The stock market still has not recovered from the meltdown of 2008, and many companies have had severe reductions in their workforces, but CEO compensation of major U.S. companies rose 36.5% last year. Why is there this disconnect between stock market performance, mass layoffs and CEO compensation? What should boards of directors be doing to better align CEO compensation with company performance? The Silicon Valley National Association of Corporate Directors (SVNACD) assembled a panel of experts who led an interactive discussion of these issues, which are a major cause of the Occupy Wall Street movement across the country.
No board member wants to admit their CEO is below average. If they do, it would be time to start recruiting a replacement.
The SVNACD panel reviewed ISS policy updates. Plaintiff law suits have raised concerns. A negative vote on say on pay, is it indicative of a breach of fiduciary duty? In the case of Umpqua, the court said no. However, there are more to come and they are being filed in state courts. Cincinnati Bell has one down and one to go.
ISS is advising a withhold of votes if a board decides to hold say-on-pay vote less frequently than that received which a majority of votes cast, although most companies simply went with the one year standard. ISS looks at the pay vote on a case by case. If a company received less than 70% of votes cast, they will look more deeply. How did you engage with your shareowners? Even if the affirmative vote was less than 80%, they still consider it a kind of failure.
In 2012 ISS is using a new peer group alignment assessment. They’re picking a peer group for you based companies in the same six-digit Global Industry Classification Standard (“GICS”) classification. They don’t consider stock options to be performance based, whereas that is not the case for most Silicon Valley companies.
Most are mindful of what ISS is thinking but if you disagree you’ll probably need more of an active outreach to shareowners. Don’t wait until ISS has taken a position against your pay. You need to start earlier. More and more discussions about about your philosophy could make a real difference. You could make your decisions based on ISS but that might not be best business judgment. Remember to talk to the side that votes, which may be different than the investment side of funds.
Everyone recognizes that pay for performance strategies can vary but ISS metrics aren’s as flexible as the needs of individual companies. On the plus side, ISS brings positions can be used by compensation committees as a crutch to get rid of certain practices.
The IRS and Treasury are looking closer at compensation plans to ensure compliance with 162(m). If you used a nonGAP metric but you told shareowners it was GAP compliant… those types of fumbles can get your company in trouble. The consensus was that you must have outside experts. Don’t try to do it by yourself.
ISS tells you after the fact who the peer group is but at least they’re giving you the methodology of how they develop the peers. Projecting stock price of your company and your peers and how they’ve done over past year… seems like they are asking for the impossible. However, ISS serves to strengthen engagement and, again, can be a useful shield but their policies are not the same as the rules.
Peer groups are frequently picked based on aspiration. We compete for talent. Is your peer group based roughly on your size, geographically, etc.? Don’t be a Tootsie Roll (they compared themselves to Kraft, which was 100 times larger). You’ll need to set your operating plan before your compensation plan. If your CEO sits on the compensation committee of another “responsible” company, that can be a plus, since they may then be more sympathetic to the tasks.
Companies are mostly waiting on the SEC for rules re clawbacks. Good practice to add a clause indicating that a bonus plan could be clawed back as required by law with no finding of guilt, just the result of a restatement. Work to form core team between committee, consultant & HR. Start with CEO and their beliefs. Reconcile those beliefs with corporate practices.
Even more so than most SVNACD events, there was a lot of interaction with the audience. There was discussion of imposing public company realities on CEOs who operated private companies that have gone public. Outside counsel and consultants… reviewing what committee’s work is. Compensation committee “anonymous,” getting together in peer forums discussing the tough issues. Reminder that you need to understand how compensation fits into the operating plan – the strategy – to ensure you haven’t gotten lost.
Having time with the committee and advisors to ensure consensus is important. Other members often forget, so reviewing and documenting decisions are important. Don’t just rely on what gets brought to the meeting. Think about the information ahead of time. Peer groups: Where to you find them? NYSE/Boardmember Magazine does a good job of bringing people together. Although I got the impression the best groups are formed through networking with other compensation committee members attending events like this one.
Setting up framework. Metrics are key to providing an answer…. implement consistently. Lead director, board chair provide feedback — compensation follows. Again, ISS can be a shield when CEO wants bonuses not in original plan. Portion in RSUs important when stockmarket tanks. 10b(5)(1) plans should have timed sales to take some of the pressure off.
Companies are required to discuss what you did as a result of last year’s vote. Apparently, Mark Borges has already pointed to a proxy that did not. An example was given of an IR team that called 1200 shareowners. Don’t underestimate the value of a proxy solicitor. Create a campaign. Reach out to address shareowner concerns. Talk to the people that are actually going to vote the shares. A proxy solicitor can help with that. It should be an ongoing program. Again, it is relatively easy to use the market as a shield for perks. Structural elements are tougher. Don’t expect base to increase when market is flat.
See also Proxy outlook 2012: say on pay year two, Say on Pay 2011: Proxy Advisors On Course for Hegemony, Say on Pay research, CII’s Say on Pay, Test Driving the USPX Guidelines on Say-on-Pay. Video wrap-up of the SVNACD session.
Wendy Davis is a partner at Cooley LLP in the compensation and benefits group in the Palo Alto office. She specializes in equity and executive compensation and has extensive experience in establishing and maintaining equity compensation plans, cash bonus plans, deferred compensation arrangements and change of control agreements. Davis regularly negotiates executive retention, employment and severance agreements and assists with the compensation, benefits and executive-related issues arising in mergers and acquisitions.
With almost 20 years of compensation consulting experience, Sue Gellen is a principal of Compensia, a consulting firm that provides counsel to boards, compensation committees and senior management on issues concerning executive and board pay, reward strategy and corporate governance as it relates to compensation plans.
With more than 30 years experience in the technology sector, Carol Mills currently serves on the board of directors for Tekelec Corporation, Blue Coat Systems and Xactly Corporation. She has served as a CEO, executive vice president and general manager as well as a member of the board of directors for Adobe Systems. She has chaired three executive compensation committees as well as nominating and governance committees, investment committees and special litigation committees.
Thomas J. Toy is currently on the boards of directors of UTStarcom (NASDAQ: UTSI, currently chairman of the board), Hanwha SolarOne (NASDAQ: HSOL) and several private companies. His past companies also include SunPower (NASDAQ: SPWR, former co-lead investor), Catalina Marketing (NYSE: POS), LifeCell (NASDAQ: LIFC, then acquired by Kinetic Concepts), White Electronic Designs (NASDAQ: WEDC, then acquired by Microsemi), SyStemix (NASDAQ: STMX, then acquired by Novartis) and CafePress.
Moderator Kim Le is the founder of A2Q2, a professional services firm specializing in business process optimization, internal controls, Sarbanes-Oxley compliance and M&A integration. She has more than 16 years experience in accounting and consulting. Le spent eight years in public accounting with Arthur Andersen until its demise in 2002. In 2010 the National Council of the Asian American Business Association selected her as the Asian Business Woman of the Year. In 2009 the California Public Utility Commission recognized her with the Women in Business Excellence Award. Le graduated from Arizona State University, summa cum laude.
This program, like all SVNACD programs, is subject to the Chatham House Rule.