ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

Just In Time For Thanksgiving - The Compensation Turkeys of the Year!

At Thanksgiving, our thoughts naturally turn to gluttony of all sorts. So it seems like a fitting time to recognize a few companies for granting awards to their executives that look so ridiculous they practically beg Congress to speed up compensation reform. A great place to look for these examples is the footnoted.org blog, which prides itself on posting the interesting stories "found in the footnotes" of SEC filings.

So pass the cranberry sauce and gravy, here are my nominees for the "Compensation Turkeys of the Year", all reported by footnoted.org in the past few weeks:

Of course, Goldman Sachs makes the list for its announcement that it is setting aside around $17 billion for compensation and bonuses, calculated to be more than $700,000 on average for each of the company's 31,700 employees. I blogged about this last month. The bonuses are based on Goldman's financial results for the current year, and commentators disagree on how much the results were enhanced by the government bailout of AIG and other financial companies.

Allis-Chalmers reported recently that healthcare benefit premiums and expenses for its CEO exceeded $72,000 last year. (That buys a lot of aspirin.)

Microsoft announced that, for one new executive, they paid a relocation allowance of $4.1 million, and a related tax gross-up of $1.2 million.

These aren't the only examples of compensation that grab your attention, but they are just the most recent obvious ones. As Mark Borges pointed out at the NASPP Annual Conference and other presentations, when companies eventually are required to have advisory votes on executive pay (Say-on-Pay), most companies' compensation will be approved. However, to prevent a "no" vote, they will need to think about the compensation practices that appear the most excessive - personal use of corporate jets, tax gross-ups, etc. It will be interesting to see whether, in a couple of years, after compensation reform, the Compensation Turkeys of the Year will be extinct birds. Don't count on it.

If you have any other Compensation Turkeys of the Year you would like to report, send me an e-mail. (As with any other good whistleblower policy, I won't use your name unless you give permission.)

By the way, the picture above shows the family of wild turkeys that hung out in our back yard for the past few months. Leading up to Thanksgiving, though, I haven't seen them lately. Times are tough.

Anyway, have a fantastic Thanksgiving!

RiskMetrics Update

Last week I reported that RiskMetrics Group came out with its 2010 updates to its proxy voting guidelines, summarized here. The compensation policy has changed more in form than in substance from last year, integrating separate policies into a single policy. RiskMetrics also clarified its methodology when it has compensation-related recommendations for a company based on its analysis. If that company has a Say-on-Pay proposal on the ballot, RiskMetrics will generally apply its recommendations to that resolution. However, if egregious practices are identified, or if a company previously received a negative recommendation on a Say-on-Pay resolution and the issue is not resolved, RiskMetrics may recommend a withhold vote with respect to compensation committee members.

The new governance policy also changes RiskMetrics' standards when making recommendations with respect to shareholder rights plans and revises its director independence standards.

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Several new reports have been published that provide valuable information about what's going on in the public company world. Here are two that just came out:

Pearl Meyer & Partners released a survey report covering companies' attitudes toward Say-on-Pay, which is currently required for TARP recipients but will not be required for other public companies until at least 2011. The survey found that most respondents were not very concerned about Say-on-Pay and are not yet taking specific steps to plan for shareholders advisory votes. The Pearl Meyer firm reports that virtually all advisory votes have passed, mostly by a sizeable majority. However, the firm cautions that institutional shareholders may get tougher on Say-on-Pay votes in the future. The survey report recommends some specific steps companies can take over the next several months to plan for Say-on-Pay.

Frederick W. Cook & Co. released a report of its study of non-employee director compensation at the 100 largest New York Stock Exchange companies and the 100 largest Nasdaq companies. The study found that compensation levels generally stabilized in 2009 after several years of increases, which had tracked increased director responsibilities under the Sarbanes-Oxley Act of 2002. The study also found that the compensation mix changed, with more companies moving director equity awards out of stock options and into stock awards. Also, the declines in the equity markets had a significant impact on equity award values, especially at Nasdaq companies. The study outlines median compensation levels at these companies and examines a number of compensation practices.

One more update - hot off the presses: I noticed that RiskMetrics today published some of its 2010 policy information, which applies to all shareholder meetings occurring on or after February 1, 2010. The more comprehensive proxy voting guidelines will be published in December. However, the just-released documents shed some light on RiskMetrics' evaluation of compensation and governance practices for the 2010 season. It appears that RiskMetrics will make some changes to its approach in making recommendations on Say-on-Pay votes and other compensation-related votes. I will report further on this next week.

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I've just finished three and a half very interesting days at the NASPP Annual Conference and the Proxy Disclosure Conference sponsored by CompensationStandards.com in San Francisco. Aside from an unexpectedly big crowd and some great food, attendees encountered some interesting updates:

Proxy Disclosure Rules. Shelley Parratt, Director of Corporation Finance of the SEC, addressed the group, and there were two main news items. First, she previewed the currently proposed amendments to the proxy disclosure rules. She didn't address when the amendments would be considered, but stated that the new rules "may well" be in place for the 2010 proxy season. The SEC staff still clearly wants to accomplish this goal. Since the rules probably won't be considered until early December, this will likely put proxy drafters and compensation committees in a bind.

Second, apart from the new rules, Parratt discussed compliance with the proxy disclosure rules adopted in 2007 and indicated that the SEC staff will take a more assertive (aggressive?) posture in its comment process. The staff has observed that companies that have already responded to comments on these rules are doing a pretty good job of compliance, although they can always do better. On the other hand, companies that have not yet received the comments seem to be waiting to receive comments before complying with the staff's guidance. She indicated that companies should be more proactive in changing their practices before they get comments, because the SEC will be taking a "no more Mr. Nice Guy" approach. Instead of "futures comments" (amend your filings in the future to comply), the staff will now be requiring many companies to go back and amend their prior filings. The main areas to focus on: (1) make sure your CD&A contains real analysis of "how" and "why" compensation decisions were made, and (2) disclose the performance targets underlying incentive compensation, unless there is a really compelling case to support competitive harm.

New Governance Reform Bill. There was some discussion of the financial reform bill released this week by Senator Christopher Dodd - the "Restoring American Financial Stability Act of 2009". Buried in the 1,136 page bill, which would reform the financial regulatory system, are numerous governance reforms that would apply to all public companies. These are very similar to the provisions of the Schumer bill, described in the ON Securities Cheat Sheet. See this description of the Dodd bill provisions in the Corporate Counsel Blog. The Dodd bill is significant to governance reform, because it may give momentum to the provisions of the other reform bills, which can now be reconciled and carried forward as part of financial institution reform.

A New Ball Game. I bumped into well known compensation attorney and blogger Mike Melbinger, but he was rushing out to the Fox News affiliate to give an interview. It's very entertaining - he talked about AIG CEO Robert Benmosche's statement that he may leave the company because of the government's limitations on executive pay. Melbinger likened the Treasury to a baseball owner. He said that if you want your team to be successful (i.e., if you want AIG to pay back the $180 billion in government aid), you pay whatever it takes to hire C.C. Sabathia, rather than hiring a journeyman pitcher for a low price and hoping for the best. Even Melbinger, however, admitted that if everyone at AIG is driving around in Lamborghinis, you might have a PR problem.

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Early November finds us in a kind of limbo - those of us who advise public companies on governance and compensation matters are waiting for something big to happen. But there's plenty of smaller stuff to report on - although most of these items present more questions than answers:

Proxy Disclosure Rules. On November 4, SEC Chairman Schapiro gave a speech addressing current regulatory developments. She described the proxy disclosure rules but did not address when they would be adopted or considered. The Corporate Counsel Blog reports that the rules will not be adopted on November 9, as previously rumored. However, there is still a chance that the rules will apply for the 2010 proxy season. If so, there won't be much time to evaluate the rules, or to hold a compensation committee meeting to address the new disclosures. Stay tuned. . . .

Proxy Access. Rep. Maxine Waters has proposed an amendment to the Investor Protection Act of 2009 (the current provisions of the Act are described in the ON Securities Cheat Sheet). The amendment would require the SEC to adopt rules permitting large shareholders to nominate directors in the company's proxy statement (proxy access). If added to the Act and ultimately adopted, this provision would enhance the SEC's position in adopting its proposed Rule 14a-11 granting proxy access.

Say-On-Pay and Shareholder Surveys. Companies continue to conduct annual advisory votes on compensation on a voluntary basis. Meanwhile, as reported by the Corporate Counsel Blog, some companies, including Schering-Plough, have begun to survey their shareholders. This will provide more detailed data on shareholders' opinions about compensation practices and may emerge as an alternative or supplement to simple yes-or-no advisory votes.

New York Power of Attorney Law. You may have read about the amendments to the New York power of attorney laws, effective September 1, 2009. See this Forbes article. The amendments impose strict requirements (font size, notarization, etc.) for powers of attorney, particularly those signed in New York by New York residents. The amendments have prompted a flood of articles and analyses, including speculation that the requirements could affect the validity of powers of attorney for SEC registration statements, Section 16 filings, etc. I agree with this analysis, indicating that, even though there is no definitive guidance, the validity of powers of attorney for SEC filings should be governed by SEC rules and not state law.

I should get updates on some of these items next week - I'll be attending the NASPP Annual Conference in San Francisco. Of course, I can't wait to share the information with the ON Securities readers. There may even be a tweet or two, if you can't wait for the Blog.

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