Preparing for Pay Ratio

Could the politically charged pay ratio calculation and disclosure of Dodd-Frank Section 953(b) go away with this year under this Republican Congress? Of course it could. Since companies generally will not be doing this disclosure until early 2018, does that mean they should hope that it goes away and not plan for it? No. The process will be long and data collection will be arduous for many companies. You don't want to get caught unprepared.

For those of you not familiar, I have written on this extensively. And, despite the fact that I think it will be a huge expenditure of effort by issuers of proxies and that I think it will provide little value to shareholders and the public generally, it's still the law and it becomes a requirement in the upcoming proxy season.

In a nutshell, determination of the pay ratio will follow this process:

• Identify the CEO (that should be easy)
• Identify the employee in the controlled group globally whose annual total compensation (a term of art including almost all forms of current and deferred compensation) when ranked sequentially among all employees falls right in the middle of that ranking
• Determine the annual total compensation for the CEO (you're doing this for the proxy already)
• Determine the annual total compensation for the median compensated employee
• Determine the ratio of the two

You may be wondering at this point where the complexities may lie; that is, in what situations are you more likely to want to consider outsourcing this determination than doing it yourself. Consider these as complicating factors:

• You operate in multiple countries
• You sponsor multiple pension plans perhaps in multiple countries
• You provide equity compensation broadly
• You provide other unusual forms of compensation
• You are afraid for whatever reason that your pay ratio will be high enough to garner unwanted negative publicity and you'd like guidance on managing the message

If you do have any of those situations, I'd suggest you consider seeking outside help. After all, this sort of data manipulation and these sorts of calculations are likely not in your core competencies. And, if they're not, I'd love to find a way to make your determination of the pay ratio less painful for you.

Compensating Executives in a "Challenging" World

The rationale has always gone something like this: if you don't compensate your executives at least equal to their peers and if you don't reward their performance, you will never have a top tier executive group and your company will not succeed.

Is that statement true? Is part of it true?

We're getting much closer to finding out. The big news this proxy season is from shareholder proposals on executive compensation. That's right -- since Say-on-Pay votes are non-binding, shareholder groups are looking to force companies to put components of executive compensation to a binding shareholder vote.

Before getting into a few details, let's understand how most companies are reacting. It's not surprising, but as a group, large corporations do not think their shareholders understand executive compensation. They are seeking to keep these votes off of their proxies. As a precursor to doing so, they request what is known as a "no-action letter" from the Securities and Exchange Commission (SEC). In brief, when a government agency issues a no-action letter, it assures the requestor that it will not take action on a given issue. So, when a company seeks such a letter from the SEC, the company is asking the SEC to confirm that it will not take action, for example, for a failure to place a particular item in its definitive proxy.

One of the most ardent submitters of executive compensation proposals is the largest American labor union, the AFL-CIO. In a statement, the AFL-CIO said, "We opposed compensation plans that provide windfalls to executives that are unrelated to their performance."

On its surface, that seems very prudent. But, it may be a bit trickier in practice.

What makes compensation related to performance? How does one define performance? Is compensation as expressed in the Summary Compensation Table? Is it cash only? Does it include equity? Does it include the (proxy-includable) value of deferred compensation?

Here is how it would strike me.

• Base pay is not related to performance. But, generally, to the extent that such pay is deductible to the employer under Section 162(m) ($1 million pay cap), some observers will not consider it to be egregious. On the other hand, in today's world of pay ratios and calls for increases in rank and file wages, other observers will ask that it be capped at some multiple of either the median pay for the entire company or even that of the lowest-paid employees of the company.
• Bonuses are theoretically related to performance. To the extent that the criteria used to evaluate executive performance and by extension, executive bonuses, are appropriate, so should those bonuses be. To play devil's advocate, however, if an executive knows how her bonus will be calculated, she may take inappropriate risks (for the company) in order to maximize the expected value of her bonus. Similarly, she may find ways to accelerate certain items into the fiscal year in question while deferring others until the next year. 
• Long-term incentives are [nearly] always performance based. In today's world, it is expected that those incentive payouts will be based on the achievement of a set of goals related to metrics deemed appropriate for that executive. Often, there are circuit breakers (elements that if the executive fails to meet a pre-established minimum level of performance, he will not receive a payout or that part of a payout at all). But, long-term incentives are often paid in company equity. This means that compensation will, to a large extent, be tied to share price. As we know, however, share price is not always tied to corporate performance. On any given day, share price may be influenced by such as the state of peace or war in the Middle East, a speech given by the President of the United States, or the rise or fall of housing starts during the last month. 
• What about deferred compensation (here I am referring to traditional deferred compensation plans, either defined benefit or defined contribution)? It's rarely performance based. Theoretically, the company is paying an executive less today for a promise to give them some of that pay in the future. What sorts of plans should be challenged? If an executive voluntarily defers some of their compensation and it grows at a rate tied to some broadly investable index, is that okay? Suppose she has a DB SERP that looks just like the broad-based plan (qualified plan), but without limitations applicable to qualified plans. Institutional Shareholder Services (ISS) is generally fine with this, but major labor unions may not be. And, if that SERP looks very different from qualified plans, even if there is a good reason for it, this may be a situation where no institutional shareholders are satisfied.

What should Boards of Directors and their Compensation Committees do about all of this? ConocoPhillips shareholders are asking that the Compensation Committee develop a program to determine which portions of a bonus should be paid immediately, which portions should be deferred, and what adjustments should be made to those deferrals based on performance.

Perhaps this has some merit. If it does, however, it's a bit of a nightmare for people who need to figure out how to make such a plan 409A-compliant and for those who need to administer FICA tax payments.

On the other hand, if adjustments are to be made based on performance, can't the same executive who is able to manipulate performance metrics in the LTI scenario described above also find a way to manipulate them here? Where there are objective formulas, there are smart people who can figure out how to game the system. Where there are subjective evaluations, Boards will be accused of pandering to the executives of the companies.

More than ever, the Compensation Discussion and Analysis (CD&A) will be very key. Explaining why the mix of objective and subjective factors was chosen can go a long way to appeasing large shareholders. Explaining how levels of compensation were chosen is a must. And, for the first time, we may see companies rationalizing their levels of executive pay as compared to rank and file pay.

With all of these challenges to executive compensation, these are challenging times for Compensation Committees.

Suppose You Couldn't Have Your Annual Shareholder's Meeting

In 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) into law. Billed as a reaction to the financial crisis and abuse by the financial services industry of the public trust, Dodd-Frank has been more ... much more. Whether that more and much more has been good for the public or for anyone else is a matter of opinion. My opinion, as it is with most laws is that there were good parts, and there were less good parts. But, as is often their wont, Congress attacked a problem with far too broad-reaching a weapon.

Many of the more controversial provisions of the nearly 3000 page law lie in Title IX dealing with executive compensation and paramount among those may be the Shareholder Say on Pay (SSOP). Under these provisions, shareholders have the opportunity to weigh in, albeit in a non-binding fashion, on executive compensation proposals.

As is often the case with such provisions, plaintiff's bar views provisions such as these as an opportunity to litigate the matters. In one case, in California, in order to get a temporary injunction lifted, a company was forced to delay the implementation of their executive compensation proposal, file a revised and more detailed definitive proxy (Form 14A) and pay plaintiff's attorneys more than half a million dollars.

Suppose they hadn't done this. Then a state judge in California was precluding the company from conducting its annual meeting.

And, this was not because the executive compensation package was viewed as being outlandish, but simply over a few provisions that MAY not have been worded perfectly.

On ISS and SERPs

We're getting close to proxy season for issuers of proxies under the purview of the Securities and Exchange Commission (SEC). And, especially since the passage of Dodd-Frank which gave us the new concept of the  (non-binding, but very important) Shareholder Say-On-Pay (SSOP), one of the most important names that we see is Institutional Shareholder Services (ISS).

In a nutshell, ISS provides a service to institutional shareholders of issuers. By performing their analysis of SSOP proposals, ISS gives its subscribers guidance related to how they should cast their SSOP votes. While I may not sound entirely favorable toward ISS and their opinions in this post, I do think this is a valuable service.

For those people who would like to understand ISS's standards and protocols, they have a fairly detailed website with new practices for 2013 as well as their comprehensive 2012 policies.

Now I quote directly from their comprehensive 2012 policies:

 Egregious pension/SERP (supplemental executive retirement plan) payouts:

§  Inclusion of additional years of service not worked that result in significant benefits provided in new arrangements

§  Inclusion of performance-based equity or other long-term awards in the pension calculation

I could be particularly troubled by what I see there, but it's not what gives me pause. Generally, granting of additional years of service for top executives is not a best practice. Similarly, inclusion of long-term awards in compensation for SERP purposes is not a best practice.

However, ISS appears (emphasis here on appears as compared to has) to have taken the position that having a SERP with a more generous formula than in a qualified plan also constitutes an egregious SERP. Often, they are correct. But, not always.

There is a reason, or at least there ought to be, that SERPs are designed as they are. Some companies, for example, tend to promote from within and their executives will likely be long-service employees who are motivated by retention devices rather than attraction devices. SERPs perform this function well. Freezing a SERP when the qualified defined benefit (DB) plan is frozen may be detrimental to shareholders as executives will no longer be bound by the retention device.

What should ISS do? While I have often said negative things about the Summary Compensation Table (SCT) in the proxy, perhaps the SEC had it somewhat correct when they designed it. While technical pension issues may make the pension data in the proxy less valuable than it otherwise might be, the pension accrual is part of annual compensation.

Now, suppose an executive receives lower direct cash compensation than his peer group (other companies), but receives more in deferred compensation through a SERP. Should this be problematic to shareholders? In my opinion, it should not be. In fact, since direct cash compensation is the proverbial bird in the hand while deferred compensation may not be paid if the company suffers particularly adverse business circumstances such as bankruptcy, the generous SERP in lieu of generous current cash may actually be more desirable. But, it's not viewed that way.

New methodologies allow reviewers of proxies to better make this analysis. I'm working on a paper that will explain this in more detail. Regular readers will see it here.

How Companies Can Piss Off Shareholders

I thought this might be a provocative title for a blog post: "How Companies Can Piss Off Shareholders". Frankly, if you are expecting a full discourse on all the ways this can be done, you've come to the wrong place. The seminal piece on this is undoubtedly the ISS (Institutional Shareholder Services) 2011-2012 Policy Survey Summary of Results. And, for that matter, if you really want a more thoughtful analysis of the entire survey, I would direct you to Mike Melbinger's latest blog post on this topic.

ISS would never say anything like the title of this post. And, Mike Melbinger, while I love his blog, tends to be more politically correct than yours truly. If you came here to read about this, then you are looking to see someone fall. Knives in the back are fair game. So are sucker punches below the belt. Here, the only rules are the Truth According to Me (apologies to John Irving and T.S. Garp).

So, between the strategically chosen dates of July 6 and August 26 of 2011 (after people came back from celebrating our nation's birthday and before they left to celebrate labor (the kind that you get paid for, not the kind that causes expectant mothers to scream)), ISS asked a whole bunch of questions of both investors (institutional shareholders) and issuers (companies that issue proxies to their shareholders).

Before getting into the nitty gritty, though, I feel the need to digress. Has a body as educated and seemingly intelligent as ISS not made it through 3rd grade math? In their introductory remarks, ISS notes that "[M]ore than 335 total responses were received. A total of 138 institutions responded. ... 197 corporate issuers responded ... ." I got out my handy-dandy calculator which in my case sits somewhere north of my neck (traditional calculators have a tendency in my world to hide themselves under stacks of paper, but my calculator always seems to live in about the same place, covered with some hair in strategically chosen places) and added 138 to 197. Hmm? The total was 335. It was not more than 335. Come on, ISS, this is simple stuff. Editors, though, have a problem with starting sentences with a number, so they use silly terms like more than to mean exactly.

OK, enough on that rant ...

In any event, ISS does an outstanding job with their report. Right up front, they summarize key findings. And, for the upcoming proxy season, the #1 governance issue cited by 60% of investor respondents and 61% of issuer respondents is Executive Compensation. Said differently: if a company wants to piss off its shareholders, the #1 way is to compensate its executives in a manner or amount that does not align with shareholder goals. Other top issues for shareholders were Board independence, shareholder rights, and risk oversight, in that order. For companies, the only issue other than executive compensation receiving more than a 30% vote was risk oversight.

Later on, ISS drills down (I've never used that term in writing before, but I felt the need today). Some of the findings that I found interesting were these:

• 62% of investors find it very relevant (negatively so) when executives are paid significantly higher than their peer group.
• 88% of investors find it very relevant if pay levels have increased disproportionately to the company's performance.
• While issuers generally do not feel compelled to respond to a say-on-pay vote until the dissenting vote has approached or reached 50%, nearly half (48%) of investors feel that an issuer should provide an explicit response when the no votes reach 20% or even less.

Institutional shareholders are very serious about say-on-pay. Companies that ignore this are seeing two phenomena -- contested elections of Directors and shareholder lawsuits against the Board of Directors. 

For companies that may be headed down a path of compensation that could get a lot of no votes, they need to do a lot of planning and explain their decisions up front. Right up there near the top of problematic pay practices are egregious SERPs. Sometimes, they are justifiable, and other times, ...

Caveat enditor!

Are CEOs Paid Too Much?

That's a simple question that I ask: "Are CEOs paid too much?" Or is it? I would bet that most people who read this have a fairly immediate answer, but unlike everyone having an immediate and hopefully unanimous answer to the question "Is the Earth flat?", in this case, I would not expect unanimity.

Last Thursday, CNN had an online article on the topic. Their headline stated that CEOs earn 343 times as much as typical workers. Later on, we learn that they are citing statistics from an AFL-CIO website.. Does the fact that these are AFL-CIO compiled statistics make this comparison incorrect? No! To the contrary, does that fact make the comparison correct? No!

The article tells us that the typical US worker for all occupations earned $33,190 for all occupations in 2009. This, they say, is according to data compiled by the Bureau of Labor Statistics (BLS). The comparison was made to the 2010 pay of Fortune 500 CEOs. The CEO compensation is proxy compensation which means that it includes the increase in value in pensions and deferred compensation. The BLS data does not.

Richard Trumka is President of AFL-CIO. His salary is roughly four times that of the 'typical' worker. He says that he will be happy when average CEO pay is at four times that of the typical worker.

I think that Fortune 500 CEOs make a lot of money. Some of them make more than they deserve, in my opinion. Most that I know of work more than twice as many hours every week as the 'typical' worker. In fact, I don't even know if the typical worker, according to this data, is a full-time employee anywhere.

In any event, this is another example of the media (and they all do it) taking a story that has an air of sensationalism to it and making headlines. This is just wrong. At least the AFL-CIO paywatch website breaks down the compensation of the executives. Here is an excerpt from the AFL-CIO site.

2010 Average CEO Pay at S&P 500 Companies
Salary	$1,093,989
Bonus	$251,413
Stock Awards	$3,833,052
Option Awards	$2,384,871
Nonequity Incentive Plan Compensation	$2,397,152
Pension and Deferred Compensation Earnings	$1,182,057
All Other Compensation	$215,911
TOTAL	$11,358,445

I expect that data for the typical worker does not include all of these elements. For example, my observations lead me to conclude that most AFL-CIO workers have pensions, but they are probably not included in the compensation for a 'typical' worker. At some companies, at times, they have received equity awards. These are not included in their compensation.

Maybe you think that $11.4 million is too much compensation for the average Fortune 500 CEO (by the way, we don't know if average is mean or median here). Maybe I do as well. But, if someone is actually trying to inform, they will, at the very least, make an apples to apples comparison.

Here is the problem. What this really all goes back to are two things that I have written about in the past: Say-on-Pay and the Dodd-Frank Pay Ratio disclosure. Mr. Trumka has been an outspoken proponent of both, and he is certainly entitled to both his opinions and to his right to voice them. At this point, four companies have received a no vote from their shareholders with regard to Say-on-Pay. Given that only four have gotten that thumbs down, I think those companies deserve to be called out here:

• Beazer Homes USA
• Hewlett Packard
• Jacobs Engineering Group
• Shuffle Master

Perhaps, ultimately, the message to companies here is to communicate and to explain. Yes, there are things that are required in a proxy disclosure, but there is plenty of room for narrative. If there is a really good reason that executive compensation has increased dramatically, disclose it. If a particular component is going to look bad in print, but there is a perfectly good reason, disclose it.

And, if you can't figure out how to disclose things to make them understandable to your shareholders, you know how to find me.

CEO Pay in 2010 Up From 2009

I couldn't think what to call this blog post. What brought the topic up for me was an article from the 4/10/11 (yesterday) edition of the New York Times. You may have seen it already as it certainly made the rounds on the social networking sites yesterday.

Here are some of my general comments on the article:

• Many corporate CEOs make far more money than they deserve.
• Shareholders now have an opportunity to speak their collective minds on that through the Dodd-Frank Say-on-Pay vote, but only four companies have had the shareholders reject their compensation plans for top executives.
• The pay that the New York Times article cites appears to be "Total Annual Compensation" from the proxy statements. This is not pay the way you and I think of it.
• Dodd-Frank has a section which will require companies to show the ratio of such pay to that of the median employee in the company, and while this particular calculation is misguided, it does lend some insights into CEO pay.
• You probably don't know what goes into this Total Annual Compensation number. Did you know that it goes up and down from year to year due to things like timing of equity awards, underlying discount rates, and corporate performance?

Let's revisit that last question. CEO pay tends to go up when the return on a shareholder's investment improves. Duh! What exactly are the major goals of most corporate CEOs? Isn't one of them to provide a better return on investment for shareholders? So, as a general concept, what is the problem with compensating CEOs better for better performance?

With regard to another item, CEO Total Annual Compensation tends to have more variability than it used to because more of their compensation is tied to shareholder return and stock price. How did this happen? Well, corporate governance models have suggested that significant portions of CEO compensation be in equity and that even for cash compensation, large portions be tied to performance. Hmm, you ask corporate America to adopt a model, they adopt it, and you criticize them for the results of your demand -- what's wrong with this picture?

Where I do have a problem though is with trends. Unemployment figures in the US have stayed high. Yes, they have come down a little bit, and whether you believe that decrease in unemployment to be truly reflective of positive employment figures or not, far too many people remain unemployed. In a nutshell, most large corporations are not doing much hiring. At the same time, pay raises for the rank and file have been horrible. While inflation numbers have been low for the last two years as well, those numbers have so much embedded convolution that they are not, IMHO, remotely reflective of changes in the cost of living for average Americans.

Further, suppose we look at real pay for working Americans. It has gone down, and that decrease has been significant. "How can you say that, John?" you ask. Well, let's consider. If CEO pay is to include the total value of the reward that they receive for doing their job, than perhaps so should yours and mine (the fact is that the value of employer-provided healthcare benefits is one of the items that is excluded). Here is how I would like to look at trends in pay for you and me. Given consistent behavior (you don't change your benefits elections), has our take-home pay gone up or gone down? For many of us, meager pay raises combined with increases in our share of the cost of benefits, and further coupled with cuts in the value of  those benefit programs means that at the end of the day, we are seeing less value from our employers, even in times of high corporate profits. Aren't you and I, or at the very least, the collective we composed of all the little people at a company, contributing to that excellent corporate performance? If we're not, then how and why are our employers succeeding?

This is what people should be upset with. If the wealth is being spread among all contributors and shareholder's are seeing expected (or better returns), than all is well. But, when the wealth is being spread among just a few, then things are wrong. Sadly, the Times article devoted only one small paragraph to this.

Author's Note: My current employer is a small, private firm that to my knowledge has not followed the large corporate trend of cutting real employee pay.

Companies Fight Back on Say-on-Pay

I've written several times recently about Say-on-Pay under the Dodd-Frank legislation. You can see the compilation and get background here: http://johnhlowell.blogspot.com/search/label/Say%20on%20Pay

For those that don't know, there are a few firms out there, most notably Institutional Shareholder Services (ISS) and Glass-Lewis, that advise shareholders (primarily large institutional shareholders) on how to vote. The companies are now fighting back. Roughly 100 large companies through a lobbying adviser are asking that ISS, Glass-Lewis and others be investigated for conflicts of interest.

So, the battle heats up. Personally, I do think that ISS and Glass-Lewis have a bias, but they do perform an important service. Large institutional investors do not have the manpower or skill sets to be evaluating executive compensation programs. On the other hand, the services, while they have general expertise, are automatically biased against certain forms of compensation which may be appropriate in individual circumstances.

I'm not sure where this one is going, but as it moves along its path, I'll do my best to keep you informed.

First Say on Pay Loser

You just knew there had to be a first one, the first company whose Dodd-Frank say-on-pay vote failed. Here is where you can find the 8-K for Jacobs Engineering Group, Inc, filed on January 27: http://www.sec.gov/Archives/edgar/data/52988/000119312511017395/d8k.htm

By a vote of 54% to 45% with a little more than 1% abstaining, the vote lost. It's not as if there was a complete upheaval against the company (you'll notice that other votes passed with almost no opposition), but the executive compensation got a 'NO' vote. We don't know why, the shareholders don't get to vote on individual components of executive compensation. It's just an up or down vote on the total package.

What lessons do we learn from this failure? In my opinion, the biggest one is that companies need to develop a strategy for the say-on-pay vote. What communications are necessary to increase the likelihood that shareholders will not find the executive compensation proposal unreasonable? Did Jacobs Engineering explain their proposal well? I don't know. Is there one thing in the proposal that was viewed as particularly egregious by shareholders? We have no way of knowing.

But, the simple fact is that the Compensation Committee of their Board should have had a good idea of which parts of their proposed package could be viewed negatively, and guarded against this sort of vote. It looks like they didn't do that, and for that, as the first big loser here under Dodd-Frank, they shall live in ignominy.

Say on Pay Final Rules

If you're a follower of executive compensation issues, you undoubtedly know that Dodd-Frank Wall Street Reform and Consumer Protection Act became law last year. It made sweeping changes for most public companies. With regard to the executive compensation issues, the Securities and Exchange Commission (SEC) generally is responsible for interpreting the statute and writing the rules. In fact, they issued final rules for Shareholder Say on Pay (SSOP) and Shareholder Say on Golden Parachutes (SSOGP) earlier this week.

WARNING: This is really technical stuff and if you want the really technical version, you can read the briefings that virtually every major law firm is doing or already has done on this.

BENEFITS OF READING THIS INSTEAD: I think this is a pretty good summary of what's in there though. You may laugh a little bit, which probably won't happen if you read the law firm versions (I just have to pick on lawyers once in a while). I don't use fancy legal terms unless I have to. So, you won't see anything like estoppel, res ipse locutur, or aberemurdo.

I'm going to address them, hopefully from a practical standpoint, here, but first, as is my prerogative, I digress. This is a bad name for a law. It has no useful acronym. Back in the 70s and 80s, we got useful names for laws. They had great acronyms like ERISA, TEFRA, COBRA, and ERTA. I can pronounce all those things. I cannot for the life of me pronounce DFWSRCPA. Maybe you are more proficient with new diphthongs than I, but my tongue is twisted. And, yesterday, Congress showed they can still do it. A bill to enact medical malpractice reform was introduced with the catchy acronym of HEALTH Act. It's too bad that it has the full name of Help Efficient Accessible Low-Cost Timely Healthcare Act of 2011, but it last I can say the acronym.

OK, back to serious stuff. What are the differences between the Dodd-Frank final rules and the proposed rules and what stays the same?

Differences


Say on Pay

• SSOP votes are required only at meetings where directors are being elected. The vote may be more frequent, but it must occur no less frequently than once every three years.
• The only required vote is on the executive compensation of named executive officers (NEOs). Don't despair, though, companies may choose to solicit shareholder opinion on other compensation issues. Here's a guess that most companies won't do that.
• Companies with share value available to be traded by the public of less than $75 million (some people refer to this as the float) get a 2-year delay in needing to comply.

Say on Frequency of vote (SSOF)

• Again, these are required only with respect to annual or special meetings at which directors are being elected, and not less frequently than every six years. Is it ironic that votes on frequency do not need to occur frequently?
• Companies with a float of less than $75 million get a two-year delay here as well.
• Not less than 150 days after the annual meeting and not less than 60 days before shareholder proposals for the next annual meeting are due, the company must file an 8-K explaining how often it will hold SSOP votes in light of the results of the SSOF vote.
• If one of the three frequency alternatives (annual, biennial, triennial) gets a majority of the shareholder vote (more than 50% as compared to a plurality which is simply the largest vote-getter), and the company chooses to adopt that frequency of vote, then the company may reject any shareholder proposal calling for a SSOP or SSOF vote.
• Proxy statements must disclose the frequency and next occurrence of SSOP votes.

Say on Golden Parachutes

• Smaller companies (float < $75 million) get a 2-year delay
• These rules apply to any filings after April 24, 2011

The Song Remains the Same

These items are significant, IMHO, but unchanged, or largely unchanged from the proposed rules issued last October.

Say on Pay

• There is no specific language requirement. Companies should just make sure they do not mislead shareholders.
• Director compensation need not be voted on in the SSOP.
• The result of the SSOP vote must be disclosed to shareholders within 4 days after the meeting.
• The vote is non-binding. The proxy statement must disclose that it is non-binding. Editorially, of the shareholders who actually read the proxy information, I wonder how many will not realize that the non-binding nature is simply following the law, and will have a "why are they doing this" moment.
• In the next Compensation Discussion and Analysis (CD&A), companies must discuss whether and how they considered the most recent SSOP vote, and how that vote has affected their executive compensation, as well as their policies and decisions with respect to that compensation.
• Institutional investors are required to file their SSOP voting record with the SEC.
• Companies still under the auspices of TARP are exempt from these rules (until they have fully repaid and been released from TARP), but they are subject to the TARP SSOP rules.

Say on Frequency

• The same 8-K 4-day rule as applies for SSOP applies here.
• This is non-binding and the proxy must disclose such non-binding nature.
• There are no specific language requirements.
• Four and only four choices must be presented for the SSOP vote in the SSOF vote (I wonder what would happen if the majority vote were abstain. If that were the case, would the company by somehow adopting abstain be allowed to ignore shareholder SSOP and SSOF proposals? I don't even know what that means.):
• Annual
• Biennial
• Triennial
• Abstain

Say on Golden Parachutes

• The information already provided in the proxy entitled "Potential Payments upon Termination of Employment or Change in Control" (Item 402(t)) does not satisfy the Dodd-Frank requirement. However, they still have to provide that other information. Talk about overkill ...
• Item 402(t) disclosure is required whenever a proxy solicits change-in-control approval, whether or not the company is required to have a SSOGP vote
• Disclosure for the SSOGP vote must be in both tabular and narrative form. This way, both the verbally and the mathematically challenged get a second bite at the apple.
• Here are the goesintaz (that's what must go in) for the tables. The comeoutaz (what the executives get may be pretty massive). There is no de minimis exception:
• cash payments
• value of accelerated payments and stock awards
• payments in cancellation of options and stock awards
• enhancements to pension and nonqualified deferred compensation arrangements
• perqs and other personal benefits
• health and welfare benefits
• tax reimbursements and gross-ups
• any other comeoutaz (see above for what this means) that don't fit into any other category
• The aggregate amount
• Footnotes
• other pertinent information
• single or double trigger
• The narrative must disclose the specifics of the events that would trigger these payments, who would make the payments, whether they will be made in lump sums, installments, or some other way, and any restrictive covenants (such a fancy name for a non-compete or non-solicitation agreement) that apply.

SEC Approves Final Say on Pay Rules ... Narrowly

Yesterday, by a 3-2 vote, the Securities and Exchange Commission (SEC) approved its new final rules implementing the Dodd-Frank 'Say on Pay' provisions. Before discussing the key provisions of the new rules, let me digress by saying that compared to other government agencies such as the IRS and DOL, the SEC has what I view as a strange process. Presumably with significant input from Commissioners, staffers write the rules which are then voted on (usually at an open meeting) by the five commissioners. At the open meeting, there is enough discussion that attendees (live or by some sort of conferencing medium) can get the gist of what is in the rules. Then, they publish the rules.

For those who don't normally play in this arena, 'say on pay' is the common term for allowing shareholders of an SEC registrant the right to, at least triennially, express their opinions (non-binding vote) via an up or down vote on the compensation of top executives.

In any case, here are the keys as I heard them:

• Proxy issuers must give shareholders all four available choices for a say-on-pay vote. That is, they must have a choice between annual, biennial, triennial, or abstention.
• Companies must explain in their Compensation Discussion and Analysis (CD&A) what consideration they gave to the shareholder's say on pay vote.
• Future shareholder proposals on say on pay or say on pay frequency may only be excluded if the company adopts the frequency indicated by the majority vote (NOTE: I'm not sure what happens if no choice gets a majority vote, it could be that there is only a plurality).
• The requirement to report the results of these shareholder votes is to be postponed to 150 days after the annual meeting, at which point it should be filed in Form 8-K.
• Small companies get a 2-year delay in effective date.

There is one other (in my view) strange thing about the way these SEC rules evolve. Periodically, the staffers will receive questions from registrants. They publish their answers on the SEC website, and once published, by some magical process, those answers appear to become part of the final rule.

Time for Say on Pay

It's "say on pay" time, or at least that's just around the corner. Companies are struggling to decide (or maybe they are not struggling) how frequently to hold say on pay votes. According to a December 2010 Towers Watson survey, of 135 publicly traded respondents, 51% plan to hold annual say on pay votes, 10% biennial votes and 39% will hold their votes only as frequently as required -- once every three years.

What does it say about those various companies? In my opinion, in today's climate, a company that is not willing to hold an annual say on pay vote is just spitting in the collective faces of its shareholders. Of the companies who have decided how they will evaluate their shareholder votes, most, according to the survey, say that an 80% shareholder approval rate will be considered successful.

If we consider the typical shareholder profile of a typical publicly traded company, I suspect that significant numbers of shares are held by institutional investors. Of the shares held by regular old people like you and me, far more are higher-income individuals than not and will not be immediately scared off by currently reasonable levels of executive pay. If you can't get 80% approval annually, you are doing something wrong ... and you should change.