Title: Robert B. Jones, JD, CPA, CEBS, CSCP
1 Philadelphia Chapter of NACD
2014 Compensation UpdateFollowing the Right
Path in 2014 Robert B. Jones, JD, CPA, CEBS,
CSCP CEO, Innovative Compensation and Benefits
Concepts, LLC Philadelphia, PA May 14th,
2014
- Robert B. Jones, JD, CPA, CEBS, CSCP
- CEO, Innovative Compensation and Benefits
Concepts, LLC - Conshohocken, PA
- November 22, 2011Robert B. Jones, JD, CPA, CEBS,
CSCP - CEO, Innovative Compensation and Benefits
Concepts, LLC - Philadelphia, PA
- Februrary 22, 2011
2Quotable
- Despite our concerns regarding the goals of the
original provision, we understand that as a
matter of U.S. law, SEC is mandated to pass a
rule implementing it. In a previous comment
letter..sent Nov. 18, 2010, NACD noted an
unfavorable cost-benefit ratio for the rule,
with no perceivable benefits and significant
costs, and urged the SEC to implement this
provision with extreme care. We still believe
this to be true. NACD letter of 12/1/13 - The pushback is that this calculation between
top executive pay and median employee pay is
actually a really hard calculation to make. It
can be extremely hard with a global corporation
with hundreds of thousands of employees or even
millions of employees in the case of a company
like Wal-Mart to figure out what exactly the
median employee's paid, especially since some
work part time, some may work in other nations. - Lynn Stout, Cornell Law
Professor, NPR, 10/26/13
3Todays Agenda
- 1. Brief Review of executive pay practice trends
for 2014. - 2. Brief Review of best practices for Say on Pay
in 2014. - 3. The New Dodd-Frank SEC Pay Ratio Rule--Value
or Folly?
4The Changing Compensation EnvironmentCompanies
Continue to Re-Think their Compensation Strategy
Innovative Compensation and Benefits Concepts
5The changing compensation environment-rethinking
the compensation strategy
Significant Forces Affecting Executive
Compensation in 2014
- Regulators
- SEC
- FASB and IASB
- Financial
- Manage earnings expense
- Manage dilution
- Cost vs. perceived value
- Economic conditions
- Lawmakers
- Sarbanes-Oxley Act
- Deferred comp reform
- More from Congress?
Impact on Future Designs
- Stakeholders
- Shareholders
- Proxy advisory firms
- Employees/Retirees
- Labor unions
- Corporate governance
- Stock Exchanges
- New proposed governance rules
- Listing requirements
- Media
- Heightened vigilance and skepticism
6Major Issues in 2014
- In a perfect storm 3 main issues are surfacing
at once - How can organizations be confident that their
compensation programs are fully aligned with 2014
business objectives? - What does the current regulatory environment mean
for the future design of executive remuneration
programs? - How can organizations be sure that their rewards
programs attract, retain, and motivate their top
executives for the long term?
71. Executive pay practice trends for 2014
Innovative Compensation and Benefits Concepts
8Key Equity Compensation Trends from 2013
- For the 3rd year in a row, long-term performance
shares increased in prevalence. According to one
major survey, they are now used by 81 of the Top
250 (up from 75 in the 2012 report), and are the
most prevalent form of equity. Restricted stock
usage has also increased this year, from 58 to
63, while the use of stock options and long-term
cash plans remains largely unchanged. - Companies are still emphasizing a portfolio
approach to their long-term incentive programs
(LTIPs), with an increasing number of companies
using 3 LTI grant types (39), while those
granting one or two types declined. - Total Shareholder Return (TSR) has become the
most prevalent performance metric (for the first
time) for LTIPs, featured in 50 of all
performance awards, as companies continue to look
for ways to tie executive compensation to
shareholder experience at the urging of proxy
advisory firms and shareholder advocates. - Overall, the design of LTIPs has become more
complex as the number of grant types, number of
performance award measures, and prevalence of the
concurrent use of absolute and relative measures
all increased. - Source Frederic W. Cook Co. 2013 Top 250
report
9Current Equity Pay Trends ---2
- Because of the rising stock market last year,
while the total dollar value of LTIP awards
increased, the number of shares required for
those awards decreased. - The use of full-value awards continues to
increase, with companies showing a median equity
mix of 67 full-value awards and 33 appreciation
awards based on the number of shares granted, and
86 full-value awards and 14 appreciation awards
based on the fair value of equity awarded in the
year. - For the near term, it seems clear that full-value
awards, particularly performance-based awards,
will continue to be the primary award vehicle in
the LTIP portfolio of large U.S. companies.
However, while decreasing in influence, stock
appreciation awards are in no danger of
disappearing and continue to have a place in the
LTI mix. The evolution in equity award usage will
continue. - Source Frederic W. Cook Co. 2013 Top 250
report
10So whats the problem ?......
- Major Disconnect between the views of investors
and the views of directors - Nearly 3 in 4 investors (72) say that the
executive pay model in the US has led to
excessive CEO pay levels while only 1 in 5
directors (20) say the executive pay model has
led to excessive pay levels - 7 in 10 directors (70) say the executive pay
model at most companies is closely linked to
company strategy, compared with just 1 in 3
investors (34). - Less than one-fourth of directors (23) say
executive pay is overly influenced by management,
versus two-thirds of investors (66). - Source Towers Watson, January 16, 2014 Evolving
Director and Investor Views of Executive Pay in
the Say-on-Pay Era
11Current Equity Pay Trends --3
- According to one survey, stock grants are most
common, followed by performance shares/units. - Stock Grants/Awards 81
- Performance Shares/Units 72
- Stock Options/SARs 54
- Source Deloitte/ NASPP Annual 2013 SurveyTop
Trends in Equity Plan Design
12Say on Pay for 2014
Innovative Compensation and Benefits Concepts
13Executive Summary
- Key Takeaways from the Past Year
- Compensation committees have become more
disciplined and effective in analyzing and
designing executive compensation programs. - The adoption of Say-on-Pay for publicly-traded
companies and additional shareholder scrutiny of
executive compensation arrangements have
definitely played a role in the increase of
granting performance-based awards. - Most companies, even those with good Say-on-Pay
shareholder voting results, have been proactively
reaching out to shareholders over the past few
years to interactively discuss, review and
analyze what their key shareholders think about
executive compensation.
14Say on Pay Results
- 3,363 companies held Say on Pay votes in 2013
- 73 companies have failed with an average 60
Against vote - (Two additional companies received less than 50
For but considered the vote a win because For
votes outnumbered Against votes due to
abstentions). - 15 companies failed previous votes
- 70.6 of companies have received a greater than
90 For vote - 8.4 Average Against vote
- 1.8 Abstentions
- One company, Looksmart, received 100 Against
on their Say on Pay vote
15Say on Pay Results ---2
- Total fail rate 2.2
- Average vote for those who passed 91
- Average vote for those who failed 37
- gt90 For vote 70.6
- 70-90 For vote 20.8
- 50-70 For vote 6.2
- lt50 For vote 2.3
- - - -
16Say on Pay Results---3
- ISS lt70 approval rating---will have to address
any perceived shortfalls in procedures, votes,
etc. - Glass-Lewis lt75 of vote, will be looking for
an explanation from the Company
17NACD Pay for Performance research
- December, 2013 NACD Paper on P4P
- 1. Need for Standard Definitions
- 2. Need for consistent time horizons oriented to
the Long Term - 3. Need for Disclosure beyond the CEO
- 4. Importance of Board Judgment and Company
Context
18Pay for Performance is Still Key
- Bottom Line
- Companies need to stress in their CDA/proxies
the linkage between pay-for-performance and what
they have accomplished as a management team
during. the past year. Pay-for-performance is now
the mantra for compensation consultants and
investorsand compensation committees too. - Companies also need to show how their pay
practices have aligned with the performance of
the Company and the performance of the pay
packages for the NEOs
19Important to Also View Pay for Performance from
the Proxy Advisors Perspective
- Public companies also must develop a clear
understanding of the perspective of proxy
advisory services that analyze company practices
and advise institutional investors on the voting
of their shares. - One of the most well-known proxy advisors, (ISS)
uses detailed criteria to assess companies
executive pay practices - These criteria include
- The long-term relationship between CEO pay and
total shareholder return - The portion of total compensation delivered via
performance-based vehicles - The use, type and disclosure of performance
measures and goals - The existence of poor pay policies and
practices. -
20CEO Pay Ratio Controversy
Innovative Compensation and Benefits Concepts
21The Pay-Ratio Rule in Broad Terms
-
- The pay ratio rule is a provision in the
Dodd-Frank Act that requires the SEC to publish
rules requiring public companies to disclose the
ratio of the CEOs total compensation to the
median employees total compensation. - The average multiple of CEO compensation to that
of rank-and-file workers at companies in the SP
500 Index is 204, according to data compiled by
Bloomberg.
22What do opponents and proponents say ?
- Critics say the rule will do the following
- The ratio will be misleading
- The pay ratio is a headline statistic, not an
actionable tool - Compliance will be costly
- Supporters say the rule will do the following
- Provide greater transparency
- Reduce pay
23 Tempest Brewing Many Business Groups Urge
Repeal of CEO-to-Worker Pay Ratio Disclosure Rule
- The provision was reportedly a last-minute
addition to the Dodd-Frank legislation. - Many business groups have been fighting this
provision. - A proposed rule was issued on September 18, 2013
with the SEC voting 3-2 along partisan lines. - A 60-day comment period for the SEC began with
the publication of the rule. Comments were due by
December 2nd, 2013, but are expected well into
2014.
24Many Business Groups Urge Repeal of CEO-to-Worker
Pay Ratio Disclosure Rule ---2
- On the day the proposed rule was announced, the
SEC said it had already received 22,860 comment
letters and a petitions sender that was not
disclosed with 84,700 signatories. Many of the
comment letters were form letters. The actual
number of unique letters was 260, fairly evenly
divided between pro and con. - From the pro rule camp, the SEC received
letters from labor groups such as AFL-CIO, UAW
Retiree Medical Benefits Trust, (left-leaning)
Institute for Policy Studies, and the Independent
Drucker Institute, Calvert Investment Management,
and Americans for Financial Reform. - From the against the rule camp, the SEC
received letters from NACD, American Bar
Association and numerous law firms, Society of
Human Resources Management (SHRM), Towers Watson,
Pay Governance, Meridian Compensation Partners,
and the Society of Corporate Secretaries and
Governance Professionals.
25Business Groups Urge Repeal of CEO-to-Worker Pay
Ratio Disclosure Rule --3
- The new rule, required under the Dodd-Frank Act,
would not prescribe a specific methodology for
companies to use in calculating a pay ratio.
Instead, companies would have the flexibility to
determine the median annual total compensation of
its employees in a way that best suits its
particular circumstances. - In a letter sent to SEC Chair Mary Schapiro,
nearly two dozen business groups asked the agency
to "engage in expanded public outreach and
consideration of alternatives" before moving
forward with implementing the new rule. - The proposed rule would not specify any required
calculation methodologies for identifying the
median employee in terms of total compensation
for all employees. Instead, it would allow
companies to select a methodology that is
appropriate to the size and structure of their
own businesses and the way they compensate
employees.
26Business Groups Urge Repeal of CEO-to-Worker Pay
Ratio Disclosure Rule --4
- For example, a company would be permitted to
identify the median employee based on total
compensation using either its full employee
population or a statistical sample of that
population. - A company could, for example, identify the median
of its population or sample - Using annual total compensation as determined
under existing executive compensation rules. - Using any consistently used compensation measure
such as compensation amounts reported in its
payroll or tax records. A company would then
calculate the annual total compensation for that
median employee in accordance with the definition
of total compensation set forth in the SECs
executive compensation rules.
27CEO-to-Worker Pay Ratio Rule--Early Returns
- For total direct compensation overall, one
consulting firm found that the median CEO pay
multiple among all companies studied is 25.8x,
although there was considerable variability
within the studied companies. - While they found no compelling differences
between industry groupings, they found that the
CEO pay multiple is most closely correlated to
organizational size the larger the company the
higher the multiple. - The second most influential factor for CEO pay
multiples appears to be a companys degree of
globalization. The finding was that the CEO pay
multiple to non-US employees is more than twice
as large as the multiple to US employees. - Source Radford
28CEO pay has clearly risen....
29But, the CEO job today is much more demanding
- Research from some sources shows that the CEOs
pay package compared to the size of the SP 500
has tracked its growth very closely since World
War II. (Columbia University Professor
Guadalupes study using proxies since WWII). She
argues that 3 factors increased company size, a
strong market for generalists, and global
competition have helped to cause the rapid
increase in CEO pay over the past 30 years. - The CEOs job is extraordinarily complex in 2014,
encompassing many more skillsets than in 1980,
nearly 35 years ago. The world is much more
complicated today. One more quote Where is the
outrage at professional athletes who make that
kind of money? Managing an international company
with thousands of employees is more important
than winning a championship. There is a
similarity though, in that its worth paying top
dollar for the very best. If you have a billion
dollars a year in revenue, you don't want to
skimp on who you put in charge of that.----Adam
Allen post
30The view in support of the SEC pay ratio rule
- What is so important about the pay ratio numbers
? - Peter Drucker, the father of business management,
famously said the CEO-to worker salary ratio
should not exceed 201, which is what existed in
the United States in 1965. Beyond that, managers
will see an increase in 'resentment and falling
morale,' said Drucker. (Reportedly, Andrew
Carnegie also had his own ratio in mind). - Many supporters say that the rule will continue
to draw public attention to the disparity in
executive pay compared to the rank and file, even
causing executive pay to not continue to rise at
such a high rate. - A few experts have suggested that the IRS make
CEO pay a non-deductible business expense when it
is higher than a given number such as 100 times
the minimum wage.
31The view in support of the SEC pay ratio rule ---2
- Across the pond--------
- The movement in Europe is to make say on pay
votes not merely advisory but mandatory. In Great
Britain, where it has become a binding vote, UK
firms responded to negative say on pay voting
outcomes by removing controversial CEO pay
practices criticized as rewards for failure
(e.g., generous severance contracts) and
increasing the sensitivity of pay to poor
realizations of performance. - Swiss voters, (from a traditionally
business-friendly and conservative European
country) on November 24th, 2013 decisively
rejected a proposal to cap pay for top
executives. Final results showed that votes
against were 65.3 to 34.7. The ground-breaking
proposal would have meant executives would have
been unable to earn more in a month than their
lowest-paid workers in a year (12x). In March,
voters approved a measure that boosted
shareholders power over managerial salaries and
banned one-off bonuses so-called "golden
hellos" and "golden goodbyes".
32The view in support of the SEC pay ratio rule ---3
- California lawmakers are proposing higher tax
rates on companies that pay their chief executive
officers more than 100 times the wages of a
typical worker. The bill, which would likewise
give tax breaks to companies with lower ratios,
passed the Senate Governance and Finance
Committee yesterday in a 5-2 vote, with Democrats
in favor and Republicans opposed. California
would be the first state to penalize or reward
publicly traded corporations for their
compensation practices. - Whole Foods is reportedly one of the few public
companies to disclose that it maintains a fixed
ratio between executives and worker pay (cash
compensation limited in 2013 to 19 times the
average annual wage).
33NACDs comments (12/1/13 letter to the SEC)
- Our views reflect recent surveys of our members,
as well as the values implicit in the findings of
NACDs thought leadership groups such as our Blue
Ribbon Commissions and Fortune 500 committee
chair advisory councils. This letter also
incorporates perspectives from NACD chapter
leader roundtables, director forums, director
education programs, and other events focused on
promoting effective governance practices. - The pay ratio provision appears to have two main
goalsone related to information and one related
to social change. Its original sponsor wrote it
so that investors and the general public know
whether public companies pay practices are fair
to their employees, especially compared to their
highly compensated CEOs. In addition, some
supporters clearly hope that the disclosure will
have the ultimate effect of narrowing
differentials in pay. We do not believe that the
rule accomplishes the first goal, and question
the appropriateness of the second.
34Whats the view opposing the SEC pay ratio
rule?---4
- Several pieces of legislation have called for the
repeal of the act in whole or in part - HR 46---filed by Michelle Bachmann, (R-MN)
- S. 20----filed by Sen. David Vitter (R-LA)
- The US House Financial Services Committee voted
in favor of the Burdensome Data Collection Relief
Act (HR 1135), sponsored by Rep. Bill Huizenga
(R-MI) to repeal the entire law. - 2 main legal cases are pending
- A group of banks challenged the law in State
National Bank of Big Spring v. Geithner (appealed
to higher court) in September the attorney
generals of Michigan, Oklahoma and South Carolina
joined the case as plaintiffs - National Association of Manufacturers (NAM),
Chamber of Commerce, and the Business Roundtable
in July sued the SEC in the lower court and got
rejected NAM has filed a notice of intent to
appeal the July 23rd,decision.
35Actions to Consider
Innovative Compensation and Benefits Concepts
36What Actions Should Employers Consider ?
- Review compensation strategy in light of current
environment - Review your Compensation Committees usage of
peer groups and how they fit into the overall
evaluation of executive pay. - Examine your employees situation from a Total
Rewards standpointconsider the total picture - Promote stock ownership for employees wherever
possibleowning a piece of the rock is important - Review your Board governance and compensation
practices - Monitor the ongoing programs carefully each year
based on your Compensation Philosophy and your
targets
37Any Questions ???