After having had some time to review and reflect on the 2011-2012 Policy Survey Summary of Results (see prior blog entry, ISS Releases 2011-2012 Policy Survey Summary Results), I wanted to share where these survey results might lead ISS for its 2012 Policy Updates with regards to its compensation policies:
- Make companies that don’t respond and explain what they have done to address compensation concerns when there is a SOP vote that gets less than 80% support (some chance could be set at 70% or 75%) subject to some heightened review, probably factored into ISS’s vote recommendations on directors under the (poor) communications practices analysis piece.
- Introduce a new policy with respect to discretionary annual bonuses – perhaps ISS will just weigh it as a factor as part of its subjective pay-for-performance analysis.
- Equity compensation plan proposal policy could get additional factors that ISS will weigh FOR/AGAINST such proposals. This could make the evaluation of equity plan proposals a bit more subjective, but perhaps these factors would only come into play when a bright line test is failed, i.e., SVT cost exceeds a company’s allowable cap. However, some factors may get weighed even when the allowable cap isn’t exceeded, somewhat like problematic pay practices, i.e., factors like Liberal CIC definition, excessive potential voting power dilution relative to peers, High CEO/NEO concentration ratio, evergreen features, prolonged poor financial performance, and prolonged poor shareholder returns.
- Make single-trigger CIC equity vesting in the following cases enough to recommend AGAINST an equity plan proposal:
- Automatic accelerated vesting upon a CIC
- Accelerate vesting at the board’s discretion after a CIC
- ISS could decide to evaluate all equity compensation plan proposals under its equity compensation plan policies (including the SVT model) even if the proposal is made just after an IPO to gain 162(m) qualification. Possibly could be expanded to cause ISS to analyze any equity compensation plan proposal under its equity compensation plan policy regardless of whether any new shares are being requested.
- ISS might expand the problematic pay practices policy further to not only apply to new and materially amended agreements but also to existing/formerly grandfathered agreements that include problematic pay practices such as excise tax gross-ups. That might be a stretch, but this past year (for the 2011 Policy Updates issued in late 2010) ISS effectively applied its policy change retroactively at least to company actions since the prior proxy (1/1/2010 for calendar-year companies), and ISS has been focused on getting rid of excise tax gross-ups. This might not happen for 2012, could be in 2 years (i.e., for 2014) since that would then put them out 3 years from the introduction of the semi-retroactive problematic pay practices policy with respect to agreements and the term of most employment agreements is 3 years.
All of the above are just my own speculations. I have heard nothing about any of these these things actually being introduced as policy changes for 2012. But, they do represent my best guess as to what ISS might change for 2012 based on the recently released policy survey results. We’ll just have to wait to see what changes ISS has in store for proposals in 2012.
The Federal Reserve just finished up its horizontal review of large banking organizations and released a report that looks at incentive compensation practices at such firms. The report is available at:
Banks in the horizontal review with the oversight of the Federal Reserve and other banking agencies, implemented new practices to make their employees’ incentive compensation sensitive to risk. The four key areas that were addressed by banks involved in the horizontal review were:
- Incentive Compensation Design-making the amount of incentive compensation take into account the risk an employee’s activities may pose to the organization, and deferring payout of a portion of incentive compensation.
- Identifying Key employees-those who have a hand in risk taking.
- Risk-Management Processes and Controls-involving risk-management and control personnel when considering and carrying out incentive compensation arrangements.
- Corporate Governance Frameworks-changing the frameworks to become attentive to the risk-taking incentives created by the incentive compensation process for employees throughout the firm, not just to senior executives.
The report indicates that work still needs to be done in some of the above areas by the banks but that progress has been made.
I have posted updated information about the following say on pay (SOP) and say on pay frequency (say when on pay or SWOP) proposals for the S&P 900 companies reported through September 27, 2011 on Say-on-Pay.com:
- S&P 900 SOP Frequency Recommendations
- S&P 900 SWOP Recommendations vs. Adoptions
- S&P 900 Votes Reported
- S&P 900 SOP Failures
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:
