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Title: Annual Compensation Update Author: SAMELIA WHITE Last modified by: Bob Created Date: 7/28/2003 7:55:45 PM Document presentation format: On-screen Show (4:3) – PowerPoint PPT presentation

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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

2
Quotable
  • 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

3
Todays 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?

4
The Changing Compensation EnvironmentCompanies
Continue to Re-Think their Compensation Strategy
Innovative Compensation and Benefits Concepts
5
The 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

6
Major 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?

7
1. Executive pay practice trends for 2014
Innovative Compensation and Benefits Concepts
8
Key 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

9
Current 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

10
So 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

11
Current 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

12
Say on Pay for 2014
Innovative Compensation and Benefits Concepts
13
Executive 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.

14
Say 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

15
Say 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
  • - - -

16
Say 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

17
NACD 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

18
Pay 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

19
Important 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.

20
CEO Pay Ratio Controversy
Innovative Compensation and Benefits Concepts
21
The 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.

22
What 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.

24
Many 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.

25
Business 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. 

26
Business 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.

27
CEO-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

28
CEO pay has clearly risen....
29
But, 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

30
The 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.

31
The 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".

32
The 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).

33
NACDs 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.

34
Whats 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.

35
Actions to Consider
Innovative Compensation and Benefits Concepts
36
What 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

37
Any Questions ???
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