2010 Proxy Season Review: Say on Pay

Transcription

1 Cynthia M. Krus, Sutherland Asbill & Brennan LLP Lisa A. Morgan, Sutherland Asbill & Brennan LLP Reid Pearson, The Altman Group Francis H. Byrd, The Altman Group July 27, Proxy Season Review: Say on Pay

2 Speakers Cynthia M. Krus Partner Francis H. Byrd Managing Director Lisa A. Morgan Associate Reid Pearson Managing Director

3 Presentation Overview Say on Pay: What Will It Mean? Introduction to Say on Pay Say on Pay Actions to Date Legislative and Regulatory Developments Getting Ahead of Your Say On Pay Vote Preparing for the 2011 Proxy Season Say on Pay To Do List 3

4 Introduction to Say on Pay What is it? Non-binding proposal included in proxy materials that calls for annual shareholder advisory vote on a company s executive compensation program What is the History? Became required practice for London Stock Exchange companies in 2003 In 2006, Say on Pay proposals were adopted by shareholders at 5 publicly traded companies More than 50 in 2007 More than 80 in 2008 Exceeding 100 in

5 Introduction to Say on Pay What are the Benefits? Direct Incentivize companies to think about how and why they arrived at specific executive compensation decisions and create better disclosure Potential for public censure might lead directors to restrain excessive executive compensation in response to shareholder sentiment and more directly link pay with performance Indirect Promote dialogue with and feedback from shareholders Give shareholders a sense of empowerment without binding the company What are the Costs? Thumbs-up or down vote gives management little information about specific components to which shareholders object Will require companies to spend significant amount of time engaged with various corporate governance activists and proxy advisory firms Unnecessary since shareholders receive detailed information through the SEC s executive compensation disclosure rules Activist groups might use advisory votes as inroad to promote social or political agendas that are not related to the company s economic growth 5

6 Management Say on Pay Proposals Total Proposals Pass Fail Average Support 87.8% 85.4% 94.2% ISS For ISS Against ISS Refer 0 1 (RMG) 1 (RMG) Stats from Russell 3,000 Stats for meeting dates between January 1 and June 30 for each year Source: ISS Voting Analytics 6

7 Say on Pay Actions to Date First time MSOP at US company was rejected by shareholders Until 2010, seemed Say on Pay movement did not translate into votes against compensation MSOP failed at three companies in 2010 On May 5, 2010, only 46% of Motorola shareholders voted in support of the company s compensation plan Motorola gave its shareholders a Say on Pay vote in 2009 Compensation plan received support of 64% of shareholders One of four companies in 2009 to receive less than 65% approval On May 8, 2010 shareholders of Occidental Petroleum Corp voted against the company s compensation practices Voluntarily began offering shareholders Say on Pay in 2009 On May 21, KeyCorp received only 45% support during its Say on Pay vote First TARP participant to get majority dissent over its pay practices Received 87.2% approval during its 2009 advisory vote Other MSOP developments Proposals to put Say on Pay on the ballot received 51% of the vote at EMC, 47.9% of the vote at Johnson & Johnson and 45.3% of the vote at IBM Number of votes exceeded the support levels for the same resolutions at the three companies last year In response, many companies have voluntarily adopted Say on Pay policies Aflac, Alaska Air, Apple, Intel and Verizon Communications all had voluntary advisory votes on executive compensation in

8 Say on Pay Actions to Date Occidental Petroleum (voluntary): Reasons ISS did not support Repeated failure to address: pay magnitude; pay disparity; peer group disparity; and performance target issues; CEO CIC agreement contains excise tax-gross ups Motorola (voluntary): Reasons ISS did not support Dr. Jha s payment if business separation does not occur increased from $30M to $38M (inappropriate pay for failure arrangement); contains a modified excise tax gross-up provision KeyCorp (required): Reasons ISS did not support Pay for performance disconnect; short-term incentive plan more discretionary and performance results only generally referenced; same metrics used for short-term and long-term plan increasing risk profile 8

9 Legislative and Regulatory Developments Dodd-Frank Act Companies must hold advisory votes at any annual or other shareholder meeting that occurs on or after January 21, 2011 (six months after enactment) During 2011 meetings, companies required to hold separate vote on the frequency of future advisory votes One, two, or three years Afterwards, companies required to hold shareholder votes at least every six years on Say on Pay frequency SEC permitted to draft rules exempting small issuers 9

10 Legislative and Regulatory Developments Dodd-Frank Act Issues to Consider Effective date Requirement will be in effect for the 2011 proxy season Frequency of vote What happens when neither the annual, biennial or triennial options receive majority support? Not entirely clear whether frequency vote binding Companies Covered SEC authority to exempt an issuer or class of issuers from Say on Pay requirement (language added during conference) Preliminary Proxy Unclear whether advisory vote will necessitate filing of preliminary proxy statement 10

11 Getting Ahead of Your SOP Vote Although Say on Pay vote against a compensation plan has no legal ramifications and is merely advisory, bottom line is that shareholder vote will be heard Preparation for the Inevitable Recent Towers Watson survey found Only 12% of responding companies consider themselves very well prepared for Say on Pay 6% of responding companies are currently offering Say on Pay or are already planning to roll it out 46% of responding companies said they are only somewhat prepared 22% said they do not know where their companies stand While notion of Say on Pay has been in the works for years, only 80 companies currently offer Say on Pay proposals 11

12 Getting Ahead of Your SOP Vote Identify Potential Vulnerabilities: Understanding Shareholder Triggers One of the easiest steps to take is to avoid a negative SOP vote in the first place Potential triggers (1-5): A CEO base salary of more than $1 million The award of a bonus to the CEO in addition to non-equity incentive compensation A lack of correlation between company performance and annual cash incentives awarded to the CEO A pay differential between the CEO and other named executive officers (NEOs) of more than three to five times the average of other NEOs A change in pension value and non-qualified deferred compensation earnings that is larger than other elements of pay 12

13 Getting Ahead of Your SOP Vote Identify Potential Vulnerabilities: Understanding Shareholder Triggers Potential Triggers (6-10) An all other compensation column that is disproportionately large and contains excessive perks Profits made on the exercise of stock options and value realized on the vesting of equity awards that does not match long-term performance Annual performance and long-term incentive bonuses that are based on the same, single performance metric Payment of incentives for below-median performance Any perception of conflict of interest in change of control payments 13

14 Getting Ahead of Your SOP Vote Next Step: Shareholder Communication Identify potential root cause for a possible 2011 no vote Consult analytical reports prepared before meeting Arrange meetings with key investment and trade organizations Solicit meetings with representatives of major fund owners Identify your public pension and union fund shareholders Review media reporting about company s compensation policies. and Review correspondence sent to the company by dissenting shareholders Example of GlaxoSmithKline post

15 Getting Ahead of Your SOP Vote Next Step: Shareholder Communication Aim to build constructive relationships between investors, directors Identify key shareholders, trade associations, proxy agents and potentially media outlets with capacity to influence investor and public opinion on compensation matters Identify other potential non-compensation governance concerns Prepare and execute outreach plan before the annual meeting in the off-season Consult with institutional shareholders before finalizing the compensation plan Offer meetings with chair of compensation committee and/or other board members to key market players & consultants, if and when, necessary Pay attention to CD&A disclosure as a persuasive device that requires adequate scrutiny prior to public release 15

16 Getting Ahead of Your SOP Vote Next Step: Shareholder Communication Conduct an outreach program Surveys Group meetings One-on-One Meetings E-Forums (Intel, Verizon) Issues to consider with any outreach program Understand how ISS works and familiarize yourself with its voting guidelines Regulation FD If a company is considering running proposed changes by shareholders before publicly announcing the changes then the key to avoid a Regulation FD violation is to avoid sharing material nonpublic information Most changes would not be considered material 16

17 Preparing for the 2011 Proxy Season In an effort to avoid a negative Say on Pay vote in the 2011 proxy season, companies should focus on the following areas of their executive compensation programs: Compensation Committees Golden Parachutes Tax Gross-Ups Performance-Based Equity Compensation Clawbacks 17

18 Preparing for the 2011 Proxy Season Compensation Committees Securities law as it exists today does not require listed companies to have wholly independent compensation committees Investors likely won t consider compensation committees sufficiently independent unless all members are completely independent from management Includes soft relationships, such as pre-existing friendships and interlocks on charitable foundation boards What you can do now Revise committee charters to provide for total independence of compensation committee members Allow compensation committee to engage independent compensation consultants, legal counsel and other advisers 18

19 Preparing for the 2011 Proxy Season Golden Parachutes Non-binding shareholder vote on and disclosure of Golden Parachute compensation Long subject to scrutiny by proxy advisory firms and individual shareholders What you can do now Modify/revise agreements to address shareholder concerns/ eliminate change in control provisions Switch from single trigger to double trigger equity vesting Modify severance arrangements to provide severance following change in control only if executive is involuntarily terminated or if executive voluntarily terminates employment for certain good reason events Establish change in control compensation arrangements in advance, so that can be approved under a Say on Pay vote instead of a separate vote in connection with a merger 19

20 Preparing for the 2011 Proxy Season Tax Gross-Ups Companies have paid an individual s excise and related income taxes in an effort to offset the excise tax on parachute payments and keep the individual whole Providing gross-up or modified gross-up added in 2009 to RiskMetrics list of poor pay practices for new or materially amended agreements Shareholder groups also view gross-ups for imputed income tax imposed on use of corporate aircraft unfavorably What you can do now Modify or eliminate excise tax gross-up altogether. Replace excise tax gross-up with best payment provision that pays executive either the full parachute payment or a reduced amount, whichever will leave the executive in the best after-tax position taking into the account the excise tax Eliminate other types of income tax gross-ups, in some cases replacing them with a fixed cash allowance intended to provide the executive with funds that they can choose to use to pay the taxes or for other purposes 20

21 Preparing for the 2011 Proxy Season Performance-Based Equity Compensation Critics of executive compensation practices often focus on extent to which compensation is tied to company performance What you can do now Replace traditional restricted stock or restricted stock units with performance-vesting stock or stock units Utilize design in which dividends and dividend equivalents are accumulated and paid out if/when underlying equity award becomes vested 21

22 Preparing for the 2011 Proxy Season Clawbacks Require bonuses and long-term incentive compensation to be repaid to company in the event of financial restatement or other circumstances Provisions can take variety of forms Time period for enforcing a clawback also varies Significantly more common 304 of the Sarbanes-Oxley Act Dodd-Frank Act Although clawback provisions have proliferated in recent years, the enforceability of clawback provisions remains relatively untested 22

23 Preparing for the 2011 Proxy Season Compensation Discussion & Analysis ( CD&A ) In addition to reviewing and revising your executive compensation programs, companies should review the description of their programs in their CD&A Use to tell story Consider additional charts/graphics and bullets Consider executive summaries/overviews Consider adding analysis/best practices Wealth accumulation Full walk away number Internal pay equity 23

24 Say on Pay To Do List Revisit your executive compensation program Revisit the manner in which your executive compensation program is presented in your proxy statement (CD&A) Familiarize yourself with guidelines published by proxy advisory firms know what would trigger a negative vote recommendation Reach out to your shareholder base, especially institutional investors Follow the SEC rulemaking process Guidance on how Say on Pay proposal should be phrased Determination regarding applicable voting standard for vote on selection of annual, biennial or triennial vote. *** Stayed tuned for our next webinar in August *** 24

25 Questions? Cynthia M. Krus Partner Francis H. Byrd Managing Director Lisa A. Morgan Associate Reid Pearson Managing Director