failed to achieve shareholder support levels of 50% or higher These results remain unchanged from Say-on-Pay failure rates in 2013 The prevalence of companies passing their Say-on-Pay proposals with shareholder support levels below the Institutional Shareholder Services (ISS) threshold of 70% is 5.5%, down from 6.2% in 2012 and 5.8% in 2013 Technology Sector Results Among Russell 3000 technology sector companies with Say-on-Pay votes occurring between September 1, 2013, and June 15, 2014, 3.2% failed to achieve shareholder support levels of 50% or higher, up from 1.6% and 2.4% of technology companies in 2012 and 2013, respectively The prevalence of technology sector companies passing their Say-on-Pay proposals with shareholder support levels below the ISS threshold of 70% was 7.4% also up from the previous year (6.3%) and higher than the overall Russell 3000 rate of 5.5% Technology sector support levels also worsened from 2013; average shareholder support in the sector went from 90.1% to 88.7%, and is also lower than the Russell 3000 and life sciences sector averages Source: Radford analysis of ISS voting results data Say-on-Pay Results and Governance Trends in the US Technology Sector

5 Say-on-Pay Influencers Institutional Shareholder Services (ISS) 100% of Russell 3000 companies and 100% of technology sector companies with failed Say-on- Pay proposals received a negative recommendation from ISS; that s the same as last year for the sector and up from 97.6% for Russell 3000 companies, highlighting the significant influence ISS reports continue to have on many institutional shareholders However, a large majority (79.3%) of technology sector companies with negative recommendations from ISS managed to pass their Say-on-Pay votes; however, usually not without significant downward pressure on shareholder support levels, which could lead to continued scrutiny in future years Glass Lewis (GL) Drawing specific conclusions on the impact of Glass Lewis voting recommendations is difficult given the firm s overall lack of transparency, and requires waiting until the firm releases year-end results Glass Lewis Say-on-Pay shareholder support threshold is set at 75%, and 9.8% of technology sector companies passed their Say-on-Pay proposal while falling below that threshold Glass Lewis announced key revisions to its peer group development and pay-for-performance modeling in July 2012 and November 2012, and though it was predicted that these measures could serve to raise the overall profile of the firm s recommendations Source: Radford analysis of ISS voting results data Say-on-Pay Results and Governance Trends in the US Technology Sector

6 Say-on-Pay Influencers (Cont.) Pay-and-Performance Both ISS and Glass Lewis continue to point to perceived disconnects between pay-andperformance as their primary driver for making negative Say-on-Pay recommendations Companies with positive TSR performance on an absolute basis are often still targeted, either due to weaker relative performance vs. peers or the continued use of poor pay practices (as defined by ISS or Glass Lewis) Source: Radford analysis of ISS voting results data Say-on-Pay Results and Governance Trends in the US Technology Sector

7 Key Say-on-Pay Metrics The following table presents summary Say-on-Pay voting results and shareholder returns for all subindustries within the Russell 3000 technology sector In past years, Say-on-Pay outcomes in the technology sector generally aligned with the overall Russell 3000 index; however, in 2014, companies across all technology sub-industries faced considerably higher levels of scrutiny as financial performance trailed the overall Russell 3000 index Industry Groupings TSR Performance 2014 Voting Results Prevalence of Poor Outcomes Median 1-Year TSR Median 3-Year TSR Average % For Median % For ISS Rec. Against Below 70% Threshold Below 50% Threshold Hardware & Equipment +31.5% +6.5% 88.6% 95.1% 14.2% 6.2% 1.8% Semiconductors +32.3% +0.1% 88.2% 95.3% 13.2% 9.2% 0.0% Software & Services +45.3% +16.1% 87.2% 76.6% 16.6% 8.3% 4.7% Telecommunications +34.7% +10.8% 76.8% 92.4% 18.5% 7.4% 7.4% Overall Technology Sector +33.5% +8.6% 85.2% 93.8% 15.6% 7.4% 3.2% Overall Russell % 90.5% 95.5% 12.7% 5.5% 2.1% Source: Radford analysis of ISS voting results data Say-on-Pay Results and Governance Trends in the US Technology Sector

8 Year-Over-Year Shareholder Support Levels The following chart displays the year-over-year distribution of shareholder support levels for Say-on- Pay proposals at technology sector companies Average shareholder support levels dipped from 90.1% to 88.7% year-over-year, but median support levels remain strong at 95% 30.7% of technology firms received shareholder approval rates under 90% in 2014, up from 23.5% in 2013; which could reflect ISS scrutiny over lower 3-year TSRs in technology vs. the Russell % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Distribution of Shareholder Support Levels, 2013 vs % 69.3% 14.0% 8.9% 6.0% 2.4% 3.2% 3.0% 4.8% 3.3% 3.2% 5.6% Less than 50% 50%-59.9% 60%-69.9% 70%-79.9% 80%-89.9% More than 90% Source: Radford analysis of ISS voting results data Say-on-Pay Results and Governance Trends in the US Technology Sector 2013 Voting Results 2014 Voting Results

9 Evaluating the Impact of ISS in 2014 Across the entire technology sector, the impact of negative recommendations from ISS appears to be carrying more weight, forcing outright failure of Say-on-Pay proposals in 20.7% of cases, up slightly from 18.2% of cases in 2013 Another 43.1% of companies with negative recommendations from ISS passed their Say-on-Pay vote, but with less than 70% shareholder support, down slightly from 45.5% of companies who passed below 70% in 2013 Impact of ISS Negative Recommendations, % 36.2% Passed Above 70% Passed Below 70% Failed 43.1% Source: Radford analysis of ISS voting results data Say-on-Pay Results and Governance Trends in the US Technology Sector

10 Measuring the Future Impact of ISS ISS corporate governance policies require a shareholder support threshold of at least 70% support for Say-on-Pay votes; companies receiving support below 70% will undergo additional examination from ISS in subsequent years On average, technology companies receiving an Against recommendation from ISS fall below the 70% threshold, signifying that extra scrutiny from ISS and shareholders is still on the rise 100.0% 90.0% Average Shareholder Support Levels with ISS "For" or "Against" Recommendations 93.7% 94.8% 92.3% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 63.9% 65.5% 62.1% 0.0% 2012 Voting Results 2013 Voting Results 2014 Voting Results ISS "For" ISS "Against" Source: Radford analysis of ISS voting results data Say-on-Pay Results and Governance Trends in the US Technology Sector

11 Corporate Governance Trends

12 Ownership Guidelines: Prevalence The prevalence of stock ownership guidelines in the technology sector now roughly matches that of large-cap/ Fortune 100 companies Only two to three years ago, stock ownership guidelines were fairly rare among mid-sized and growthstage technology companies, but this has changed Prevalence of Stock Ownership Guidelines 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Boards of Directors Executives 90% 92% 85% 89% 60% Life Sciences Large Cap (1) Small Cap (1) Life Sciences Fortune 100 (2) 1) Boards of Directors Large and Small Cap data sourced from the 2013 Frederick W. Cook Director Compensation Report 2) Executives Fortune 100 data sourced from the 2013 Equilar Executive Stock Ownership Guidelines Report Source: Radford proprietary analysis of 59 select technology companies Say-on-Pay Results and Governance Trends in the US Technology Sector

13 Ownership Guidelines: Design More than half of companies surveyed have moved to a CEO ownership guideline fixed at 5x base salary or higher; ISS considers 6x best practice At the board level, multiples range from 3x to 5x the base retainer per director A minority of companies stipulate guidelines in terms of a fixed number of shares or pursuant to a de minimis approach at the lesser of a fixed number of shares or multiple of salary/retainer Executive Design Practices Director Design Practices 23% 2% 8% Mult. Prev. 2x 3% 21% 6% 15% Mult. Prev. 0.5x 3% 3x 12% 3x 33% 4x 9% 3.5x 3% 5x 42% 4x 7% 67% 6x 24% 58% 5x 50% 6x 4% De Minimus Multiple Fixed Shares Fixed Value De Minimus Multiple Fixed Shares Fixed Value Source: Radford proprietary analysis of 59 select technology companies Say-on-Pay Results and Governance Trends in the US Technology Sector

14 Ownership Guidelines: Definition of Equity Most companies confine qualifying stock ownership to direct share ownership (whether held by the executive, family members, or in a trust) However, a material proportion of companies include unvested restricted shares and (less often) vested, in-the-money stock options may count toward target ownership levels Inclusion of restricted stock allows companies to assist executives/directors in meeting the requirement via an annual restricted stock grant Stock options when included would typically be counted based on the vested, in-the-money value of stock options (and usually net of expected taxes) The most common period of time for affected executives or directors to comply with guidelines is 5 years posthire or appointment; with noncompliant individuals at the end of the period are typically restricted from selling all or a portion of grants until they meet the guideline Ownership Guideline Directly / Beneficially Owned Shares Restricted Stock / RSUs Options DSUs Perf. Shares Board of Directors 100% 30% 15% 21% N/A Executives 100% 35% 26% 9% 11% Source: Radford proprietary analysis of 59 select technology companies Say-on-Pay Results and Governance Trends in the US Technology Sector

15 Clawback Policies: Prevalence In anticipation of final Dodd-Frank regulations (expected to take effect in 2016), 73% of technology companies have implemented clawbacks This rate is up from 63% in 2013 (among the same group of companies) 100% Prevalence of Clawback Policies, 2013 vs % 60% 63% 73% 40% 20% 0% Source: Radford proprietary analysis of 59 select technology companies Say-on-Pay Results and Governance Trends in the US Technology Sector

16 Clawback Policies: Design Covered Individuals 89% of companies extend clawback policies to cover all Section 16 officers Triggering Events Only 41% of companies clawback pay following a restatement absent identified executive fraud or misconduct Affected Compensation 60% of companies subject cash and equity incentives to clawback policies, while 40% recover cash bonuses only Source: Radford proprietary analysis of 59 select technology companies Say-on-Pay Results and Governance Trends in the US Technology Sector

17 Insider Trading Policies: Prevalence A majority of technology companies now disclose policies relating to hedging company stock, and nearly half of companies disclose pledging policies in anticipation of finalized SEC regulations Both ISS and Glass Lewis credit companies for adopting policies on pledging; SEC regulations on hedging policies are expected to be in effect by 2016 Prevalence of Insider Trading Policy Types, % 86% 80% 60% 47% 40% 20% 0% Pledging Policy Hedging Policy Source: Radford proprietary analysis of 59 select technology companies Say-on-Pay Results and Governance Trends in the US Technology Sector

18 Shareholder Engagement Prevalence 36% of the companies reviewed in this study provided CD&A disclosure explicitly referencing the board s engagement with shareholders on compensation issues Formal Process vs. Ad Hoc Program Changes Over half (57%) of such companies provided a thorough discussion of a formal engagement effort, disclosing the proportion of total shares held by the investors with whom the board held discussions, etc. Much of the remainder reads as boilerplate style disclosure, which does not provide significant clarity as to the degree of shareholder engagement A handful of companies described a formal engagement program and specific steps taken in response to investor discussions, with adoption/enhancement of performancebased equity programs, in particular TSR-based programs, the most oft-cited change Source: Radford proprietary analysis of 59 select technology companies Say-on-Pay Results and Governance Trends in the US Technology Sector

19 Dodd-Frank Update Implementation of Dodd Frank is expected to continue on remaining issues during 2014, but final rules for outstanding areas are unlikely to take effect before the 2015 proxy season The SEC issued proposed rules related to pay ratio disclosure in September 2013 and final rules are expected to approved later this year As proposed, the rules would not be implemented until the first fiscal year following approval and would be disclosed in the proxy the following year Dodd-Frank Rule Say-on-Pay Say-on-Golden Parachutes Committee Independence Consultant Independence Pay Ratio Disclosure Pay-for-Performance Disclosure Anti-Hedging Clawbacks Status with SEC Final and Active Final and Active Final and Active Final and Active Preliminary Rules Proposed (Implementation in 2015 with first disclosure in 2016) Awaiting SEC Proposal Awaiting SEC Proposal Awaiting SEC Proposal Say-on-Pay Results and Governance Trends in the US Technology Sector

20 Covered Companies The most recent proxy statement for each of the following 59 technology companies was reviewed to assess market trends for ownership guidelines, clawback policies, insider trading policies and shareholder engagement strategies Activision Blizzard Facebook ON Semiconductor Adobe Systems Flextronics International Oracle Advanced Micro Devices Freescale Semiconductor QUALCOMM Akamai Technologies Google Red Hat Altera Hewlett-Packard Salesforce.com Amazon.com Inc. Intel SanDisk Analog Devices International Business Machines Seagate Technology Apple Intuit Skyworks Solutions Applied Materials Jabil Circuit Symantec Atmel KLA-Tencor Synopsys Autodesk Lam Research Take-Two Interactive Software Avago Technologies LinkedIn Texas Instruments Broadcom Maxim Integrated Products Twitter CA Technologies Microchip Technology VMware Cisco Systems Micron Technology Western Digital Citrix Systems Microsoft Xilinx Cree Motorola Solutions Yahoo! ebay NetApp Electronic Arts Netflix, Inc. EMC Nuance Communications Equinix NVIDIA Say-on-Pay Results and Governance Trends in the US Technology Sector

21 About Radford Radford, an Aon Hewitt company, is the leading global provider of compensation intelligence and consulting services to the technology and life sciences sectors. Our market-leading surveys, strategic consulting and equity valuation expertise help Compensation Committees and human resources leaders address their toughest challenge: attracting, engaging and retaining talent in innovation-based industries. Radford offers clients a comprehensive suite of solutions, integrating unmatched global data capabilities with high-powered analytics and deep consulting expertise to deliver market-leading guidance to more than more than 2,600 organizations annually from Fortune 10 companies to start-ups. Headquartered in San Jose, CA, Radford has professionals in Bangalore, Beijing, Boston, Brussels, Frankfurt, Hong Kong, London, Philadelphia, San Francisco, San Diego, Shanghai and Singapore Say-on-Pay Results and Governance Trends in the US Technology Sector