nyc bar: say on pay - planning & tactics for 2013

Say on Pay: Planning & Tactics for 2013

January 15, 2013

Steven HallSteven Hall & Partners

650 Fifth Ave., 33rd FloorNew York, NY 10019

[email protected]

http://www.nycbar.org/nycbar/index.php

Updated Investor/Proxy Advisor Firm Voting Guidelines

• ISS Policy Changes for 2013– ISS Peer Group Methodology Updated– Realizable Pay Incorporated into Qualitative Pay-for-Performance Assessment– Pledging and Hedging: Governance Failure– Scrutiny of Existing Change-in-Control Arrangements in Say on Golden Parachute

Proposals

• Glass Lewis Policy Changes for 2013– Board Responsiveness to Significant (25%) Shareholder Vote– No Changes to Pay-for-Performance Assessment– Modification to Analysis of Equity Compensation Plan Proposals– Equilar Accepting 2013 Peer Group Updates

• Action Items

• 2012 Say on Pay Voting Results

January 15, 2013

ISS Policy Changes for 2013

ISS Peer Group Methodology Updated

• Incorporates information from companies' self-selected pay benchmarking peer groups in order to identify GICS industry groups beyond the subject company's own GICS classification

• Focuses on a company’s 8-digit GICS designation to identify peers that are more closely related in terms of industry

• Prioritizes peers that maintain the company near the median of the peer group, are in the subject company's peer group, and have chosen the subject company as a peer

• It will be very difficult to independently identify the ISS selected peer group

– Added complexity – Large number of potential peers – Increased level of “manual judgment” on ISS’s part

January 15, 2013- 3 -


ISS Peer Group Methodology Updated (cont’d)

• ISS will begin the process of peer group construction and rationalization well before companies' new 2013 proxy disclosures are available

– ISS will typically use company-selected peers disclosed in the prior year's proxy for their new methodology• For meetings in 2013, ISS will typically use peers disclosed in

2012– ISS offered companies an opportunity to proactively provide

information regarding changes to company self-selected peer groups• Submission deadline was December 21, 2012 in order to

ensure its consideration in ISS’s peer group construction for 2013

January 15, 2013- 4 -


Realizable Pay Incorporated into Qualitative Pay-for-Performance Assessment

• ISS reviews several qualitative factors when an unsatisfactory pay-for-performance alignment is identified in its quantitative assessment

• Three-year realizable pay compared to three-year grant pay will now be one of the qualitative factors analyzed prior to the finalization of the ISS vote recommendation for S&P 500 companies

– Methodology will analyze total CEO pay for each year in the analysis without regard to whether all years are the same or different CEOs

January 15, 2013- 5 -


Realizable Pay Incorporated into Qualitative Pay-for-Performance Assessment (cont’d)

• Three-year realizable pay will consist of the sum of– Base salary for all three years– Annual bonus for all three years– Earned value of long-term cash awards made during the measurement period– Target value of long-term cash awards for on-going award cycles– Value of share-based awards made during the measurement period less the value of

any shares that were forfeited due to failure to meet performance criteria– Target level of share-based awards if awards are on-going/not vested

– Share-based awards valued based on stock price at end of measurement period

– Net value realized upon exercise of stock options that were granted during the measurement period

– Black-Scholes value for unexercised stock options that were granted during the measurement period• Black-Scholes recalculated as of the end of the measurement period

– Change in pension value and nonqualified deferred compensation earnings reported for all three years

– All other compensation reported for all three years

January 15, 2013- 6 -


Pledging and Hedging: Governance Failure

• “Significant” pledging and “any amount” of hedging of company stock by directors and/or executives now considered failure of risk oversight by ISS

– Will trigger AGAINST or WITHOLD vote recommendations against directors

– Vote recommendations will be based on the following factors:• Proxy disclosure of an antipledging policy prohibiting future

pledging activity• Magnitude of aggregate pledged shares in terms of total

common shares outstanding, market value or trading volume– No bright-line test has been disclosed

• Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time

• Proxy disclosure that shares subject to stock ownership and holding requirements do not include pledged company stock

January 15, 2013- 7 -


Scrutiny of Existing Change-in-Control Arrangements in Say on Golden Parachute Proposals

• ISS will now consider existing change-in-control arrangements with NEOs

– Previous policy was to focus only on new or extended arrangements• Further scrutiny will be placed on the number of problematic legacy features in

change-in-control agreements

• Recent amendment(s) incorporating problematic features will tend to carry more weight in the analysis, but the existence of multiple legacy problematic features will also be closely scrutinized

• ISS has provided limited guidance on how this approach will work in practice

– Problematic change-in-control features will be considered in the context of• The amount of actual tax gross-ups reported• The total change-in-control payout

January 15, 2013- 8 -


Scrutiny of Existing Change-in-Control Arrangements in Say on Golden Parachute Proposals (cont’d)

• Problematic features in change-in-control agreements include:

– Single-or modified-single-trigger cash severance;– Single-trigger acceleration of unvested equity awards;– Excessive cash severance

• >3x base salary and bonus

– Excise tax gross-ups triggered and payable • As opposed to a provision to provide excise tax gross-ups

– Excessive golden parachute payments • On an absolute basis or as a percentage of transaction equity value

– Recent amendments that incorporate any problematic features or recent actions that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders

– The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote

January 15, 2013- 9 -

Glass Lewis Policy Changes for 2013

Board Responsiveness to Significant (25%) Shareholder Vote

• Glass Lewis clarified its long-standing approach to this issue, noting that the board should demonstrate some level of engagement and responsiveness to address the shareholder concerns when 25% or more of shareholders (excluding abstentions and broker non-votes) vote

– WITHOLD or AGAINST a director nominee, – AGAINST a management-sponsored proposal, or – FOR a shareholder proposal

• While a 25% threshold alone will not be sufficient to warrant a negative recommendation on a future proposal, it will bolster arguments to vote against management’s recommendation in the event Glass Lewis determines that the board did not respond appropriately

January 15, 2013- 10 -


Board Responsiveness to Significant (25%) Shareholder Vote (cont’d)

• Glass Lewis will make a case-by-case assessment following consideration of publicly available disclosures regarding:

– Changes in directorships, committee memberships, disclosure of related party transactions, meeting attendance or other responsibilities;

– Any revisions made to the company’s articles of incorporation, bylaws or other governance documents;

– Any press or news releases indicating changes in, or adoption of, new company policies, business practices or special reports; and

– Any modifications made to the design and structure of the company’s compensation program.

January 15, 2013- 11 -


No Changes to Pay-for-Performance Assessment for 2013

• Pay-for-Performance Assessment revamped in July 2012– Compensation Analysis

• Compensation analyzed on a three-year weighted average basis– This is a change from the previous model that analyzed

only one year of compensation for NEOs– Performance Analysis

• Performance metrics evaluated on a three-year weighted average basis

• Two metrics removed– Change in stock price– Change in book value per share

• The five performance metrics remaining in the model are TSR, Change in Operating Cash Flow, EPS Growth, ROE & ROA

January 15, 2013- 12 -


No Changes to Pay-for-Performance Assessment for 2013 (cont’d)

• Pay-for-Performance Assessment revamped in July 2012 (cont’d)– Pay for Performance Grades

• Glass Lewis abandoned the forced curve grading system • Grades now based on a company’s relative percentile position

of compensation and performance rankings. Grades will be assigned as follows:– A = Performance > Compensation by 60 to 100%– B = Performance > Compensation by 30 to 59%– C = Performance > Compensation or Compensation >

Performance by 0 to 29%– D = Compensation > Performance by 30 to 59%– F = Compensation > Performance by 60 to 100%

January 15, 2013- 13 -


Modification to Analysis of Equity Compensation Plan Proposals

• Glass Lewis made an addition to the overarching principles used to evaluate equity plans

– Plans should not count shares in ways that understate the potential dilution, or cost, to common shareholders • Specifically “inverse” full-value award multipliers

January 15, 2013- 14 -


Equilar Accepting 2013 Peer Group Updates

• Equilar’s peer groups are used by Glass Lewis in its Say on Pay quantitative analyses

• Equilar is now accepting submissions of updated peer group data to include in its 2013 peer group calculations

– Equilar does not plan on updating peer groups until July 2013 absent the changes submitted on its website

– U.S. companies in the Russell 3000 Index wishing to provide updated peer group information can fill out a form on Equilar’s website

– Deadline for submission is January 18, 2013

January 15, 2013- 15 -

Action Items

In light of the new ISS and Glass Lewis guidelines, companies should take the following actions:

• Assess current company-selected comparator group and consider how this may differ from the group selected by the new ISS methodology

• Committees should also begin reviewing realizable pay calculations for NEOs, and consider incorporating this information into their CD&As

• Review hedging and pledging policies, and the current pledging practices of named executive officers and directors

• Committees should ensure that public disclosure documents all steps taken to address shareholder concerns following voting results for either directors or the say on pay vote fell below the required 75% threshold for Glass Lewis or the 70% threshold for ISS

• Review change-in-control arrangements for NEOs and evaluate whether or not such policies remain in the best interests of shareholders

January 15, 2013- 16 -

2012 Say on Pay Voting Results

• 2,608 companies held Say on Pay votes in 2012

– On average, companies have received • 89% FOR vote• 9% AGAINST vote• 2% Abstentions

• 60 companies have failed with an average 62% ‘Against’ vote

– 13 companies that received a 90%+ FOR vote last year failed this year

– 23 companies that received a 80%+ FOR vote last year failed this year

– Four companies have failed both this year’s and last year’s votes– One company received more FOR than AGAINST votes, but the

company did not approve the proposal• Less than 49% FOR votes

January 15, 2013- 17 -

2012 Say on Pay Voting ResultsAs of December 31, 2012

- 18 - January 15, 2013

Sample # of Companies Average Vote*

Size Pass Fail For Against Abstain

Total Sample 2,608 2,548 60 89.3% 9.0% 1.7%

Passed Say on Pay 2,548 90.5% 7.8% 1.7%

Failed Say on Pay 60 36.0% 62.1% 1.9%Revenue

Less than $1B 1,527 1,499 28 89.7% 8.3% 2.0%$1B - $2B 326 310 16 87.7% 10.7% 1.5%$2B - $5B 337 330 7 89.8% 9.0% 1.2%$5B - $10B 182 177 5 89.0% 10.0% 1.0%Greater than $10B 236 232 4 88.0% 11.0% 1.0%

Market Cap (as of 12/31/11)Less than $1B 1,393 1,358 35 88.9% 9.0% 2.1%$1B - $2B 369 359 10 90.1% 8.7% 1.3%$2B - $5B 402 395 7 90.4% 8.4% 1.2%$5B - $10B 180 176 4 88.2% 10.7% 1.1%Greater than $10B 264 260 4 89.2% 9.9% 0.9%

Industry (GICS Sector)Consumer Discretionary 347 338 9 89.4% 8.9% 1.7%Consumer Staples 97 96 1 91.3% 7.3% 1.4%Energy 169 165 4 88.3% 9.7% 2.0%Financials 625 612 13 89.6% 8.7% 1.7%Health Care 332 317 15 87.4% 11.2% 1.5%Industrials 359 349 10 89.1% 9.1% 1.8%Information Technology 428 422 6 89.7% 8.9% 1.4%Materials 140 139 1 91.4% 7.2% 1.4%Telecommunication Services 33 33 0 89.8% 8.4% 1.8%Utilities 78 77 1 89.2% 8.0% 2.8%

* Rounded

nyc bar: say on pay - planning & tactics for 2013

Business

aggregate pledged shares

2013realizable pay incorporated

glass lewis policy

performance assessment revamped

glass lewis

problematic features

performance assessment

iss policy