Proxy Season 2012: The Year of Pay for

Transcription

Director Notes
Proxy Season 2012
The Year of Pay for Performance
by James D.C. Barrall, Alice M. Chung, and Julie D. Crisp
As in 2011, executive compensation is the single most important corporate governance
issue for companies, boards, and investors for the 2012 proxy season. This Director Notes
discusses the evolving analytics and issues around pay for performance (P4P) and suggests
ways for companies and their boards to analyze the alignment of P4P, counter negative
recommendations by proxy advisers, and draft their proxies to obtain shareholder support
for their pay programs.
In 2011, approximately 3,000 companies held their
first mandatory shareholder say on pay (SOP) and
say on frequency votes; approximately 1,500 “smaller
reporting companies” are not required to do so until
January 21, 2013.1 Overall, 42 companies that held SOP
votes in 2011 received less than 50 percent shareholder
support. More than 90 percent of companies received
shareholder support of 70 percent or higher, and more than
70 percent received shareholder support of 90 percent or
higher. On the issue of say on frequency, shareholders at
more than 75 percent of companies supported annual SOP
votes, while shareholders at a majority of the remaining
companies supported triennial votes, and a few supported
biennial votes. Following the votes, the vast majority
DNV4N8
April 2012
of companies adopted the vote frequency preference
supported by a plurality of their shareholders.2
One unexpected development during the 2011 proxy season
was the large volume of publicly filed disputations between
public companies and Institutional Shareholder Services
(ISS) and Glass Lewis, the two most influential U.S. proxy
advisers, over their negative SOP recommendations.3
While some of the negative recommendations and the
controversies that followed were related to pay practices
labeled “problematic” or “egregious” by the proxy advisers,
most of the negative recommendations and controversies
stemmed from negative recommendations based on those
proxy advisers’ P4P voting policies.
Proxy Season 2012
As of March 28, 2012, 161 companies had held SOP votes
in 2012. These votes generally received slightly greater
shareholder support than they had in 2011. A few companies with failed votes in 2011 revamped their pay plans and
disclosure dramatically and received strong shareholder
support; however, shareholder support at a few other companies slipped badly.4
At the beginning of 2012, election year politics, the Occupy
Wall Street movement, and a trend toward more aggressive limits on compensation in the United Kingdom and
Europe has intensified the scrutiny and pressures faced by
U.S. companies over their executive pay. Based on proxies,
supplemental proxy materials, and Form 8-Ks filed with
the Securities and Exchange Commission (SEC) for SOP
votes in 2012, it is clear that P4P will be an even bigger issue
in 2012 for several important reasons.
1 Most companies that are required to hold SOP votes (generally Russell 3000 companies) have largely eliminated
pay practices that proxy advisers and shareholders view
as “problematic” or “egregious” (such as large perquisites,
excessive severance pay, Internal Revenue Code Section
280G “golden parachute” payment tax gross ups, and
other tax reimbursements).
2 There appears to be a growing recognition among institutional investors and boards that the single most important
issue in the executive compensation arena for shareholders is P4P. In other words, the notion that short-term and
long-term incentive compensation (1) should be designed
to encourage behavior that drives a company’s financial
performance and results in favorable shareholder returns
over time, and (2) should be aligned with the company’s
financial performance and shareholder returns, as well as
those of its peer companies, over time.
3 There is evidence that institutional shareholders are
interested in more sophisticated and holistic methods for
analyzing P4P than those used by the proxy advisers in the
past.
4 In perhaps the most important development, proxy advisers, compensation consultants and others are focusing on
P4P like never before, as they actively compete for market
share and seek to help investors and companies analyze
P4P with more sophisticated models and holistic analyses
than in the past.
All of these and other developments ensure that 2012 will
be the year of P4P.
2
Director Notes Proxy Season 2012: The Year of Pay for Performance
As in 2011, P4P will undoubtedly generate substantial
controversy as companies challenge the proxy advisers’
P4P analytics and vote recommendations. However, there
are signs that the quality of the dialogue has improved,
and there is the anticipation that this season will shed more
light on the subject than occurred in 2011. At this early
stage, we are hopeful that this season will move the dialogue on executive compensation and P4P toward a more
holistic analysis and away from check-the-box, one-sizefits-all methodologies that have failed to account for all of
the differences between companies, their strategic and tactical business objectives, their current situations and those
of their market competitors, and the knowledgeable and
tailored judgments made by many boards. We are hopeful
that the SEC staff will study P4P ideas in the marketplace,
including the movement toward more sophisticated analyses, and adopt a flexible and holistic approach when it
drafts the Dodd-Frank rules on “pay versus performance,”
which are expected to be proposed by the end of June and
finalized before proxy season 2013.5
P4P Viewed Through Two Lenses
Responding to the controversies over P4P in 2011 and the
growing interest in more holistic approaches to P4P, some
early 2012 proxy filers have analyzed and presented their
P4P stories in new and persuasive ways. The controversies
over P4P reveal two distinct perspectives that are used to
assess P4P, both of which should be analyzed separately.
On one hand, there is the perspective of boards and compensation committees looking ahead prospectively as they
design pay plans and create compensation opportunities
to encourage the desired performance. On the other hand,
there is the perspective of the investors, proxy advisers,
boards, and compensation committees looking in the rearview mirror retrospectively to assess whether executive pay
during a specified period was in fact aligned with the company’s actual financial performance and the returns earned
by shareholders. To use another analogy, the former,
prospective lens focuses on how the performance pudding
is made; the second, retrospective lens focuses on the proof
of the pudding after it has been made.
In light of these two very distinct P4P lenses, public companies should think about the questions raised by each
separately and be prepared to address both positions in
their proxies and engagement with shareholders; however,
the analysis below does not concentrate on the prospective
lens because it is not the focus of the proxy advisers in their
www.conferenceboard.org
2012 P4P evaluations. Nevertheless, understanding the prospective P4P lens is important because shareholders should
know the position of boards and compensation committees when they design pay plans and look at the past years’
performance to create executive pay opportunities for the
next year. The prospective view should also be considered
because proxy advisers often conflate the two issues by
stating that pay opportunities created by the company
should be used to determine P4P alignment because that is
what the company thinks the executives “ought to receive,”
overlooking the important fact that pay opportunities generally are subject to performance goals that are generally
intended to be aligned with shareholder returns.
P4P Voting Policies: ISS
The 2011 ISS policy During the 2011 proxy season, the
majority of ISS’s negative recommendations on SOP advisory votes were triggered by its assessment of P4P “disconnects” between company performance and executive
compensation. ISS’s 2011 policy used a two-prong test that
measured P4P alignment by analyzing one- and three-year
total shareholder return (TSR) (stock price appreciation
plus reinvested dividends) relative to the TSRs of all Russell
3000 companies in the same four-digit Global Industry
Classification Standard (GICS) industry group, as well as
the total compensation of a chief executive officer (CEO)
who served for at least two fiscal years. Under the first
prong, a company was generally deemed to have a “performance” problem if its TSR was below the median of its
industry group over both the previous one- and three-year
periods. If this was the case, the company would be analyzed under the second prong of the ISS test, which was a
rudimentary determination of changes in the CEO’s total
direct compensation from 2009 to 2010. After applying
this second prong, ISS generally would conclude that the
company had a P4P “disconnect” if, compared to the prior
year, the CEO’s compensation had not been significantly
reduced in 2010.6
The 2011 policy was heavily criticized by companies and
others for several reasons. First, it focused on relatively
short-term performance and CEO compensation for one
year relative to the CEO’s compensation during the prior
year. Second, a company’s TSR results were measured
against a “peer group” based on four-digit GICS categories, which consisted of large groups of companies, not
true capital market or employment market peers. Third,
the only company performance evaluated was TSR, not
other important measures of financial performance (i.e.,
changes in revenue; net income earnings; earnings before
interest, taxes, depreciation, and amortization (EBITDA);
return on equity; and return on capital). Fourth, the policy
determined CEO pay based on proxy summary compensation table (SCT) values that value equity and long-term
incentive awards as of the date of grant, not the value of
the awards actually realized by the CEO in terms of awards
vested or paid. Further, the value of stock option and other
equity grants was based on ISS’s Black-Scholes assumptions and calculations (not those used by the company for
financial statement and SEC reporting purposes), which
generally overstate the value of the CEO’s awards. ISS’s
new 2012 P4P policy addresses some but not all of these
problems.
The 2012 ISS policy In response to the criticisms of its
2011 policy, ISS’s updated 2012 policy, which is in effect for
annual meetings held on or after February 1, 2012, focuses
less on below-median performance, looks at longer-term
alignment, and uses new peer groups. Under the new
policy, ISS will conduct an annual P4P analysis to identify
the degree of alignment between pay and performance over
a longer period for most public companies, not just those
below the median in their TSR scores. For Russell 3000
companies, two quantitative factors—peer group alignment
and absolute alignment—are evaluated on an objective
basis. If these evaluations are problematic, then ISS applies
a further qualitative, or subjective, evaluation.
More specifically, ISS’s new quantitative P4P tests determine the alignment between executive pay and company
performance based on three measures: two relative measures, which evaluate P4P alignment against an ISSgenerated set of peer companies, and one absolute measure,
which evaluates a company’s P4P without regard to that of
other companies.7 These three quantitative measures are:
Relative degree of alignment (RDA) The degree of
alignment within the company’s ISS peer group of
the company’s rank for both TSR and the CEO’s
total pay, as measured over the prior one- and
three-year periods (weighted 40 percent and 60 percent, respectively).
Multiple of median (MOM) The multiple of the
CEO’s total pay relative to the ISS peer group
median CEO pay.
Pay-TSR alignment (PTA) The difference between
the trend in the CEO’s annual pay and the company’s annualized TSR, measured over the prior
five fiscal years.8
3
The peer group alignment measures (the RDA and MOM
tests) emphasize longer-term alignment by considering the
degree of alignment relative to the company’s peer group of
both the company’s ranks for TSR and the CEO’s total pay
measured over one- and three-year periods (weighted 40
percent and 60 percent, respectively), as well as the multiple
of the CEO’s total pay relative to the peer group median. The
new ISS “peer group” consists of 14 to 24 companies (rather
than the entire GICS industry group) that are similar in
revenue and asset size and are selected using market cap, revenue (or assets for financial companies), and GICS industry
group. In its relative alignment analysis, ISS will typically
use a chart similar to Chart 1 to demonstrate the degree of
alignment between a company’s pay and its performance.
Chart 1 displays company pay and performance as percentages, both for the relevant company (indicated by a black
triangle) and its peers (each indicated by a blue diamond).
The shaded gray portion of the graph represents the area in
which pay and performance are aligned. Whether a company falls outside this range is one of the factors that will
be considered during ISS’s overall P4P assessment.
ISS’s absolute alignment measure (the PTA test) analyzes
the difference between the trend in the CEO’s annual pay
and the company’s annualized year-end TSR measured
over the prior five fiscal years.9 Unlike ISS’s 2011 policy,
total CEO pay is examined for each relevant year, based on
the compensation of the CEO serving at the end of the year,
and CEO pay is based on SCT values without regard to
whether the CEO remains the same or changes from year to
year.10 Below right is an example of the chart ISS generally
uses to analyze absolute alignment:
Chart 2 compares the company’s CEO pay to the company’s TSR over the previous five years, measuring how
annual company performance compares to annual pay and
the general trend in pay and performance alignment over
that period. Once ISS’s analysis is complete, a final score is
assigned to each company based on outcomes of the three
quantitative tests, which ISS uses to determine whether the
company’s P4P demonstrates a “high,” “medium,” or “low”
level of concern (i.e., the degree to which the company is
likely to have a P4P “disconnect”).
If the quantitative tests described above indicate unsatisfactory long-term P4P alignment (or, for non-Russell 3000
companies, indicate misaligned pay and performance), ISS
will analyze the following qualitative factors to determine
how pay encourages or undermines the creation of longterm value and alignment with shareholder interests. If
enough mitigating factors are present, this will result in a
positive P4P result notwithstanding unsatisfactory results
on the quantitative tests:
•
The ratio of performance-based to time-based equity awards
•
The ratio of performance-based to total compensation
Chart 2
ISS analysis of absolute alignment
CEO Pay, in millions
Pay
TSR
8.7
8.1
7.7
6.9
6.1
Chart 1
ISS analysis of relative alignment
100
Performance
2007
2008
2009
2010
2011
Source: Analysis by Latham & Watkins.
50
Table 1
ISS analysis of absolute alignment
2007
2008
2009
2010
2011
8,123
6,137
8,724
6,940
7,723
Indexed TSR
142.76
91.21
97.85
121.76
121.76
CEO
Roberts
Roberts
Roberts
Smith
Smith
Pay ($000)
0%
0%
50
Pay
100
4
•
Completeness of the company’s executive compensation
disclosure and the rigor of performance goals
•
Peer group benchmarking practices
•
Actual results of financial and operational metrics (including growth in revenue, profit, and cash flow (absolute and as
compared to peers))
•
Special circumstances, such as nonannual equity grant practices or the effect of a new CEO during the prior fiscal year
•
Any other relevant factors
ICS Corporate Services (an affiliate of ISS that provides
consulting services to companies) and many compensation consulting firms are now simulating ISS’s P4P analysis
(including the new peer groups) to show how ISS proxy
advisers are likely to apply ISS’s new P4P policy during the
2012 proxy season.11
Problems with the 2012 policy Despite these attempts
to address investor and company criticisms of its 2011
P4P policy, the new ISS policy perpetuates several of
the problems of its prior P4P policy, such as analyzing
relative performance based on relatively arbitrary GICS
industry groups, which largely consist of companies that
are not “peers”; applying a single approach to companies
throughout various industries that may be better suited for
different types of performance-pay alignment analytics;
and reliance on grant date values for equity and long-term
incentive compensation awards without regard to amounts
actually paid or amounts that could be earned. In addition, the 2012 policy continues to focus exclusively on CEO
compensation to assess P4P.12
The greatest concern, however, of many companies and
their advisors and investors is that the new policy continues
to quantify pay based on “pay opportunity,” as reflected
in the SCT, rather than on realizable or realized pay. The
reliance on pay opportunity has been widely criticized by
investors and companies as providing an inaccurate picture
of the compensation taken home by the CEO during the
year, as well as for its reliance on Black-Scholes valuations
of equity awards, which often overstate or underestimate
the value of expected compensation.13 Notably, and as
discussed in further detail below, the pay and performance
of companies that are deemed to have unsatisfactory P4P
alignment under ISS’s methodology (e.g., high pay opportunity and low company performance), are often aligned
when realizable pay, rather than pay opportunity, is
analyzed.14
The new policy also creates timing disconnects for many
companies, particularly those that file proxy statements
early in the season. In such cases, it appears that the
company’s 2011 pay will be compared with that of its ISS
peer group for 2010 if the peers have not yet reported their
2011 pay. In addition, it is possible that pay and TSRs may
be mismatched depending on year ends, such as by using
peer group 2010 pay measured against their 2011 TSRs.
Finally, ISS’s new and more complex quantitative tests will
likely put substantial pressure on ISS to load and properly
analyze and report CEO pay and TSR data on more than
3,000 companies, which will be interesting to watch as the
shareholder meeting calendar becomes more crowded.
P4P Voting Policies: Glass Lewis
Historical policy Glass Lewis’s P4P voting policy has
historically been substantially less transparent than the
ISS policy. In 2011, Glass Lewis said that its P4P policy
analyzed seven factors of shareholder wealth and business
performance (change in stock price, change in book value
per share, change in operating cash flow, EPS growth, total
shareholder return, return on equity, and return on assets)
over one-, two-, and three-year periods, and two compensation points—total compensation for the CEO and the
top five executives compared against the performance and
compensation of the issuer’s peer companies. However, the
policy has been opaque, and its application has been difficult to assess largely because Glass Lewis has not publicly
disclosed its P4P methodology in any real detail. In 2011, as
in prior years, the only clues about its methodology came
from Glass Lewis’s boilerplate proxy report statements that
its assessments of companies’ P4P were based on a proprietary P4P model that used 36 measurement points. Each
company was assigned a P4P letter grade ranging from A
to F, reflecting Glass Lewis’s determination as to whether
the company’s pay aligned with its performance. While the
Glass Lewis analytics may have been more holistic than
those used by ISS, its lack of transparency has left much to
be desired.
2012 policy In early February 2012, Glass Lewis and
Equilar, which provides executive compensation data and
analytical services to companies, investors, and compensation consultants, announced a partnership to provide
investors and companies with an enhanced compensation
analysis for analytical and proxy voting purposes, especially with respect to P4P.15 Glass Lewis announced that it
will make its P4P proxy voting recommendations based on
5
the partnership’s new analytics for proxies for shareholder
meetings held after June 30, 2012. Glass Lewis’ P4P model
will be updated to incorporate Equilar’s “realizable” pay
data, which focuses on earned pay rather than pay opportunity. As discussed in detail later, realizable pay focuses
on current stock prices and payouts from long-term incentives to provide an estimate of the actual compensation
that executives realized, or could realize, on their stock
grants and by exercising their options and stock appreciation rights, rather than on grant date values that over- or
underestimate the value of awards or compensation that
were in fact delivered.
In a second major change, the new Glass Lewis model will
also rely on “market-based” peer groups developed using
Equilar’s algorithms for analyzing publicly-disclosed relationships among companies, hopefully to create strong and
accurate peer groups. Unlike ISS’s peer group methodology, which relies on fixed GICS classifications and company size, largely based on revenue, Equilar’s methodology
is based on a host of factors that link public companies to
one another. These factors include the companies in the
publicly disclosed peer groups, the similarities between
companies, and the geography, industry, and size of the
companies. Equilar then selects companies that have the
strongest relationship with the company in question and
then provides Glass Lewis with the peer groups for each
issuer undergoing a P4P analysis. Although the effect of
this enhanced policy is currently unknown, the new analytics may increase the transparency of Glass Lewis’s P4P
methodology and could provide companies and shareholders with more accurate and helpful guidance as to the
alignment of company performance and compensation.
Early 2012 Investor Response
In response to the controversy over P4P in 2011, institutional investors appear to be moving toward more holistic P4P analyses. In early January 2012, the Council of
Institutional Investors (CII) became the first client to
subscribe to Equilar’s P4P Analytics—this method, as
discussed above, uses a market-based algorithm to determine peer companies and a realizable pay methodology for
determining the value of equity and long-term incentive
awards—as more accurate and objective measures of peers
and pay.16
Other investors have embraced the concept that executive compensation and analyzing P4P can and should
vary between companies. In other words, what works for
6
one company in terms of pay-performance alignment
and encouraging executives may not work for another.
Recognizing the “unique nature of compensation” and the
lack of a “one-size-fits-all” solution to executive compensation, the California State Teachers’ Retirement System
(CalSTRS) affirmed that it intends to evaluate pay holistically, analyzing not only the alignment between pay and
performance, but also corporate peer groups, problematic
pay practices, and disclosures.17 Similarly, BlackRock
stated that it will use a “value-focused engagement”
approach to governance that involves examining a company’s specific positions, and that it is willing to support
“unconventional approaches” if they serve the interests of
long-term shareholders.18 Recently, the Wall Street Journal
reported that the California Public Employees’ Retirement
System (CalPERS) accepted The Walt Disney Company’s
arguments for the alignment of its pay and performance,
notwithstanding ISS’s conclusion to the contrary and negative say on pay vote recommendation.19 It would not be
surprising to see more investors and their representatives
do the same.
P4P Analytics and Arguments in 2012 Proxies
Proxy filings for early 2012 meetings are proving the importance of the P4P issue, arguing company cases for P4P
alignment with more precision and force than ever before,
and challenging the proxy advisers’ P4P analytics, both
anticipatorily and in response to negative vote recommendations in supplemental proxy filings.20 Not surprisingly,
these filings focus on the meanings of pay, performance,
and peer groups.
The analysis of “pay” in P4P When the SEC amended its
rules on the presentation of executive compensation in 2006
by introducing the Compensation Discussion & Analysis
(CD&A) and new tables including the SCT, it said that the
SCT would continue to serve as the principal disclosure
vehicle regarding executive compensation, and the total
compensation column would simplify the presentation of
the previous tables.21 However, under the amended rules,
the SCT contains a mix of realized pay (such as base salary, short-term nonequity incentive plan amounts, and
long-term nonequity incentive plan amounts) and pay
opportunities (such as equity and cash-based long-term
incentive awards), the latter of which will only be realized if
the company’s stock appreciates in value (such as for stock
option awards) or performance targets are attained (such
as for performance shares or performance-based long-term
The use of “realizable pay” An important approach that
companies have adopted with growing frequency is to
analyze their pay in P4P based on “realizable pay” and not
on the pay opportunities reflected by the SCT. Although
companies and compensation consultants have different ways of calculating realizable pay, it is based on the
general principle that pay should be calculated based on
actual compensation earned during the subject period and
amounts that can be realized (e.g., reflecting the value of
any equity and long-term incentive awards granted during
the period in question, based on actual stock prices and
company financial performance). Companies that include
realizable pay information in their proxy statements for
equity awards argue that realizable pay reflects the real
value of the equity awards granted, and they say it is the
most responsive measure to the increases and decreases of
stock price changes. A study by compensation consulting
firm Pay Governance found “strong alignment between
companies’ stock price performance and realizable CEO
pay: CEOs at high-performance companies earned higher
realizable pay than their counterparts at poorly performing companies... [Pay Governance believes that] realizable
pay is the best measure for assessing the alignment that we
advocate, as it is a truer representation of the value most
likely attainable by an executive in a given time/performance period than is pay opportunity or realized pay.”22
Pay Governance also found that more than 10 percent of
the companies in its test sample that would have had a P4P
disconnect under ISS’s RDA test based on pay opportunity
would have actually had realizable pay that was aligned
with company performance.23
Some companies illustrate P4P alignment based on realizable pay by presenting the company’s P4P alignment
relative to that of its peer group. For example, the proxy
statement filed by ABM Industries, Inc. on February 6,
2012, includes Chart 3, which shows realizable pay compared to its three-year TSR.24
The ABM graph performs several different tasks. First, it
looks at three-year realizable pay, which ABM defines as:
(1) actual base salary paid over the three-year
period, (2) actual short-term incentive payouts over the three-year period, and (3) the
December 31, 2010, market value of: (A) in-themoney value of stock options granted over the
three-year period, (B) time-based restricted stock
awards granted over the three-year period, and (C)
performance-based incentives (i) as paid for grant
cycles beginning and ending between 2008–2010,
and (ii) as granted for performance cycles that have
not yet been completed, assuming target performance based on actual stock prices as of the end of
the period, not as of the date of grant.25
Second, it shows ABM’s named executive officers’ realizable pay during the three-year period compared to the
realizable pay of peer group company executives during
that same period (ABM’s named executive officers’ realizable pay is at around 50th percentile of its peer group
companies’ named executive officers’ realizable pay).
Third, it shows ABM’s three-year TSR compared to the
three-year TSR of its peer group companies (ABM’s threeyear TSR is above the 75th percentile of its peer group
Chart 3
ABM Industries Inc. P4P Alignment
Realizable pay versus three-year total shareholder return performance
(2008–2010)
High Pay
75th
Realizable pay
(percentile of peer group)
incentive awards). The impact of the fundamental disconnects in the SCT itself has been exacerbated by proxy
advisers’ use of the table to determine P4P alignment.
The emerging good news is that institutional shareholders appear to be unpacking the SCT numbers in analyzing
P4P, and companies are drafting their proxy statements to
include disaggregated SCT quantitative information not
required by the SEC’s rules to help shareholders better
understand their P4P alignment.
ABM
50th
25th
Low
Performance
High
Performance
25th
Low Pay
50th
75th
3 year TSR
(percentile of peer group)
Source: ABM proxy statement, filed February 6, 2012, p. 24
(www.sec.gov/Archives/edgar/data/771497/000104746912000629/a2207018zde
f14a.htm#cy78802_compensation_risk_analysis).
7
companies). Finally, it shows that, among its peer group
companies, only six companies had a better P4P ratio (i.e.,
higher performance with lower named executive officer
compensation).
In another example of a P4P analysis using realizable pay,
Aecom Technology Corp. disclosed the absolute comparison between its realizable pay and company performance.
Aecom’s proxy statement, filed January 27, 2012, includes
two bar graphs showing its CEO’s realizable pay compared
to its four-year earnings before interest, taxes, and amortization (EBITA) and EPS performance, as shown below.26
Aecom defines realizable total compensation as salary
paid, actual annual incentive earned, and the value of all
equity incentives granted over the last four years based
on a 2011 fiscal-year-end stock price.27 The bar graphs
in Chart 4 illustrate several concepts. First, they show
that total compensation amounts calculated with grant
date fair values (or grant date total compensation) were
significantly higher than the total compensation amounts
calculated with realizable values (or realizable total
compensation). Second, they show that even though grant
date total compensation increased significantly every year,
the realizable total compensation only increased modestly
(and decreased during 2009). Third, they show that as
company’s financial performance (as measured by EBITA
and EPS) improved, CEO realizable total compensation
increased only modestly or decreased. As discussed below,
this is an important concept, as there is more to company
performance than TSR.
Other companies have shown their realizable pay numbers
as compared to their SCT numbers.28 For example, Staples
included tables in its 2011 proxy statement in support of
its contention that realizable pay was the most appropriate measure for assessing pay for performance.29 Table 2
provides Staples’ calculations of how its CEO total “actual”
compensation was determined.
If Staples’ shareholders had compared the “Total Actual
Pay” numbers to Staples’ SCT total compensation
numbers, they would have seen that the CEO’s pay was
$6,144,422 (realizable) in 2008, instead of $12,636,795
(as shown in the SCT); $11,962,056 in 2009, instead of
$10,759,001; and $10,819,582, instead of $15,165,193 in 2010.
Of course, there are limitations to the realizable pay
approach. It is still a hypothetical measure of pay, based
on a measure of pay at a specific point in time of the
amount that may be realized by the executive in the future.
Realizable pay, therefore, does not take into account
numerous future events that may occur (e.g., forfeiture of
compensation due to unattained performance goals) and
that could determine the amount of actual pay. Another
common concern about the realizable pay approach is the
difficulty stockholders may have comparing companies
because of the various ways of calculating and defining
realizable pay. Over time this should be less problematic
as companies and their pay consultants begin to develop
consensus around these issues.
Chart 4
Aecom CEO total compensation grant date and
realizable value versus EBITA*
Total
compensation
$000
Total compensation – grant date values
Total compensation – realizable values
EBITA
Aecom CEO total compensation grant date and
realizable value versus EPS*
EBITA
$MM
Total
compensation
$000
$6,000
500
450
400
350
300
250
$4,000
200
150
$4,000
$2,000
100
50
$2,000
$12,000
$10,000
$8,000
$0
0
2008
2009
2010
Total compensation – grant date values
Total compensation – realizable values
EPS
EPS
$12,000
$2.50
$10,000
2.00
$8,000
1.50
$6,000
1.00
.50
$0
2011
.00
2008
2009
2010
2011
*Excludes All Other Compensation, any change in Pension Value and all Deferred Compensation Earnings.
Source: Aecom Technology Corp. proxy statement, filed January 27, 2012, p. 29 (www.sec.gov/Archives/edgar/data/868857/000104746912000443/a2206923zdef14a.htm).
8
Table 2
Staples CEO total “actual” compensation
CEO compensation
2006
2007
2008
Base salary
$1,070,192
$1,108,775
$1,112,000
$1,112,000
$1,145,400
Annual performance-based cash bonus
$1,523,018
$621,006
$0
$1,344,291
$1,633,639
Long-term incentives
(paper value as of 1/28/11; SPLS=$22.32)
$1,711,944
$3,228,365
$4,548,459
$9,111,969
$7,562,565
Stock option
2009
2010
$0
$0
$0
$1,428,733
$1,969,028
$1,711,944
$1,554,365
$1,562,043
$1,754,508
$2,632,666
Performance-based share payout
$0
$0
$0
$2,942,312
$0
Performance-based cash accrual
$0
$0
$0
$0
$814,371
Time-based restricted stock
Special grants: normalized value
All other compensation
Total actual pay
$0
$1,674,000
$2,986,416
$2,986,416
$2,146,500
$437,018
$471,292
$483,963
$393,796
$477,978
$4,742,172
$5,429,438
$6,144,422
$11,962,056
$10,819,582
Difference from prior year
N/A
$687,266
$714,984
$5,817,634
-$1,142,473
% change
N/A
14.5%
13.2%
94.7%
-9.6%
TSR 100 (base year)
113
103
70
104
101
12.8%
-8.5%
-32.4%
49.5%
-3.3%
1-year TSR
Source: Staples Inc. proxy statement, filed April 25, 2011, p. 28 (www.sec.gov/Archives/edgar/data/791519/000104746911004020/a2203429zdef14a.htm
The use of “realized pay” A second approach adopted by
some companies to tell their P4P stories is the “realized
pay” approach. The realized pay approach is the easiest to understand, since it measures the compensation an
executive actually received during the year in question.
However, differences exist in companies’ approaches
to calculating realized pay on such issues as whether to
include the value of stock option shares vested during the
subject year and whether or not the executive exercised the
stock option. Some companies argue that realized pay is
the best approach to determine the relationship between
compensation and company performance over a specific
period.30 For example, CalSTRS has stated, “In the end,
you can’t take Black-Scholes to the bank,” and it also said
it would like to see additional tables in proxy statements
that describe realized pay to support better alignment with
performance.31
Table 3
HP Realized Pay
Name
Catherine A. Lesjak
R. Todd Bradley
Vyomesh I. Joshi
Year
Base
salary
($)
PfR plan
bonus
($)
Other
bonuses
($)
PRU awards
vested in
fiscal year(1)
($)
Options
and stock
awards
vested in
fiscal year(2)
($)
All other
compensation(3)
($)
Total
compensation
realized
($)
2011
825,000
679,143
—
—
1,187,745
101,507
2,793,395
2010
610,000
940,925
2,580,762
3,671,882
2,275,373
84,034
10,162,976
2011
850,000
464,457
—
—
1,551,640
105,447
2,971,544
2010
748,000
1,465,145
1,655,355
5,050,995
4,158,224
187,666
13,265,385
2011
850,000
638,355
—
—
1,159,257
76,215
2,723,827
2010
748,000
1,568,930
1,953,883
4,039,939
3,757,497
102,459
12,170,708
Source: Hewlett-Packard proxy statement, filed February 3, 2012, p. 57 (www.sec.gov/Archives/edgar/data/47217/000104746912000593/a2207020zdef14a.htm).
9
As compared to the total column in H-P’s SCT, the total
compensation realized tells a much different story. For
example, Ms. Lesjak’s 2011 and 2010 total compensation
shown in the SCT is $11,005,978 and $8,096,968, respectively, as compared to $2,793,395 and $10,162,976 for the
same years in the total compensation realized table. The
realized pay table shows the impact that the company’s
below-target financial performance in fiscal 2011 had on
realized compensation.
Other companies illustrate realized pay as compared to
company performance, both in absolute and relative terms.
For example, Baker Hughes Inc. included explanations and
charts in its proxy statement (Charts 5 and 6).34
Johnson & Johnson’s proxy statement also illustrated
realized pay as compared to company performance, as
measured by TSR. The graph and table both compare its
CEO’s realized pay and total SCT compensation to TSR for
2007–2011.35
Chart 5
Baker Hughes Inc. PEO compensation versus indexed TSR
The chart below illustrates an internal comparison of target and realized
compensation for our PEO versus the company’s total shareholder return
(TSR) over a three-year period. Target pay includes base salary, target
bonus, and target value of options, restricted stock, and performance units
for the year (all measured as of the dates of grant). Realized pay includes
base salary, bonus payout and grant date value of options, restricted stock,
and performance unit payout for the year. The chart below assumes that
$100 was invested in our common stock on December 31, 2008. It shows
the directional relationship between company stock performance and PEO
pay. Our three-year TSR has increased between 2008 and 2011, while the
target pay for our PEO has remained relatively constant. The chart also
reflects, over the three-year period, how realized pay for our PEO has
increased along with growth in TSR.
$18,000,000
$15,000,000
$200
Target pay
Realized pay
TSR
$180
$160
$140
$12,000,000
$120
$100
$8,000,000
The Johnson & Johnson line graph in Chart 7 illustrates
clearly that there is P4P alignment when looking at realized pay, compared to the company’s TSR. It also distinctly
shows that the pay opportunity shown in the SCT is not a
good measure of P4P alignment.
As with the realizable pay approach, there are limitations
to the realized pay approach. Again, there may be difficulty in comparing companies because of the different ways
of defining and calculating realized pay. Some companies
include in their calculations the value of stock options upon
a specified date (e.g., vesting date or fiscal year-end date),
whether or not exercised; therefore, even though the executive is shown to have realized the value of such options, if
the executive has not yet exercised the option, the value of
such option may decrease or increase in future years. Other
companies do not include the value of stock options if they
are not exercised, leading some to argue that not including
the values of such vested stock options unjustly underreports the executive’s compensation.
Chart 6
Relative pay versus relative TSR
(Baker Hughes versus industry peers)
The chart below illustrates the company’s three-year realized pay
percentile ranking and performance percentile ranking for our PEO versus
the company’s oilfield services peers, which include Halliburton Company,
National Oilwell Varco Inc., Schlumberger Ltd., and Weatherford
International Ltd. Realized pay includes base salary, bonus payout and
grant date value of options, restricted stock, and performance unit payout
for the year. The chart reflects that for the fiscal 2010 one-year period,
company TSR performance was in the upper quartile while our PEO’s pay
was in the lower quartile. For the fiscal 2008 through fiscal 2010
three–year period, our PEO’s pay was aligned with the company’s TSR
performance. Information on our peers for fiscal year 2011 was not
available at the time of filing the proxy statement.
Upper
Quartile
TSR Percentile Ranking
Some companies that have adopted the realized pay approach
prefer to show total realized pay as a supplement to the SCT,
using the same format.32 For example, Hewlett-Packard’s 2012
proxy statement includes a table showing realized pay.33
1-Year
Median
3-Year
$80
$5,000,000
$60
$40
$3,000,000
$20
$0
FY2008
$0
FY2009
FY2010
FY2011
Source: Baker Hughes Inc. proxy statement, filed March 2, 2012, p. 14
(www.sec.gov/Archives/edgar/data/808362/000119312512094143/
d306785ddef14a.htm).
10
Lower
Quartile
Lower
Quartile
Median
Upper
Quartile
Realized Total Direct Compensation Percentile Ranking
Source: Baker Hughes Inc. proxy statement, filed March 2, 2012, p. 14
Chart 7
Johnson & Johnson CEO pay versus performance
Total actual compensation & total SCT compensation
Millions
Total actual compensation
Total SCT compensation
TSR %
$50
15.0%
$45
$40
10.0%
$35
$30
5.0%
$25
$20
0.0%
$15
$10
-5.0%
$5
$0
2007
2008
2009
2010
2011
-10.0%
Table 4
CEO Pay Versus Performance
2007
2008
2009
2010
2011
Total actual compensation
$30,850,020
$7,626,372
$47,107,877
$24,913,562
$29,676,268
Total SCT compensation
$28,404,762
$29,127,432
$30,813,844
$28,720,491
$26,797,939
Total shareholder return
3.6%
(7.8%)
11.3%
(0.6%)
9.9%
Source: Johnson & Johnson proxy statement, filed March 14, 2012, p. 43 (www.sec.gov/Archives/edgar/data/200406/000119312512113826/
d282627ddef14a.htm#tx282627_16).
The Analysis of “Performance” in P4P
The use of TSR While the ISS and Glass Lewis P4P voting policies primarily use TSR movement to determine
company performance during any relevant period of time,
TSR does not tell the whole story of company performance.
Many argue that there are many companies with stock
prices lower than they should be because of undervaluation
in the stock market. For instance, small-cap companies
experience low trading volumes and TSR arguably does
not reflect the company’s performance during the period
of time in question.36 Still other companies have experienced favorable company financial performances, but TSR
may not show such company financial performance due
to the macroeconomic climate or stock market perceptions, largely outside of the companies’ and executives’
control.37 For example, Piedmont Natural Gas Company,
Inc.’s communication with certain shareholders, filed with
the SEC on February 22, 2012, argues that its 2008 stock
price should not be the starting point of the three-year TSR
measure because the financial crisis during that period of
time drove their stock prices to skyrocket due to the “flight
to quality” that occurred at that time.38
The use of financial performance metrics (often with TSR)
Accordingly, many companies argue that, although
TSR should be a factor in analyzing the performance of
a company, other factors should also be included, such
as whether revenue, net income, EBITDA, earnings per
share or return on capital or equity increased during the
relevant period. These companies contend that, over time,
improved company financial performance measured by
metrics such as these should and will result in the creation
of shareholder value. In the meantime, shareholders should
not penalize a company for alleged P4P disconnects that
result from sound policies and pay plans that were designed
to encourage improvements on these targeted metrics, but
which may not be rewarded by fickle and volatile stock
markets. These companies further argue that shareholders
should not focus exclusively on TSR, but on whether the
company’s compensation program aligns the attainment of
important financial performance objectives with executive
compensation.39 Still other companies argue that longer
TSR performance should be the measure and not the oneor three-year TSR. Longer TSR performance calculations
reflect long-term sustainable value as opposed to shortterm anomalies in stock price.40
11
The P4P “peer group”
The peer group to which a company is compared can dramatically affect the outcome of any P4P analysis. As discussed above, ISS will determine a company’s peer group
in 2012 by selecting 14 to 24 companies that are similar in
revenue (or assets for financial companies) and market cap
within the company’s GICS industry group.41 If the peer
group consists of companies that are comparatively too
small in terms of market cap, net income, or other company
financial measures or too different in terms of industry, the
P4P analysis may be skewed unfavorably against the company because smaller companies or companies in different
industries may have lower executive compensation numbers.42 Some companies are reaching out to shareholders to
explain their view that the peer group being used by ISS for
its P4P analysis isn’t appropriate.
For example, Qualcomm sent a letter to shareholders, filed
with the SEC on February 21, 2012, detailing its view on
why the ISS peer group pay should not be compared to
Qualcomm’s pay.43 The company takes “issue with the peer
group selected by ISS to benchmark our CEO compensation and believe that it fails to recognize that Qualcomm is
one of the largest companies in the United States by market
capitalization value, and fails to recognize our unique
business structure.”44 The letter continued, “Qualcomm
is among the largest and most profitable companies in the
S&P 500 and is significantly larger than most companies in
the ISS comparator group.”45 In a table format, Qualcomm
disclosed that in market capitalization and in net income
in terms of dollars, it was ranked second out of the 15 ISS
peer group companies. Using its internal compensation
peer group, Qualcomm ranked eleventh out of the 28 peer
group companies on both measures. Qualcomm reasoned
that because of ISS’ emphasis on revenue, it ranked as one
of the largest companies on all key size measures in the
ISS peer group; therefore, “it is no surprise that our CEO’s
compensation was viewed as being relatively higher.”46 If
ISS had used Qualcomm’s internal compensation peer
group, the letter stated, the company would have passed all
three ISS quantitative tests with “low” concern.47
The Walt Disney Company also sent a letter to its shareholders, filed with the SEC on March 1, 2012, criticizing
ISS’s peer group analysis and arguing that the only companies it should be compared to are “the five major publiclyheld entertainment companies whose management issues
and challenges most closely resemble those of The Walt
Disney Company.”48 “ISS has off-handedly and improperly
12
dismissed the board’s judgment that the five media companies with whom the company competes for talent are the
most relevant points of comparison to assess performance
and to structure a compensation package to retain a CEO,”
the letter stated. “ISS’s position is out of touch with the
reality that no company could attract and retain top management if its compensation packages are not competitive
with those offered by the companies with whom it competes
for talent.”49
Piedmont Natural Gas Company and National Fuel Gas
Company also sent letters to shareholders arguing that ISS
takes too simplistic an approach to its peer group formation and does not take into account the specific industries
in which the companies are involved.50 Piedmont noted that
its ISS peer group includes companies that are not in the
same line of business. “We believe that several of the peer
companies selected by ISS are diversified energy companies with operations outside of natural gas distribution
and therefore are not readily comparable to Piedmont,”
the letter stated. “Given the importance of the selected
peer group under ISS’ new pay for performance analysis,
we believe Piedmont’s shareholders deserve an appropriate
comparison group for measuring long-term shareholder
value creation.”51 National Fuel argued that using the GICS
classification to determine peer group companies is fatally
simplistic because it does not “accurately capture the
nature of an entity that operates in multiple lines of business that each have a significant contribution to its financial and share price performance… National Fuel’s current
GICS classification is reflective of its historic origin as a
Utility… [and] does not reflect the company’s transformation into a company with an oil and gas Exploration and
Production business segment.”52
Another argument against ISS peer group data analysis is
based on timing differences. National Fuel argued that ISS’
P4P analysis is internally flawed because the compensation
used in its peer group analysis is derived from proxy statement filings, which may be from the previous year. 53 This
causes a disconnect because ISS is comparing current year
compensation in the subject company to prior year compensation in peer group companies.54 National Fuel stated,
“for at least 77 percent of the ISS selected peer group, the
[ISS] Report compares 2010 compensation to 2011 performance, while comparing National Fuel’s 2011 compensation to its performance in fiscal 2011… if the apples to
oranges comparison is intended, then the report should
clearly draw attention to that fact and explain it.”55 Adobe
Systems Inc. also argued in a letter to its shareholders that
“the ISS report compares compensation data primarily
from calendar year 2010 for all of ISS’ selected peer companies to primarily their 2011 total stockholder return… in
comparison, ISS compares our fiscal 2011 compensation to
our 2011 TSR performance”56 The letter continues, “This
asymmetry leads to results that are decidedly skewed, in
part, due to significant improvements in economic conditions since 2010. ISS’ report fails to draw attention to this
apples-to-oranges comparison and neglects to explain its
effects.”57
Given the influence of ISS and Glass Lewis recommendations on SOP vote results and the increased focus on P4P
linkages, companies should consider whether they would
benefit from including additional disclosure of the reasons for their internal peer group selection for comparing
performance and pay. Even though ISS or Glass Lewis may
use a different peer group, a strong internal peer group
analysis could help shareholders to take a more critical
look at the question than if the company makes no such
analysis, and set the stage for the company to file supplementary proxy materials if necessary.
Some Practical P4P Recommendations
for Companies
In view of the growing importance of P4P, boards and
compensation committees ought to consider the following
steps to help support their P4P stories and garner support
for their say–on-pay votes:
•
Understand the short- and long-term strategic and tactical
objectives of the company, based on its individual circumstances, as well as the management performance objectives
necessary to achieve the company’s business and financial
objectives, and design short- and long-term executive compensation plans that encourage the executives to achieve
those objectives.
•
At least annually, evaluate whether the company’s business
and financial objectives have changed or should be revised,
whether the company’s pay plans are working as intended,
and whether/how they should be adjusted to work better to
achieve the desired objectives.
•
Convey concisely and persuasively in the CD&A that P4P is
important in setting compensation, and that the company
actively reviews and adjusts its performance plans based on
changing circumstances.
•
Evaluate the performance of the company’s incentive plans
at least annually over a longer period (at least three to
five years) to determine the extent to which the realizable
pay generated for management is aligned with the actual
achievement of business and financial objectives and the
creation of shareholder value, as well how the company’s
realizable pay, financial performance, and value creation
align with its peers.
•
Perform or commission simulations of ISS and/or Glass
Lewis P4P tests to determine their likely determinations and
recommendations to shareholders.
•
Review disclosure by peer group companies about their P4P
alignment.
•
Draft clear, concise descriptions in the executive summary
portion of the CD&A of business, financial, and shareholder
return performance; how pay plans are designed to drive
these; and how the plans have generated realizable pay over
time that is aligned with the company’s performance and the
performance and pay of its peers.
•
Use plain English, charts, and graphs in the CD&A executive
summary to tell the company’s P4P story.
•
In the CD&A, actively anticipate any likely P4P objections
by the proxy advisers to lay the groundwork for shareholder
engagement and supplemental proxy materials that dispute
the advisers if necessary.
•
Engage directly with shareholders on P4P matters to the
extent possible.
•
Be prepared to file supplemental proxy materials in response
to negative recommendations from the proxy advisers.
13
Endnotes
1
Say on pay votes and say on frequency votes are required by Section
951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank).
2
See James D.C. Barrall and Alice M. Chung, “Say on Pay in the 2011
Proxy Season: Lessons Learned and Coming Attractions for U.S.
Public Companies,” Director Notes, July 2011 (www.lw.com/upload/
pubContent/_pdf/pub4251_1.pdf). For final statistics on the 2011 proxy
season, see Mark Borges, “This Week’s “Say on Pay” Vote Results - The
Final Tabulation,” Borges Proxy Disclosure Blog, February 26, 2012
(subsciption required www.compensationstandards.com).
3
In 2011, ISS recommended that its investor clients vote against
SOP resolutions at a rate of approximately 12 percent. Glass Lewis’
negative recommendation rate was approximately 17 percent. In 2011,
shareholder support for say on pay proposals was 25 percent lower at
companies that received negative recommendations from ISS. Glass
Lewis had fewer investor clients and its negative recommendations had
substantially less impact at most companies.
4
Semler Brossy Consulting Group, “2012 Say on Pay Results,” March 28,
2012 (www.semlerbrossy.com/wp-content/uploads/2012/03/SBCGSOP-2012-03-28.pdf).
5
Section 953(a) of Dodd-Frank requires that the SEC adopt rules which
will require US public companies to disclose information that shows
the relationship between compensation paid to the executive officers
named in their proxies and the companies’ financial performance,
taking into account shareholder returns, which disclosure may include
graphic as well narrative presentation.
6
Barrall and Chung, “Say on Pay in the 2011 Proxy Season,” July 2011.
7
Gary Hewitt and Carol Bowie, “Evaluating Pay for Performance
Alignment, ISS’ Quantitative and Qualitative Approach,”
December 20, 2011, (www.issgovernance.com/sites/default/files/
EvaluatingPayForPerformance_20111219.pdf).
8
Ibid.
9
Ibid.
10 For a more detailed discussion on the analysis of total CEO pay,
TSR and the analysis of pay and performance under the 2012 P4P
policy, see ISS, “2012 US Compensation Policy Frequently Asked
Questions,” January 25, 2012, (www.issgovernance.com/policy/2012/
USCompensationFAQ).
11 See, for example, Equilar, “Simulating ISS P4P Tests,” 2012 (www.
equilar.com/webinar/2012-simulating-iss-p4p-tests/EquilarSimulating-the-ISS-P4P-Tests.pdf).
12 Relying on the 4-digit GICS may produce up to 65 comparably-sized
companies, and the 2012 P4P policy does not provide guidance on
how to select a “peer group” of 14 to 24 of these companies. For
more information, see Steve Kline, “Grappling with Peer Groups,”
January 26, 2012 (www.towerswatson.com/newsletters/executive-paymatters/6292).
13 See, for example, David F. Larcker, Allan L. McCall, and Bryan Tayan,
“What Does It Mean for an Executive to ‘Make’ $1 Million?” Rock
Center for Corporate Governance at Stanford University Closer Look
Series: Topics, Issues and Controversies in Corporate Governance
No. CGRP-22, December 14, 2011 (http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1972627##); CalSTRS, “Lessons Learned:
The Inaugural Year of Say-on-Pay,” January 2012 (http://www.calstrs.
com/CorporateGovernance/lessons_learned_say_on_pay.pdf); Ira
Kay, “Realizable Pay: An Effective Measure of CEO Comp,” Agenda,
November 7, 2011(www.agendaweek.com/c/270141/32191; Josh
Martin, “Summary Vs. Realized: The Pay Debate,” February 6, 2012,
Agenda, (www.agendaweek.com/c/308392/35892; Ira T. Kay,
14
Brian J. Lane and Bentham Stradley, “Evaluating the ISS Test of CEO
Pay for Performance for Say-on-Pay Votes: A Comparison of Pay
Opportunity and Realizable Pay,” PayGovernance, March 2012 (http://
paygovernance.com/Includes/pdf/realizablePay.pdf).
14 Kay, Lane and Stradley, “Evaluating the ISS Test of CEO Pay for
Performance for Say-on-Pay Votes,” March 2012.
15 Equilar, “2012 Executive Compensation Outlook Report” (www.
equilar.com/knowledge-network/research-reports/2012-researchreports/2012-Executive-Compensation-Outlook-Report.php).
16 Equilar press release, “Equilar’s New Pay-for-Performance Analytics
Provides Unprecedented Insight Into ‘Say on Pay’ Issues: Counsel
of Institutional Investors Signs on as First Client to Use Equilar PayFor-Performance Suite,” January 10, 2012 (http://www.equilar.com/
company/press-release/index.php).
17 CalSTRS, “Lessons Learned,” January 2012.
18 See text of letter sent by Larry Fink, BlackRock’s Chairman and CEO,
encouraging engagement, January 17, 2012 (https://www2.blackrock.
com/webcore/litService/search/getDocument.seam?contentId=11111
58937&Source=SEARCH&Venue=PUB_INS).
19 Joann S. Lublin “Disney Takes on Proxy Adviser,” Wall Street Journal,
March 12, 2012, (http://online.wsj.com/article/SB1000142405
2702304450004577277851562921924.html); The Walt Disney
Company DEFA14A, filed March 1, 2012 (www.sec.gov/Archives/
edgar/data/1001039/000119312512091621/d310012ddefa14a.htm)
and The Walt Disney Company DEFA14A, filed March 1, 2012 (www.
sec.gov/Archives/edgar/data/1001039/000119312512091625/
d310008ddefa14a.htm).
20 For a listing of companies filing supplemental proxy filings to address
negative say on pay vote recommendations, see Semler Brossy
Consulting Group, “2012 Say on Pay Results,” March 28, 2012, p. 12.
As of March 27, 2012, all company responses have addressed P4P
analytics issues.
21 SEC Final Rule, “Executive Compensation and Related Person
Disclosure,” August 29, 2006, text at footnotes 123 and 124, pp. 48-49.
22 Kay, “Realizable Pay,” November 7, 2011.
23 Kay, Lane, and Stradley “Evaluating the ISS Test of CEO Pay for
Performance for Say-on-Pay Votes,” March 2012.
24 ABM Industries, Inc. proxy statement, filed February 6, 2012 (www.
a2207018zdef14a.htm). For other examples, see Johnson &
Johnson proxy statement, filed March 14, 2012 (www.sec.
gov/Archives/edgar/data/200406/000119312512113826/
d282627ddef14a.htm#tx282627_16); Black Box Corp. proxy
statement, filed June 23, 2011(www.sec.gov/Archives/edgar/
data/849547/000095012311061117/l42461def14a.htm), Deere and
Co. proxy statement, filed January 13, 2012 (www.sec.gov/Archives/
edgar/data/315189/000120677412000114/deereandco_def14a.htm).
Deere defined total realizable compensation as including the “BlackScholes value as of October 31, 2011 of any stock options granted over
the three-year period,” which may have the same concerns as the SCT
stock option values because such analysis is also forward-looking and
measured in terms of opportunity. See also International Paper Co.
proxy statement, filed April 8, 2011 (www.sec.gov/Archives/edgar/
data/51434/000119312511092389/ddef14a.htm).
25 ABM Industries, Inc. proxy statement, p. 24.
26 Aecom Technology Corp. proxy statement, filed January 27, 2012
a2206923zdef14a.htm).
27 Ibid.
28 For example, see Alcoa Inc. proxy statement, filed March 12, 2012
29 Staples, Inc. proxy statement, filed April 25, 2011 (www.sec.
gov/Archives/edgar/data/791519/000104746911004020/
41 As discussed above, Glass Lewis will be relying on peer groups
developed using Equilar’s algorithms; however, because the new
analytics are not yet effective, the effect of Glass Lewis’ new
approach to peer groups is currently unknown. Historically, Glass
Lewis has declined to list the peer group companies to which it
compares the subject company, which led to less specific criticisms,
as compared to the ISS peer group methodology. Perhaps this will
change under its new policy.
30 See Johnson & Johnson proxy statement, Eaton Corp. proxy
statement, filed March 16, 2012, (www.sec.gov/Archives/edgar/
data/31277/000119312512117906/d265459ddef14a.htm) and NCR
Corp. proxy statement, filed March 12, 2012, (www.sec.gov/Archives/
edgar/data/70866/000119312512108449/d283224ddef14a.htm).
42 For examples, see Piedmont Natural Gas Company, Inc.
DEFA14A, National Fuel Gas Company DEFA14A, Qualcomm
Incorporation DEFA14A (www.sec.gov/Archives/edgar/
data/804328/000119312512068644/d304063ddefa14a.htm) and
The Walt Disney Company DEFA14A at (www.sec.gov/Archives/edgar/
data/1001039/000119312512091621/d310012ddefa14a.htm).
31 CalSTRS, “Lessons Learned: The Inaugural Year of Say-on-Pay” (www.
calstrs.com/CorporateGovernance/lessons_learned_say_on_pay.
pdf).
43 Qualcomm Incorporation DEFA14A.
44 Ibid.
32 For examples, see Navistar International Corp. proxy statement,
filed January 20, 2012 (www.sec.gov/Archives/edgar/
data/808450/000119312512018714/d259799ddef14a.htm);
General Electric Co. proxy statement, filed March 9, 2012 (www.
d301131ddef14a.htm#toc301131_18); Avery Dennison Corp. proxy
statement, filed March 9, 2012 (www.sec.gov/Archives/edgar/
data/8818/000119312512106393/d262340ddef14a.htm); and
Exelon Corp. proxy statement, filed February 22, 2012 (www.
45 Ibid.
33 Hewlett-Packard proxy statement, filed February 3, 2012, (www.
51 Piedmont Natural Gas Company, Inc. DEFA14A.
34 Baker Hughes Inc. proxy statement, filed March 2, 2012 (www.
d306785ddef14a.htm). Also see L 3 Communications Holdings Inc.
proxy statement, filed March 12, 2012 (www.sec.gov/Archives/edgar/
data/1056239/000119312512108221/d313326ddef14a.htm).
35 See Johnson & Johnson proxy statement.
36 For example, Nutraceutical International Corp. DEFA14A (www.sec.
gov/Archives/edgar/data/1050007/000110465912001790/a122645_1defa14a.htm).
46 Ibid.
47 Ibid.
48 The Walt Disney Company DEFA14A.
49 Ibid.
50 Piedmont Natural Gas Company, Inc. DEFA14A and National Fuel Gas
Company DEFA14A.
52 National Fuel Gas Company DEFA14A.
53 Ibid.
54 Ibid.
55 Ibid.
56 Adobe Systems Inc. DEFA14A (www.sec.gov/Archives/edgar/
data/796343/000110465912023071/a12-8458_2defa14a.htm).
57 Ibid.
37 For examples, see Actuant Corp. DEFA14A (www.sec.gov/Archives/
edgar/data/6955/000119312511354823/d273993ddefa14a.htm)
and Johnson Controls, Inc. DEFA14A (www.sec.gov/Archives/edgar/
data/53669/000119312512009252/d281518ddefa14a.htm).
38 See Piedmont Natural Gas Company Inc. DEFA14A,
filed February 22, 2012 (www.sec.gov/Archives/edgar/
data/78460/000110465912011677/a12-5638_1defa14a.htm).
39 For examples, see Parametric Technology Corp. DEFA14A,
filed January 26, 2012 (www.sec.gov/Archives/edgar/
data/857005/000085700512000006/defa14a.htm) and
Nutraceutical International Corp. DEFA14A.
40 For examples, see Piedmont Natural Gas Company, Inc. DEFA14A and
National Fuel Gas Company DEFA14A at (www.sec.gov/Archives/
edgar/data/70145/000119312512077357/d304333ddefa14a.htm).
15
About the Authors
James D.C. Barrall is a partner in the Los Angeles office of
Latham & Watkins LLP, is the Global Co-Chair of the firm’s Benefits
and Compensation Group and specializes in executive compensation, employee benefits and related corporate governance and
disclosure matters. He has more than 35 years of experience in
representing companies, Compensation Committees and Boards
of Directors in designing, negotiating, documenting and disclosing executive compensation and benefit arrangements of all types
in many contexts. Mr. Barrall is a frequent author and lecturer
on executive compensation, corporate governance and disclosure topics and is a co-author of the chapter on extensions of
credit to directors and officers in the American Bar Association’s
Practitioner’s Guide to the Sarbanes-Oxley Act. He has served as a
contributing editor, columnist and op-ed writer for various publications, including Agenda, Executive Compensation Strategies and
the Los Angeles and San Francisco Daily Journals. Mr. Barrall has
lectured at the UCLA Law School, the UCLA Anderson School of
Management and the Aresty Institute of Executive Education at
the Wharton School, University of Pennsylvania. He is ranked by
Cambers USA and The Legal 500 as one of the country’s leading
benefits and compensation attorneys.
Julie D. Crisp is an associate in the San Francisco office of
Latham & Watkins LLP and specializes in executive compensation and employee benefits matters. Ms. Crisp advises public and
private companies on the establishment of compensation arrangements for executives and employees, including employment, severance and change in control agreements, equity and non-equity
incentive compensation arrangements, and deferred compensation
arrangements. Ms. Crisp also counsels companies on matters relating to the employee benefits and compensation aspects of initial
public offerings, mergers and acquisitions and financings, including
golden parachutes and health and welfare plan issues. In addition,
she has served as a co-author for law firm client alerts and corporate governance commentaries relating to executive compensation
and employee benefits matters.
This Director Notes expresses the authors’ views and does not
necessarily reflect those of Latham & Watkins LLP.
Alice M. Chung is a senior associate in the Silicon Valley office of
Latham & Watkins LLP and specializes in executive compensation
and employee benefits matters, as well as company representation.
Ms. Chung counsels public and private companies on implementing
various types of compensation and benefit arrangements, including employment agreements, equity plans and agreements, change
in control arrangements and incentive compensation. In addition,
Ms. Chung advises on the employee benefits and executive compensation issues of corporate mergers and acquisitions and initial
public offerings, including issues relating to severance, retention
and golden parachute arrangements, equity-based compensation,
employment agreements, COBRA, 401(k) plans and health and
welfare plans. Ms. Chung frequently authors firm client alerts and
corporate governance commentaries relating to public company
governance and disclosure matters.
16
About Director Notes
About the Executive Editor
Director Notes is a series of online publications in which The
Conference Board engages experts from several disciplines of business leadership, including corporate governance, risk oversight,
and sustainability, in an open dialogue about topical issues of concern to member companies. The opinions expressed in this report
are those of the author(s) only and do not necessarily reflect the
views of The Conference Board. The Conference Board makes no
representation as to the accuracy and completeness of the content.
This report is not intended to provide legal advice with respect to
any particular situation, and no legal or business decision should be
based solely on its content.
Melissa Aguilar is a researcher in the corporate leadership department at The Conference Board in New York focusing on issues of
corporate governance, regulatory compliance, and risk management. Prior to joining The Conference Board, she was a contributor
for more than five years at Compliance Week, where she reported
on a variety of corporate governance topics, including proxy voting
developments, executive compensation, risk management, and
shareholder activism. Her work has also appeared in Bloomberg
Brief: Financial Regulation newsletter. She previously held a number
of editorial positions at SourceMedia Inc. Aguilar is a graduate of
Binghamton University.
About the Series Director
About The Conference Board
Matteo Tonello is managing director of corporate leadership at
The Conference Board in New York. In his role, Tonello advises
members of The Conference Board on issues of corporate governance, regulatory compliance, and risk management. He regularly
participates as a speaker and moderator in educational programs
on governance best practices and conducts analyses and research
in collaboration with leading corporations, institutional investors,
and professional firms. He is the author of several publications,
including Corporate Governance Handbook: Legal Standards and
Board Practices, the annual U.S. Directors’ Compensation and
Board Practices and Institutional Investment reports, Sustainability
in the Boardroom, and the forthcoming Risk Oversight Handbook.
Recently, he served as the co-chair of The Conference Board
Expert Committee on Shareholder Activism and on the Technical
Advisory Board to The Conference Board Task Force on Executive
Compensation. He is a member of the Network for Sustainable
Financial Markets. Prior to joining The Conference Board, he practiced corporate law at Davis, Polk & Wardwell. Tonello is a graduate
of Harvard Law School and the University of Bologna.
The Conference Board is a global, independent business membership and research association working in the public interest. Our
mission is unique: to provide the world’s leading organizations with
the practical knowledge they need to improve their performance
and better serve society. The Conference Board is a nonadvocacy,
not-for-profit entity, holding 501(c) (3) tax-exempt status in the
United States.
For more information on this report, please contact:
Melissa Aguilar, researcher, corporate leadership at 212 339 0303 or [email protected]
THE CONFERENCE BOARD, INC. www.conferenceboard.org
AMERICAS +1 212 759 0900 / [email protected]
ASIA-PACIFIC + 65 6325 3121 / [email protected]
EUROPE/AFRICA/MIDDLE EAST + 32 2 675 54 05 / [email protected]
SOUTH ASIA +91 22 23051402 / [email protected]
THE CONFERENCE BOARD OF CANADA +1 613 526 3280 / www.conferenceboard.ca
© 2012 by The Conference Board, Inc. All rights reserved. Printed in the U.S.A.
The Conference Board® and the torch logo are registered trademarks of The Conference Board, Inc.

Proxy Season 2012: The Year of Pay for

Transcription

Documents pareils

Call Document

Quantification of Moral Damages in Personal Injury Cases

Wall Street On Track To Award Record Pay - Maths-Fi

Workplace Democracy in the Lab

Folie 1

Bruno Kaiser - Ontario Securities Commission

COMMISSION DELEGATED REGULATION (EU) No 526/•2014

Convening Notice

A review of pay-for-performance programs in the inpatient sector in