Tag: Equity-based compensation

ISS Global Policy Survey 2015-2016

Stuart H. Gelfond is a partner in the Corporate Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Gelfond, Amy L. Blackman, Donald P. Carleen, and Jared Heady.

Recently, Institutional Shareholder Services Inc. (“ISS”) released the results of its global policy survey for 2015-2016 (the “Survey”). [1] The Survey reflects the results of 421 responses from a combination of institutional investors, corporate issuers, asset managers, pension funds, mutual funds, endowments and others. Each year, ISS typically considers the results of its annual global policy surveys when formulating proposed amendments to its Proxy Voting Guidelines. Below, we discuss some of the highlights of the Survey which may be a prelude to changes to be made by ISS to its Proxy Voting Guidelines in its next update.


Executive Overconfidence and Compensation Structure

Ling Lisic is Associate Professor of Accounting at George Mason University. This post is based on an article authored by Professor Lisic; Mark Humphery-Jenner, Senior Lecturer at UNSW Business School; Vikram Nanda, Professor of Finance and Managerial Economics at University of Texas at Dallas; and Sabatino Silveri, Assistant Professor of Finance at the University of Memphis. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

In our paper “Executive Overconfidence and Compensation Structure,” forthcoming in the Journal of Financial Economics, we investigate whether overconfidence affects the compensation structure of CEOs and other senior executives. There is a burgeoning literature on the impact of CEO overconfidence on corporate policies. Overconfident CEOs are prone to overestimate returns to investments and to underestimate risks. Little is known, however, about the nature of incentive contracts offered to overconfident managers or even whether firms “fine-tune” compensation contracts to match a manager’s personality traits. We help fill this gap.


CEO and Executive Compensation Practices: 2015 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO and Executive Compensation Practices: 2015 Edition, an annual benchmarking report authored by Dr. Tonello with James Reda of Arthur J. Gallagher & Co. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

The Conference Board, in collaboration with Arthur J. Gallagher & Co., recently released the Key Findings from CEO and Executive Compensation Practices: 2015 Edition, which documents trends and developments on senior management compensation at companies issuing equity securities registered with the U.S. Securities and Exchange Commission (SEC) and, as of May 2015, included in the Russell 3000 Index.

The report has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages and the evolving features of short-term and long-term incentive plans (STIs and LTIs), the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design.


Pro Forma Compensation

David Larcker is Professor of Accounting at Stanford University. This post is based on an article authored by Professor Larcker; Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford University; and Youfei Xiao of the Stanford Graduate School of Business.

In recent years, companies have begun to voluntarily disclose supplemental calculations of executive compensation beyond those required by the Securities and Exchange Commission in the annual proxy. Our paper, Pro Forma Compensation: Useful Insight or Window-Dressing?, which was recently made publicly available on SSRN, examines the motivation to disclose adjusted compensation and the prevalence of this practice.

Corporate disclosure of executive compensation is regulated by the SEC and is reported in the annual proxy Compensation Discussion & Analysis section and various summary compensation tables. These figures are widely cited by corporate observers, and in many cases used to rank (and criticize) corporations for their pay practices.


2016 ISS Policy Survey

Linda Pappas and Maggie Choi are Consultants at Pay Governance LLC. This post is based on a Pay Governance memorandum.

In August 4, 2015, Institutional Shareholder Services (ISS) released its annual policy survey for the 2016 proxy voting season. The survey encompasses its global proxy voting policies across all potential topic areas. The responses elicited from the survey are used to assist ISS in developing changes to its proxy voting policy guidelines, and will be open for one month (until September 4, 2015). Upon closing of the survey, there will be an open comment period prior to the finalization of the updated ISS proxy voting policies which are targeted for release in November 2015.

The key survey areas specifically related to compensation for 2016 include use of adjusted or non-GAAP metrics in incentive compensation programs and equity compensation vehicles for non-executive directors. This post focuses on these two topic areas, and touches on other noteworthy U.S. and global policy areas.


SEC Proposes Compensation Clawback Rules

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update. Related research from the Program on Corporate Governance includes Excess-Pay Clawbacks by Jesse Fried and Nitzan Shilon (discussed on the Forum here).

On July 1, 2015, the Securities and Exchange Commission (SEC), by a 3-2 vote, proposed long-awaited rules [1] mandated by Section 954 of the Dodd-Frank Act that would direct the national securities exchanges and associations to establish listing standards that would require any company to adopt, disclose and comply with a compensation clawback policy as a condition to listing securities on a national securities exchange or association. With the proposal of the clawback rules, the SEC has now proposed or adopted rules to implement all of the Dodd-Frank Act provisions relating to executive compensation.

The clawback policy would be required to provide that, in the event that the company is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws, the company would recover from any of its current or former executive officers (not just named executive officers) who received incentive-based compensation during the preceding three-year period based on the erroneous data, any such compensation in excess of what would have been paid under the accounting restatement. In addition to requiring that a company file its clawback policy as an exhibit to its annual report on Form 10-K or 20-F, as applicable, the proposed rules would require proxy statement disclosure of certain actions taken pursuant to the clawback policy.

SEC Proposes Rules on Mandatory Clawback Policies

Renata J. Ferrari is partner tax & benefits department at Ropes & Gray LLP. This post is based on a Ropes & Gray Alert.

On July 1, 2015, the Securities and Exchange Commission proposed rules to require issuers of securities listed on U.S. stock exchanges to adopt and enforce clawback policies applicable to incentive-based compensation received by current and former executives in the three-year period preceding the date the issuer is required to prepare an accounting restatement due to material noncompliance with financial reporting requirements. The proposed rules would implement the “no fault” clawback rule requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Section 10D of the Securities Exchange Act of 1934, as amended).


Clawbacks of Erroneously Awarded Compensation

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at a recent open meeting of the SEC; the full text is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

A few months ago, the baseball world celebrated the 90th birthday of Yogi Berra, the legendary former catcher and manager for the New York Yankees. Yogi Berra is well-known for his witty comments, often referred to as “Yogi-isms.” [1] Several come to mind today, as we consider another rulemaking related to executive compensation.

“Pair up in threes.”

Following our earlier efforts on hedging and pay versus performance, today’s proposal is the third relating to executive compensation that we have considered in 2015. The Commission has yet again spent significant time and resources on a provision inserted into the Dodd-Frank Act that has nothing to do with the origins of the financial crisis and affects Main Street businesses that are not even part of the financial services sector. Why does the Commission continue to prioritize our agenda with these types of issues, when rulemakings that are directly related to the financial crisis remain unaddressed?


Does the SEC’s New “Compensation Actually Paid” Help Shareholders?

Ira Kay is a Managing Partner and Blaine Martin is a Consultant at Pay Governance LLC. This post is based on a Pay Governance memorandum.

On April 29, 2015, the SEC released proposed rules on public company pay‐for‐performance disclosure mandated under the Dodd‐Frank Act. Pay Governance has analyzed the proposed rules and the implications for our clients’ proxy disclosures and pay‐for‐performance explanations to investors. We are concerned about the validity of describing a company’s pay‐for‐performance alignment using the disclosure mandated under the SEC’s proposed rules, and its implications for Say on Pay votes.

The disclosure of “compensation actually paid” (CAP) as defined by the SEC may prove helpful for investors and other outside parties to estimate the amount of compensation earned by executives, in contrast to the compensation opportunity as disclosed in the Summary Compensation Table (SCT). However, the SEC’s proposed rules are explicitly intended to compare executive compensation earned with company stock performance (TSR), per the relevant section of the Dodd‐Frank legislation. [1] If the rules are intended to help shareholders understand the linkage between executive compensation programs and stock performance, then the technical nuance of the proposed methodology may be problematic.


Making Executive Compensation More Accountable

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

When it comes to compensation, Americans believe you should earn your money. They also believe, just as strongly, that you should not keep what you did not earn. It’s fundamental to our values. However, when companies have to restate their financial statements because they violated applicable reporting requirements, their executives may not be required to reimburse any incentive-based compensation that was erroneously paid. In other words, they get to keep what they never should have received in the first place.

And, quite often, we are talking about very large amounts. In today’s corporate world, many executives are earning eye-catching sums. Much of the increase in executive compensation is commonly attributed to the impact of incentive-based compensation, including equity and other performance-based compensation plans.

Incentive-based compensation plans are intended to align the interests of company managers and shareholders. However, when a company is required to issue a restatement, and when its executives have been paid compensation based on inflated financial results, this alignment disappears. In such cases, it is only fair that these erroneously awarded payments be recovered.


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