NACD Blog

Pay Ratios: A Question of When, Not If

May 4th, 2012 | By Kate Iannelli

Moving into May and the peak of annual meeting season, executive compensation is one of the top stories in the business media. To date, eight companies have failed their annual say-on-pay votes. With the bulk of annual shareholder meetings in the coming months, this number is expected to increase. This week, an editorial in the New York Times criticized the Securities and Exchange Commission (SEC) for failing to issue rules on another area of executive compensation—pay ratios—claiming the “main problem seems to be foot-dragging in the face of objections from corporate lobbyists.”

The article correctly identifies several factors. The SEC did delay issuing final rules on the CEO pay ratio until the second half of 2012, effectively postponing corporate disclosure of the ratio of chief executive pay to the company’s median salary until the 2013 proxy season. Also, a substantial number of comment letters have already been submitted to the SEC on matters regarding executive compensation disclosures, including some for which there are no rules pending. Lastly, the rules mandated for pay ratios in Dodd-Frank are unlike most other provisions in the legislation, in that Congress did not allow for much flexibility in crafting the final rules.

However, the NYT editorial did not mention several factors that have hindered progress for the SEC. According to the May 2012 Dodd-Frank Progress Report from Davis Polk, of the SEC’s 95 required rulemakings, the agency has missed the deadline for 56. When final rules are actually released, they are often met with criticism and lawsuits. Last summer the U.S. District Court of Appeals overturned the SEC’s proxy access rule on the basis that the agency had not conducted a thorough cost-benefit analysis. The SEC subsequently introduced a more robust economic analysis in its rulemaking process, leading to a missed deadline for releasing a final rule regarding the conflict minerals provision—which will require companies to track and disclose their use of minerals potentially sourced from the Democratic Republic of the Congo.

With the rigid mandates on the pay-ratio disclosure, the SEC is facing difficulties with one area not clearly defined: computing median compensation. While Dodd-Frank was explicit in the calculation of the ratio, it was not clear in how the median total compensation would be measured. This measurement leads to several questions: Does the compensation of every employee at an organization need to be computed? Should part-time employees be included in the calculation? Would international employees be included? If so, what foreign exchange rate would be used? Taking these questions into consideration, last August the AFL-CIO proposed the use of statistical sampling to calculate the median compensation, an option the SEC is taking seriously.

The argument is no longer whether pay ratio disclosures will have the intended effect of changing executive compensation. Instead, it is when and how these rules will be issued.

Share:

Tags: AFL-CIO, board governance legislation, Conflict minerals, Dodd-Frank, executive compensation, median compensation, New York Times, pay ratios, Say on Pay, SEC, Securities and Exchange Commission

1 Comment »

Learning From the Past

April 27th, 2012 | By Kurt Groeninger

On April 18^th, slightly more than 52% of the FirstMerit shareholders rejected the bank’s say-on-pay proposal. This was the fifth pay plan voted down by shareholders this year. The reason for this rejection is not new: Shareholders claim a misalignment between pay and performance for the senior executives.

FirstMerit stated that the company’s “compensation policies and procedures…are imperative to align the compensation of the company’s named executive officers with [its] business goals and long-term success and that such compensation and incentives are designed to attract, retain and motivate the Company’s key executives.” This statement is identical to the one made in their proxy last year, which received majority shareholder support.

An article in the Wall Street Journal indicated that FirstMerit awarded $6.4 million in total compensation to its CEO in 2011, although its stock trended downward from early 2010 to late 2011. Last year, several companies that lost a say-on-pay vote also faced complaints of a pay for performance disconnect. For example, Jacobs Engineering raised executive compensation nearly 34 percent despite its one- and three-year shareholder returns being below the median of its peer group.

In response to a failed advisory vote, Jacobs Engineering chose to engage directly with shareholders and discuss the rationale for its compensation policies. In 2012, the effort paid off and Jacobs received majority support for its pay plans.

Beazer Homes also approached shareholders after they rejected the 2011 say-on-pay vote. According to the company’s 2012 proxy statement, the compensation committee directed management to “contact several major stockholders in order to better understand the reasons behind the [say-on-pay] vote outcome.” Additionally, the proxy lists the significant changes made to the compensation plan. In February 2012, Beazer Homes reported that the shareholders had overwhelmingly approved the revised compensation plan.

Failing a say-on-pay vote presents a challenge for boards. In some cases, shareholder outreach can provide valuable insights into investor concerns. Over the past year, Jacobs Engineering, Beazer Homes, and others have proved that this type of engagement can succeed.

Share:

No Comments »

The Surprisingly Weak March Jobs Report

April 13th, 2012 | By Kate Iannelli

Last Monday, directors opened their email inboxes to find a disappointing employment report in NACD Directors Daily. In March, the U.S. economy added 120,000 jobs, far below economists’ projection of 210,000. This marks the first month since December that job increases failed to meet the mark of 200,000. While the unemployment rate dropped from 8.3 percent to 8.2 percent, it is speculated that this was largely the result of more people choosing to stop actively searching for jobs. While slightly more positive, NACD’s Board Confidence Index (BCI) also shows slow growth in employment.

Surveying directors on their confidence in the first quarter of 2012, the overall BCI score rose nearly six points to 60.6. Although an improvement over its Q3 2011 low of 47.5, the BCI is yet to reach its peak—achieved in Q1 2011—of 64.9. This growth is achieved through a consistently improved outlook for the long-term future of the economy, as well as progress made in the past year. Directors tend to be less confident in short-term economic conditions.

The boardroom is not unfounded in its hesitancy to predict the state of the economy in the coming months. The JOBS Act was recently signed into law, the future of the health care reform legislation is under debate, and most companies are in the midst of proxy season. Not to mention the list of proposed and final rules expected to come from the Securities and Exchange Commission and Public Company Accounting Oversight Board.

Thirty-six percent of directors responded that their company’s hiring practices resulted in a net gain in the last quarter. This is a 5 percent increase over Q4 2011. However, the amount of directors who plan to expand their workforce in the next quarter declined by nearly 15 percent.

Produced in conjunction with Pearl Meyer & Partners, this quarter the BCI introduced two questions that will provide significant benchmarks in the coming months. When asked if their CEO is on track to meet incentive plan performance objectives for this fiscal year, 74 percent of directors said their CEO was on schedule. Twenty-two percent noted their CEO was behind schedule. Furthermore, 60 percent of directors are confident their CEO will meet these incentive plan goals.

To read more about the BCI, click here.

Share: