The Economist (October 11-17, 2003): “CEO’s are selected for their cleverness and determination, and they have directed these qualities at boosting their own pay. The more the public spotlight is thrown on one aspect of bosses’ remuneration, it seems, the more it rises elsewhere.”
Goldman Sachs First-Half Compensation Climbs to $11.4 Billion Bloomberg (July 14, 2009) Goldman Sachs Group set aside $11.4 billion for compensation and benefits in the first half of 2009, up 33 percent from a year earlier and enough to pay each employee $386,429 for the period. The compensation figures were released today with the firm’s record second-quarter earnings results. Revenue jumped 31 percent to $23.19 billion in the first half and the firm set aside 49 percent to cover its largest expense, compensation and benefits. The number of employees fell to 29,400 from 29,800 at the end of March, New York-based Goldman Sachs said today. After setting a Wall Street profit and pay record in 2007, Goldman Sachs cut compensation 46 percent last year as the financial crisis slashed revenue and the firm accepted government support. The firm repaid $10 billion to the U.S. Treasury last month, freeing itself from restrictions on year- end bonuses. Even so, a compensation bonanza at a company that received taxpayer support could stoke political anger with the U.S. economy in recession. And then lost again
The Act: Would require public companies to hold an annual non-binding shareholder vote on executive compensation plans; and an additional non-binding advisory vote if the company awards a new golden parachute package while simultaneously negotiating the purchase or sale of the company. March 2007: Introduced in the U.S. House by Congressman Barney Frank (HLS ’77). Passes by a vote of 269-134 in April. April 2007: Introduced in the U.S. Senate by then-Senator Barack Obama (HLS ’91). July 2009: still pending in the U.S. Congress. The Shareholder Vote on Executive Compensation Act
Recent Developments Pay Czar Gets Broad Authority Over Executive Compensation Wall Street Journal (June 11, 2009) The Obama administration scrapped the $500,000 salary cap it proposed for executives at firms receiving large amounts of federal assistance but appointed a pay czar to review, reject and even set pay levels -- with no appeal. Kenneth Feinberg, the administration's new "special master for compensation," will have broad authority over compensation for senior executives and the top 100 earners at American International Group, Bank of America, Citigroup, General Motors, GMAC LLC, Chrysler LLC, and Chrysler Financial. All seven companies got what the government calls "exceptional assistance" from the Troubled Asset Relief Program. Mr. Feinberg's decisions won't be subject to appeal, and the Treasury Department said he will follow certain principles in making his decisions, including whether compensation rewards risk, allows a firm to remain competitive, is comparable to peers, tied to long-term performance and contributes to the value of the firm. Mr. Feinberg won't receive any government compensation himself. Meanwhile, Treasury Secretary Timothy Geithner outlined his push to reform compensation practices at all firms, including those that didn't receive bailout funds, but shied away from imposing specific rules. Instead, the Obama administration issued voluntary compensation guidelines that tie pay more closely to long-term performance.
A Pay Cap? New York Times, January 4, 2009,Should Congress Put a Cap on Executive Pay? By ROBERT H. FRANK IT’S no wonder that voters’ outrage over exorbitant executive pay is mounting. After all, the government just had to bail out financial firms that paid big bonuses last year to many of the same executives who helped precipitate the current financial crisis. Nor is it any wonder that Congress is considering measures to limit executive pay — not just in the financial industry, but economywide. So far, the only formal legislative proposal is “say on pay,” which would require a nonbinding shareholder vote on executive pay proposals. But critics complain that this would have little impact and are hungry for stronger measures.executive payfinancial crisis One popular proposal would cap the chief executive’s pay at each company at 20 times its average worker’s salary. To be sure, executive pay in the United States is vastly higher than necessary. So why not limit executive pay? The problem is that although every company wants a talented chief executive, there are only so many to go around. Relative salaries guide job choices. If salaries were capped at, say, $2 million annually, the most talented candidates would have less reason to seek the positions that make best use of their talents.
More troubling, if C.E.O. pay were capped and pay for other jobs was not, the most talented potential managers would be more likely to become lawyers or hedge fund operators. Can anyone think that would be a good thing? In large companies, even small differences in managerial talent can make an enormous difference. Consider a company with $10 billion in annual earnings that has narrowed its C.E.O. search to two finalists. If one would make just a handful of better decisions each year than the other, the company’s annual earnings might easily be 3 percent — or $30 million — higher under the better candidate’s leadership. That same candidate couldn’t possibly make as much difference at a company with only $10 million in earnings. That’s why companies where executive decisions have the greatest impact tend to outbid others in hiring the ablest managers. C.E.O. compensation at large companies grew sixfold between 1980 and 2003, the same as the market-cap growth of these businesses. Beyond growth in company size, executive mobility has also increased. In past decades, about the only way to become a C.E.O. was to have spent one’s entire career with the company. With only a handful of plausible internal candidates, pay was essentially a matter of bilateral negotiation between the board and the chosen. Increasingly, however, hiring committees believe that a talented executive from one industry can also deliver top performance in another. This new spot market for talent has affected executive salaries in much the same way that free agency affected the salaries of professional athletes.
Since the fall of the former Soviet Union, no one has seriously challenged the wisdom of relegating a high proportion of society’s most important tasks to private markets. And the market-determined salary of a job generally offers the best — if imperfect — measure of its importance. THE financial industry, however, may be an exception. A money manager’s pay depends primarily on the amount of money managed, which in turn depends on the fund’s rate of return relative to other funds. This provides strong incentives to invest in highly leveraged risky assets, which yield higher average returns. But as recent events have shown, these complex assets also expose the rest of us to considerable systemic risk. On balance, then, the high pay that lures talent to the financial industry may actually cause harm. So if Congress wants to cap executive pay in financial institutions receiving bailout money, well and good. Elsewhere, however, the more prudent response to runaway salaries at the top is to raise marginal tax rates on the highest earners, irrespective of occupation. In answering voter outrage about executive pay, Congress should recall the words of Marcus Aurelius: “How much more grievous are the consequences of anger than the causes of it.” http://www.nytimes.com/2009/01/04/business/economy/04view.html?_r=2 http://www.nytimes.com/2009/01/04/business/economy/04view.html?_r=2
December 2009 – SEC acts In December, the SEC adopted rules that require companies to discuss and analyze their overall compensation policies and practices for employees generally, including non-executive officers, if the risks arising from the incentives created by these policies and practices are reasonably likely to have a material adverse effect on the company as a whole. The SEC has stated that its prior rules already required disclosure in the compensation discussion and analysis (”CD&A”) section of the proxy statement to the extent that these risk considerations are a material aspect of the company’s compensation policies or decisions for named executive officers. The new rules include examples of the types of situations that potentially could trigger disclosure as well as the types of information to be disclosed if disclosure is required. It will be necessary to brief the compensation committee about whether any non-executive compensation policies may incentivize conduct that is reasonably likely to contribute materially to a company’s business risks, and management will need to review the policies in order to make that assessment. In addition, the compensation committee should be comfortable that it understands any significant risks that may result from incentives created by compensation policies and decisions applicable to named executive officers and other senior executives.
The SEC’s new rules also include enhanced disclosure requirements relating to compensation consultants. Motivated by concerns that consultants’ relationships with management may compromise the independence of the advice they provide compensation committees, several institutional investors have called for the elimination of these potential conflicts while others have called for increased disclosure of consultants’ services. The new rules require companies to provide enhanced disclosure about compensation consultants that provide advice to the board, compensation committee or management regarding executive or director compensation if the consultants also provide other services to the company... in excess of $120,000 during the fiscal year. http://blogs.law.harvard.edu/corpgov/2010/02/23/considerations-for-directors-in-the-2010-proxy-season/#more- 7264http://blogs.law.harvard.edu/corpgov/2010/02/23/considerations-for-directors-in-the-2010-proxy-season/#more- 7264
SEC Approves Enhanced Disclosure About Risk, Compensation and Corporate Governance Washington, D.C., Dec. 16, 2009 — The Securities and Exchange Commission today approved rules to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies. Beginning in the upcoming annual reporting and proxy season, the new rules will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made. "Good corporate governance is a system in which those who manage a company — that is, officers and directors — are effectively held accountable for their decisions and performance. But accountability is impossible without transparency," said SEC Chairman Mary L. Schapiro. "By adopting these rules, we will improve the disclosure around risk, compensation, and corporate governance, thereby increasing accountability and directly benefiting investors." In particular, the new rules require disclosures in proxy and information statements about: The relationship of a company's compensation policies and practices to risk management. The background and qualifications of directors and nominees. Legal actions involving a company's executive officers, directors and nominees. The consideration of diversity in the process by which candidates for director are considered for nomination. Board leadership structure and the board's role in risk oversight. Stock and option awards to company executives and directors. Potential conflicts of interests of compensation consultants. The new rules, which will be effective Feb. 28, 2010, also require quicker reporting of shareholder voting results. (from SEC website)
Specifically, the Commission's approved rules will: Require Disclosure of a Company's Compensation Policies and Practices as They Relate to the Company's Risk Management: The SEC approved a rule that would help investors determine whether a company has incentivized excessive or inappropriate risk-taking by employees. Among other things, it would require a narrative disclosure about the company's compensation policies and practices for all employees, not just executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. Smaller reporting companies will not be required to provide the new disclosure. Revise the Summary Compensation Table: The SEC approved revisions to the reporting of stock and option awards in the Summary Compensation Table and the Director Compensation Table to better reflect the compensation committees' decisions with regard to these awards. The amended rule requires companies to report the value of options when they are awarded to executives (the aggregate grant date fair value), instead of the current requirement to report the annual accounting charge. A special instruction addresses performance based awards to address concerns that the new rule might discourage use of these awards. Enhance Disclosure About Compensation Consultants: The SEC approved rules requiring disclosure about the fees paid to compensation consultants and their affiliates in certain circumstances. This is intended to provide investors with information to help them better assess the potential conflicts of interest a compensation consultant may have in recommending executive compensation. The final rules are consistent with the rule proposal, but include exceptions for circumstances that should not raise the potential conflicts of interest.
SEC’s philosophy Speech by SEC Staff: Executive Compensation Disclosure: Observations on the 2009 Proxy Season and Expectations for 2010 by Shelley Parratthttp://www.sec.gov/news/speech/2009/spch110909sp.htm The SEC's role in this area is not to regulate how companies compensate their executives, but rather to see that investors have the critical disclosure they need to make informed investment and voting decisions. The Compensation Discussion and Analysis is essential to providing investors with meaningful insight into the compensation policies and decisions of the companies in which they choose to invest. The CD&A is where a company tells its story about why it made the decisions it made.
Corporate and Financial Institution Compensation Fairness Act of 2009 In July, the House of Representatives approved the “Corporate and Financial Institution Compensation Fairness Act of 2009,” which would require that any compensation consultants or other similar advisors to the compensation committees of listed companies meet independence standards to be developed by the SEC. Moreover, on an annual basis, companies would have to disclose in their proxy statements whether or not they retained an independent compensation consultant. The Senate Committee on Banking, Housing & Urban Affairs began considering a bill sponsored by Senator Christopher Dodd (D-CT) in November called the “Restoring American Financial Stability Act of 2009″ that contains a similar provision.
Say on Pay Boards and compensation committees should prepare for the strong possibility that federal law will soon require public companies to give their shareholders an advisory vote on executive compensation, also known as “say on pay.” The “Corporate and Financial Institution Compensation Fairness Act” (discussed above) and the “Restoring American Financial Stability Act of 2009″ (discussed above) each contain a provision mandating say on pay votes at public companies but with an implementation schedule that would delay its effectiveness until after the main 2010 proxy season. In the meantime, companies that have received majority or high votes on say on pay shareholder proposals in 2009 should be preparing to address say on pay now, as they are likely to face pressure from institutional investors to act voluntarily. Whether or not they already have received a say on pay shareholder proposal, companies should assess their compensation practices and compensation disclosures, with a particular focus on the CD&A. Revisions that may be appropriate due to the prospect of say on pay include reorganization of the CD&A to highlight the connection between performance and specific pay decisions, enhanced disclosure of performance measures and “total compensation” calculations, and more informative explanations of benchmarking standards and of the bases for significant compensation decisions. (dated 2/23/10) http://blogs.law.harvard.edu/corpgov/2010/02/23/considerations-for-directors-in-the- 2010-proxy-season/#more-7264 http://blogs.law.harvard.edu/corpgov/2010/02/23/considerations-for-directors-in-the- 2010-proxy-season/#more-7264
Since 2007, shareholder proposals requesting that companies provide for an annual advisory vote on executive compensation have become increasingly popular and have received high votes. According to RiskMetrics Group, say on pay shareholder proposals received approximately 46% support at 76 meetings in 2009, including 24 proposals that received majority support. Shareholders have submitted 40 say on pay proposals for 2010 as of January 29. Moreover, in the past several years, at least 41 companies, including Intel Corp., Motorola Inc., Verizon Communications Inc. and Goldman Sachs Group Inc., have agreed to hold an advisory vote on executive compensation, either voluntarily undertaking to provide for these votes or doing so in response to shareholder proposals. In addition, approximately 400 companies that received funds under the Troubled Asset Relief Program (”TARP”) were required by law to hold a say on pay vote at shareholder meetings held in 2009. In 2009, company-sponsored say on pay votes garnered high support for the companies’ executive compensation programs, with approximately 88% of votes cast at 139 meetings for which results are available, according to data from RiskMetrics Group. Notably, although RiskMetrics Group recommended votes “against” the company say on pay proposals in a number of instances, there has yet to be a majority vote against a company’s say on pay proposal.
Some companies have taken different approaches to soliciting shareholder input on executive compensation. A number of companies, including Ingersoll Rand Co. Ltd. and Pfizer Inc., have held meetings with their large shareholders to discuss governance issues, including executive compensation. In April 2009, Schering- Plough Corp. submitted a survey to its shareholders to obtain their views on a variety of compensation issues, and Amgen Inc., Lockheed Martin Corp., and Northrop Grumman Corp. have posted web-based surveys for their shareholders to provide feedback on their executive compensation practices. In addition, some shareholders have advocated an alternative to annual advisory votes on executive compensation, with the Carpenters Union Pension Trust submitting shareholder proposals calling for an advisory vote on executive compensation once every three years and additional steps designed to provide greater meaning to and feedback from the process. Microsoft Corporation announced that it would hold an advisory vote on executive compensation once every three years, beginning with its annual meeting this past November, while Pfizer Inc. and Prudential Financial, Inc. have indicated that they will provide shareholders with a say on pay every other year starting this year.
TIME’s discussion and analysis: By most accounts, Goldman Sachs is doing pretty well for a financial services firm these days: its stock is down only 14% over the past year, compared to 29% for the currently embattled industry overall, and it earned $11.6 billion in profits in its most recent fiscal year. So does that mean CEO Lloyd Blankfein deserves the $70 million pay package he received for 2007? Maybe. Or maybe not. But at the very least shouldn't public shareholders — the people who actually own the company — get a say? Timothy Smith thinks so, which is why on Thursday, at Goldman's annual meeting, the senior vice president of Walden Asset Management, which owns 65,000 shares of the Wall Street giant, will stand up in front of thousands of fellow shareholders and make the case for being able to vote on the firm's compensation practices. Smith's gambit is just the latest salvo in the ongoing battle over executive pay, but this time there's a crucial difference: the pressure isn't coming just from politicians and populist crusaders, but also from big institutional shareholders like mutual funds, pensions and foundations — a constituency companies often find difficult to ignore.ongoing battle over executive pay Investors this year have asked for so-called "say on pay" at some 100 companies, including Coca-Cola, IBM, General Motors, Exxon Mobil, Citigroup, Anheuser-Busch, General Electric and Wal-Mart. As companies hold their annual meetings throughout April and May, some 70 different institutional investors will be pushing to add an annual provision to let shareholders vote up or down on how companies pay their top five executives. "This isn't an attack on companies in general," says Smith. "This is good governance, just like ratification of auditors or majority vote for directors."
The founders of the "say on pay" movement probably wouldn't put it so diplomatically. In the fall of 2005, the American Federation of State, County and Municipal Employees (AFSCME), a union that runs a $850 million pension fund, was trying to figure out what to do about CEO pay — especially at Home Depot, one of its holdings, where then CEO Bob Nardelli was collecting a nearly $32-million pay package for the year, while the company's stock languished. "We had reached a level of frustration because it seemed CEO pay, no matter what we did as activist investors, kept spiraling out of control," says Richard Ferlauto, AFSCME's director of pension and benefit policy. The quintessential example: after Congress passed a law that gave companies incentives to cap CEO base salaries at $1 million a year, the issuance of stock options, an alternative way to pad pay packages, skyrocketed — to the point that by 2005, average large-company CEO compensation had reached 262 times the average employee's take, compared with 24 times in 1965, according to the Economic Policy Institute. So AFSCME decided to try an approach that had been codified into law in Great Britain three years earlier: "say on pay" votes, a method meant to harness investor sentiment into a unified message more forceful than any one shareholder complaining to a company's board of directors could deliver.
Most companies, not surprisingly, aren't so amenable to the idea. The core argument against the movement is that CEOs get paid a market rate and say-on-pay votes undermine the very nature of corporate governance — a board of directors charged with luring and keeping the best talent. In the rebuttal statements to say-for-pay proposals found in their annual proxies, companies lay out all sorts of counter-arguments. IBM says there's no way that shareholders can know what's an appropriate pay practice since they're not privy to competitive information like which executives are receiving other job offers. Coca-Cola stresses that shareholders already have a way to deal with pay practices they find unpalatable: don't vote for members of the board when they come up for re-election. Perhaps the savviest argument companies make is that there are mixed results about what, exactly, say-on-pay votes accomplish. In the U.K. there have been some resounding successes — most notably GlaxoSmithKline, which revamped its pay practices, aligning compensation with performance, after a "no" vote of 50.7% in 2003. (Its CEO at the time was on track to earn about $18 million.) Yet various studies have shown that in the years since say-on-pay went into effect, CEO compensation has continued to rise, anywhere between 5% and 11% annually. But in a couple of important ways, the system seems to be working. In a recent paper, Fabrizio Ferri and David Maber of Harvard Business School document how, since say-on-pay went into effect in the U.K., CEO compensation has become more likely to fall when operating performance does. "'Say on pay' in the U.K. was effective in achieving one of its major goals," the authors write, "to reduce the 'rewards for failure' through a stronger link between pay and realizations of poor performance." That effect has been most pronounced at the firms handing out the biggest pay packages. http://www.time.com//business/article/0,8599,1729480,00.html http://www.time.com//business/article/0,8599,1729480,00.html
SEC’s responses to No-action requests by companies The Stockholder's Proposal requests that SUPERVALU's Board of Directors: adopt a policy that provides shareholders the opportunity at each annual meeting to vote on an advisory resolution, prepared by management, to ratify the compensation of the named-executive officers listed in the proxy statement's Summary Compensation Table. http://www.sec.gov/divisions/corpfin/cf-noaction/14a- 8/2010/geraldarmstrong021810-14a8-incoming.pdfhttp://www.sec.gov/divisions/corpfin/cf-noaction/14a- 8/2010/geraldarmstrong021810-14a8-incoming.pdf rejection of BofA’s no-action request on similar matter http://www.sec.gov/divisions/corpfin/cf-noaction/14a- 8/2010/kennethsteiner012910-14a8.pdfhttp://www.sec.gov/divisions/corpfin/cf-noaction/14a- 8/2010/kennethsteiner012910-14a8.pdf
C. Scrutiny of Specific Pay Practices Companies and boards also need to be cognizant of the policies that the major proxy advisory firms apply in assessing companies’ executive compensation practices. In particular, RiskMetrics Group considers certain pay practices to be “most problematic,” which could result in a negative voting recommendation regardless of other factors. These practices include: (1) employment contracts with multi-year compensation guarantees; (2) overly generous new hire packages for CEOs; (3) abnormally large bonus payouts without justifiable performance linkage or proper disclosure; (4) pension plan or supplemental executive retirement plan payouts that include in the benefit calculation additional years of unearned service or performance-based equity awards; (5) certain perquisites for former executives (including lifetime benefits, car allowances and personal use of corporate aircraft) and current executives (including extraordinary relocation benefits); (6) certain severance or change in control provisions (including payments exceeding three times base salary plus bonus, single-triggered change in control payments and new or materially amended contracts providing for modified single-triggered change in control payments or excise tax gross-ups); (7) tax reimbursements on executive perquisites; (8) dividends or dividend equivalents paid on unvested performance-based equity awards; (9) executives using company stock in hedging activities; and (10) repricing or replacing underwater stock options without prior shareholder approval. http://blogs.law.harvard.edu/corpgov/2010/02/23/considerations-for-directors-in-the-2010-proxy-season/#more-7264
D. “Hold-’Til/Through-Retirement” Provisions Initially, shareholder activists sought to require senior executive officers to retain substantial amounts of their equity in a company until they left the company”so-called “hold-’til-retirement” requirements. More recently, the focus has shifted to “hold-through-retirement” requirements, which would require stock ownership for one or two years following an executive’s separation. These requirements are designed to align the interests of executives with those of shareholders, to discourage executives from taking unnecessary or excessive risks shortly before their retirement in order to maximize short-term stock returns to the detriment of long-term value, and to promote long-term succession planning. While “hold-through- retirement” requirements reflect some of the same policies underlying traditional stock ownership guidelines/requirements, their advocates do not view stock ownership requirements as an acceptable substitute. According to data from RiskMetrics Group, shareholders have submitted 11 hold-through-retirement shareholder proposals for 2010 as of January 29.
“Clawback” Policies “Clawback” policies are policies providing for the recoupment of bonuses and other incentive compensation payments made to individuals (usually senior executives) based on financial results that are later found to be inaccurate or based on individuals’ failure to comply with certain aspects of their employment agreements, such as non-compete and no-solicitation clauses. Since 2004, shareholders have submitted a total of 39 shareholder proposals requesting that companies adopt clawback policies. More than half of the companies that received these proposals previously had restated their financial results. A Fall 2009 survey by Equilar, Inc. indicates that among Fortune 100 companies, the prevalence of disclosed clawback policies increased from 17.6% in 2006 to 42.1% in 2007, 64.2% in 2008 and 73% in 2009. The “Shareholder Empowerment Act of 2009,” introduced in June in the House of Representatives, would require public companies to adopt clawback policies to recoup performance-based compensation paid based on inaccurate financial results. The “Restoring American Financial Stability Act of 2009″ (discussed above) would require public companies to adopt clawback policies to recoup performance-based compensation paid to executive officers in the event the company is required to restate its financial results and the compensation was paid during the three-year period preceding the date of the restatement. This provision would not require any misconduct on the part of the executive officer.