On September 26, 2011, Institutional Shareholder Services (ISS) released 2011-2012 Policy Survey Summary Results, which summarizes the responses ISS received as part of its annual policy survey. The summary is available at:
http://www.issgovernance.com/files/PolicySurveyResults2011.pdf
Under its US policy questions involving compensation, the survey summary indicates:
- A majority of investor respondents indicated that they considered both pay that is significantly higher than peer levels (66%) and pay levels that have increased disproportionately to the company’s performance trend (88%) to be very relevant.
- A majority (57%) of investor respondents indicated that they “sometimes” consider discretionary annual bonus awards (those not based primarily on the attainment of pre-set goals) to be problematic if the awards are not aligned with company performance.
- There was no clear majority view among investor respondents as to what level of opposition to a say-on-pay vote should require an explicit response from the board regarding improvements to pay practices, but the highest level of investor respondents (36%) indicated that level of opposition should be “More than 20%” while the next highest level of investor respondent support (24%) was for “More than 30%”, while both “More than 40%” and “More than 50%” each received support from 14% of the investor respondents.
- In the area of equity plan proposals that would exceed ISS’s shareholder value transfer cost, the survey indicates that a majority of investor respondents are “Somewhat” and “Very much” in favor of the factors tested by ISS to act as mitigating factors:
- Above median long-term shareholder return
- Low average burn rate relative to peers
- Double-trigger CIC equity vesting
- Reasonable plan duration based on historical share usage
- Robust vesting requirements (>5 years).
- Similarly, where the shareholder value transfer cost is not excessive, a majority of investor respondents are “Somewhat” and “Very much” in favor of weighing certain factors against the plan proposal:
- Liberal CIC definition with automatic award vesting
- Excessive potential share dilution relative to peers
- High CEO or NEO “concentration ratio”
- Automatic replenishment (“Evergreen funding”)
- Prolonged poor financial performance
- Prolonged poor shareholder returns
- A large majority of investor respondents indicated that single-trigger equity vesting (79%) upon or accelerated vesting at the board’s discretion after (71%) a CIC was not appropriate
- Finally, an overwhelming majority (80%) of investor respondents indicated that an equity plan coming to shareholder vote for the first time after an IPO (in order to qualify for Section 162(m) tax deductibility) should be evaluated under the same guidelines as a “standard” equity plan, even if no new shares are requested.
We don’t know yet how these survey responses will fit into ISS’s 2012 Policy Updates. But, I think we can start to see the glimmerings of what ISS might be considering, especially in the area of CIC protections and additional factors to weigh for and against equity plan proposals. We’ll have to wait to see what level of opposition ISS will view as triggering a company duty to respond to shareholders as well as how some of these other responses will play out in the policy updates. ISS might even have a few surprises in store for us for 2012! So we’ll have to wait and see what gets released as the 2012 Policy Updates in October or November 2011.
A new research report, Executive Decisions, Making the Most of Compensation Plans To Build and Protect Personal Wealth, from AllianceBernstein addresses equity compensation from the executive’s perspective.
One of the more interesting things detailed in the report is the finding that the optimal exercise time for stock options is when their time value is in the range of 10%-30% of total value. This could result in option exercises that occur well before the end of the option term. Many advisors had previously advised that executives should hold onto options until they are just about to expire in order to maximize the potential return from the stock options.
Additionally, the report compiles AllianceBernstein’s key findings, which include:
- How to evaluate and compare different types of stock-based compensation
- How to integrate stock-based compensation into lifetime wealth planning, using a “core and excess capital” framework
- A method for determining how much single-stock risk is appropriate in your portfolio, and, if you need to diversify, a framework for choosing which holdings to divest and which to keep
- Strategies for integrating single stock with estate and charitable planning
- Determining when and how to use non-qualified deferred compensation plans
- Best uses of 10b5-1 plans
- How to make well-informed decisions regarding Net Unrealized Appreciation (NUA) elections and 83-b elections
The report can be downloaded from:
On August 1, 2011, ISS published its preliminary report of the 2011 proxy season. The report is available for download here (free registration required):
http://www.issgovernance.com/docs/2011USSeasonPreview
Key findings of the report include:
- Average support for Say on Pay votes was 91.2%
- Say on pay votes failed at 37 Russell 3000 companies (1.6% of total companies reporting vote results)
- The 168 companies that received greater than 30% opposition on their say on pay votes in 2011 will receive greater attention in 2012
- Shareholder proposals seeking board declassification averaged support of 73.5%, and won majority supports at 22 of 23 large-cap companies
- A significant decline in shareholder opposition to directors; as of June 30, only 43 directors at Russell 3000 companies failed to win majority support compared to 87 for the same time period in 2010
On July 6, 2011, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) adopted final regulations[1] to implement Section 210(s) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which authorizes financial regulatory authorities to recoup compensation when a current or former senior executive or director is “substantially responsible” for the failed condition of a covered financial company.
While these regulations apply only to financial institutions covered by the FDIC regulations, other public companies would do well to keep an eye on these rules. Why? It is my opinion that lawmakers have had an easier time pushing reforms for financial institutions given the current environment. However, once implemented, these new rules have influenced the regulations applicable to public companies more broadly, as was the case with the implementation of the Say on Pay vote requirement which was first introduced at financial institutions that received assistance under TARP. So, it is possible that some of the concepts applicable to clawbacks for financial institutions covered by the FDIC regulation will end up being applied to public companies more broadly.
[1] Available at: http://www.fdic.gov/news/board/06july2011no7.pdf
Given the SEC delay announced Friday, July 29, 2011 (details can be found here) for certain still-pending Dodd-Frank implementation matters, the following chart gives the currently expected timing for the implementation of the compensation-related provisions of Dodd-Frank:
