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Program Reference


For the comments referenced below,  see:

Participant Comments on Forum Objectives

Keith L. Johnson

January 19, 2006


See also previous Forum Reports:

Initial Open Meeting of the Options Policies Forum

December 6, 2006


Information to be Provided in Compensation Survey Report

January 8, 2007




Forum Report


Additional Comments on Forum Objectives

            Copied below is a response from Hermes, the UK pension manager, to the recently distributed comments of Keith Johnson regarding the Forum's first open meeting in December.  As indicated, Hermes adds to Mr. Johnson's observations its own advocacy of positions:

(a)     we should broaden any consideration of options to include all other forms of equity-based compensation, and

(b)     we should assure availability of substantive information needed for a meaningful understanding of compensation's links to long term business performance objectives, going beyond reliance on stock price appreciation.

            Please let me know if you want to comment on the views offered by Mr. Johnson or Hermes, or on any other matters being addressed by the Forum.  You will not be quoted or identified unless you grant permission, according to the privacy commitments stated in the Forum's Conditions of Participation.  The Forum's essential function is to assure an open exchange of views among marketplace decision-makers, including the candid views of those who prefer to participate anonymously.


           GL – 1/29/07


Gary Lutin

Lutin & Company

575 Madison Avenue, 10th Floor

New York, New York 10022

Tel: 212-605-0335

Fax: 212-605-0325







Options Policies Forum


Hermes Equity Ownership Services’ Responses to Keith Johnson’s Comments regarding the 6 December 2006 Initial Open Meeting


26 January 2007


Thank you to Keith for providing such thoughtful and insightful comments regarding the developments at the initial meeting.  We would like to follow up on his comments, detailed below.


Broaden scope to all equity-based compensation


Keith’s references to option plans could be broadened to refer to equity-based compensation given that the Forum's initial scope has been expanded to compensation practices in general and we assert that most of the considerations he discusses would similarly hold true for equity-based compensation other than options (eg. Dilution, link to performance, link to the company's specific objectives etc would all apply to restricted stock etc).


Ideal Compensation Disclosure: 


Our reading of the SEC's new disclosure rule is not as favourable as Keith's (though he points out some of its limitations).  Ideally, we'd like to see compensation disclosure that clearly links pay to performance.  This requires a considered discussion of material items and need not be lengthy.  The CD&A should reflect that a robust discussion has taken place amongst the relevant directors and that they have all the tools they need to make the best decisions as fiduciaries (eg external independent consultants, opportunities to meet without the CEO present etc). 


We would like disclosure of both objective performance measures attached to awards and hurdle rates - and the SEC's new rule still does not require this disclosure (which, for the record, is routinely provided by UK companies).


In our view, the most significant problem with equity-based compensation plans at US companies is the fact that they are typically related to stock price appreciation alone.  In addition to the fact that to the extent that performance measures are applied, they are not clearly disclosed, and even in the rare cases that they are disclosed, the hurdle rates that must be achieved to grant threshold, target or maximum levels of awards are never disclosed.


The problem with this lack of disclosure is that it impairs our ability to determine whether or not plan participants are in fact being rewarded based on performance.  The fact that these plans generally contain a long list of possible performance metrics is insufficient. Furthermore, disclosure of performance measures without corresponding hurdle rates makes it difficult to ensure that plan participants are being incentivized properly and paid for achieving stretching goals. 


Finally, we would ask that the CD&A not contain boilerplate language; this has been a significant problem with the current disclosure provided.





This Forum program is open, free of charge, to all shareholders of the invited corporate participants, and to any fiduciaries or professionals concerned with the investment decisions of those shareholders, according to the posted Conditions of Participation.  The Forum's purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their investment interests described in the Forum Summary As stated in the Conditions, all Forum participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program has been organized with the support of Hermes Equity Ownership Services, Ltd.  It is the first in an expected series that will be managed by a not-for-profit “Institute” to be established for the purpose of continuing the Forum programs conducted by Gary Lutin.

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