Volume 35 Number 26
Tuesday, July 1, 2008
Advisory Say-on-Pay Vote Is Coming,
CEO Pay Practices Targets for Change
YORK--A shareholder advisory "say-on-pay" vote is likely to become
mandatory in the first 100 days of the new administration, no matter which
party wins, Brian T. Foley said June 19.
push for say-on-pay, Foley said executive severance is a "hot button"
issue. This is especially true in cases where the chief executive
officer's performance has been mediocre, or the company has experienced a
sudden collapse, but it is also an issue even where a company is doing
well, he added.
managing director of Brian T. Foley & Co., White Plains, N.Y., spoke at
the American Law Institute-American Bar Association's annual executive
compensation conference. He addressed executive compensation practices
targeted by investor activists and impacted by tax code Sections 409A and
Underestimating Momentum of Say-on-Pay
said most companies are "underestimating the impact of mandated say-on-pay
because most proposals to date have not garnered majority support." If
say-on-pay is mandated, companies are also underestimating the impact that
"sheer volume would have on the ability of large institutional
shareholders and proxy advisory groups to assess" the various pay programs
on a company-by-company basis, Foley said.
explained that because of these factors, say-on-pay will most likely not
be individual shareholder say-on-pay; rather, it will be large advisory
services like "RMG [formerly Institutional Shareholder Services] and Glass
Lewis say-on-pay" because smaller institutional shareholders will look to
advisory services for advice on how to vote.
many companies now require majority voting in director elections. If a
mandatory say-on-pay vote is added, he said, it is possible that the two
campaigns will enforce each other. Thus, if a company does not act on a no
vote in a say-on-pay campaign, shareholders will be advised to vote no in
the director elections. "Directors are sensitive about shareholder votes,
particularly 'vote no' campaigns," Foley commented.
In a June
20 session, Ronald O. Mueller, a partner in the Washington, D.C., office
of Gibson, Dunn & Crutcher, said media reports that the push to put
say-on-pay proposals on proxy ballots is floundering are not accurate,
noting that more proposals were voted on and more were passed this year
than last year, although proponents did not get the overwhelming support
they may have expected.
to the question of what will happen to say-on-pay, Mueller said both
presidential candidates have supported say-on-pay legislation. He
summarized activity in the House and Senate, which included:
introduced by Rep. Barney Frank (D-Mass.) (77 PBD, 4/23/07). It would give
shareholders a nonbinding, advisory vote on executive pay packages. It
passed the House April 20, 2007, and is pending in the Senate as S. 1181,
introduced by Sen. Barack Obama (D-Ill.).
introduced April 15 by Sen. Hillary Clinton (D-N.Y.). Mueller said S. 2866
is a much broader bill, and includes amendments to tax code Section 409A
to limit the amount of compensation that may be deferred, and Section 14
of the Securities Exchange Act to provide a mandatory shareholder vote on
executive compensation at every public company. The bill would also
require a separate vote on change in control golden parachute agreements,
he said. A similar provision is in the Frank/Obama bills, Mueller said.
Way To Go
that say-on-pay "is a bit of a blunt instrument," Mueller explained that
it measures for and against, but it "doesn't always indicate for or
against all or what part [of the pay package] you don't like." A better
way to go, he said, is to go out and to talk to shareholders.
conversation always helps, Mueller said companies are reaching out to
shareholders. Some are convening sessions for specific feedback from major
shareholders and others are calling large shareholders to talk about
company policy, he said. For companies, this is the time of year to "reach
out, introduce ourselves," and allow shareholders to express their
concerns, Mueller said.
and Mueller cited Riskmetrics Group's research paper "Explorations in
Executive Compensation," issued in May, that examines opening dialogues
between investors and companies concerned about this issue. In particular,
Mueller cited the paper's discussion of peer group benchmarking.
Control and Severance Pay
discussing the ways in which severance pay practices are changing, Foley,
at the earlier session, said some shareholder activists are proposing
elimination or phase out of employment contracts and cash severance pay
plans for executives.
issue, he said there is a place for contracts "in most circumstances," and
in practice many change in control cash severance agreements are being
scaled back, with more conservative extension and renewal features.
"Companies are moving away from sweeteners," Foley said.
issues that should be revisited, and possibly revised, are definitions and
payment triggers, the extent of options' and stock appreciation rights' (SARs)
post-termination exercisibility, and supplemental executive retirement
plans (SERPs) and the interplay between SERPs and severance and other exit
pay, Foley said.
severance, he said "you have to look at every severance agreement on its
merits." According to Foley, "it is not a one-size-fits-all situation."
focused on clawback provisions, saying companies have not addressed
clawbacks, but they should "take a look at putting one in" if and when
say-on-pay arrives. Clawback are contract provisions requiring executives
to repay bonus and incentives payments under certain specified
circumstances. Section 304 of the Sarbanes-Oxley Act requires the clawback
of CEO and CFO bonuses in the event of financial restatements due to fraud
a variety of issues to be sorted out, Foley said, including who is
included in a clawback provision, whether it is performance based or
misconduct based, and what types of compensation should be included. There
is little disclosure on existing clawback agreements, and there is also a
gap in having a policy and enforcing it, Foley said.
the impact of Section 409A on change in control severance agreements,
Foley said compensation committees have an obligation to shareholders to
make sure they have done what they can to make the company marketable.
many things the board and the executive could be doing, including opening
negotiations, Foley said, but he noted that it is important to restructure
a severance agreement to fit it into the short-term deferral rule under
Section 409A and to do so now while the transition period is still in
effect. Otherwise, it could create a "significant 409A obstacle to the
acquirer," he said.
to Foley, in reviewing change in control severance agreements, companies
the amount is paid out in a lump sum instead of installments;
the amount is paid out prior to the end of the applicable short-term
the agreement conforms to the safe harbor rules for good reason
is a 13-month walkaway right, make sure the severance rights end and all
severance payouts are made prior to the end of the short-term deferral
period, starting on the first day of the walkaway period.
addition, companies should "seriously consider adding a clawback feature,"
of Executive Pay
In a June
20 session, Anne Krauskopf, senior special counsel in the Division of
Corporation Finance, Securities and Exchange Commission, reviewed the SEC
staff findings in the 2007 staff disclosure project. She said SEC will
base its next steps on what it learned in the review process.
companies are seeking clarification of the review process, Krauskopf said
they should go the Web page for the Division of Corporation Finance and
click on a new feature, "Filing Review Process."
said the review process (195 PBD, 10/10/07; 34 BPR 2460, 10/16/07) and
comment letters opened a dialogue with a company, which could then be
resolved in different ways. However, Krauskopf said, "Remember this: a
comment to one company may not apply to your company."
the staff disclosure project, Krauskopf said if a company's disclosures
were not reviewed under the project, it "doesn't mean you can continue
with a mark up" of last year's Compensation Discussion and Analysis
(CD&A). The review of 350 companies was a special project, she said, and
now that it is complete, "we haven't folded up our tents and gone home,"
Krauskopf said. Under the Sarbanes Oxley Act triennial reviews of all
companies are mandated, she said.
Krauskopf has stated (24 PBD, 2/6/08; 35 BPR 340, 2/12/08), nondisclosure
of performance targets must be substantiated.
were on notice that they should be prepared to provide competitive harm
analysis and that the standard would be the same as the confidential
treatment standard," she said. Krauskopf also said the competitive harm
standard can vary from company to company. It is a facts and circumstances
situation, Krauskopf said, referring to the "significant comment" the
agency made when it adopted the rules to explain its position in striking
a balance between investor interests and company interests.
said that it was clear from the instructions for the CD&A that it may be
relevant to go back and discuss things that relate to a past or current
Borges, of the California-based consulting firm Compensia Inc., speaking
with Krauskopf on disclosure issues, said companies need to face that
there may be a "need for some negative disclosure in the CD&A." The staff
questions tended to suggest that "if you don't do something you might need
to mention it," Borges said. Look to see whether there is a connection or
relationship between two elements, and "include language people will
understand where elements linked and where they didn't," he said.
SEC's 2006 amendments to the executive compensation disclosure rules, the
CD&A is expected to contain the company's explanation of material elements
of the company's compensation policies and decisions for named executive
Explorations in Executive Compensation is available at
The SEC's review policy is available at
materials are available from ALI-ABA at
By Mary Hughes
2008, The Bureau of National Affairs, Inc.