Say on pay dan walter-update 20100521

SAY ON PAY

Say on Pay The real impact of shareholders, regulators, and

governments on Executive Compensation

September 23, 2009UPDATED: May 21, 2010

Dan Walter, CEPPresident and CEO, Performensation

[email protected] | www.performensation.com | 877-803-9255, ext 700

SAY ON PAY

Dan Walter

• Dan Walter, CEP, is the President and CEO of Performensation Consulting. Dan has more than 15 years of experience with both executive and broad‐based equity compensation. He provides end to end ‐ ‐solutions for private and public companies based in both the United States and abroad. He has worked as a compensation consultant, administrator, software architect and adviser.

• Performensation’s unique solutions include GEMS, the industry’s only tool for tracking, managing and communicating performance based programs. ‐Dan also assists in correcting out of the money stock option programs and troubled ESPPs, Additional services include RFPs and provider evaluations, and bridging the growing gap between the services of traditional compensation consultants and the professionals at issuing companies.


SAY ON PAY

UPDATE May 2010 – Say on Pay: To Fear or Not to Fear?

• With the seemingly imminent approval of new US financial regulations “Say on Pay” has become a hot topic in boardrooms, executive compensation departments, investor relations and the media.

• This presentation looks at Say on Pay from the approach of:• “What has really happened when and where it has been implemented?”• Are the theoretical dangers seen in fact or perhaps just hyperbolic?

Evidence seems to show that compensation levels and frequency are not impacted at companies with good pay practices. The only wide-spread effect is the growth in performance-based compensation instruments.

• Professionals in countries where Say on Pay is mandated state that pay discussions have become more thoughtful from both the side of the company and the side of the investor.

• Perhaps our concerns on this issue are driven more by the unknown that the truth.


SAY ON PAY

What is Say on Pay?

• Annual non-binding shareholder vote on executive remuneration– Ability for shareholders to voice their opinion on pay policies– Not a vote on specific compensation pay packages or elements– Origin in is current form goes back to 2003, in the United Kingdom

• Now policy in many countries including: Netherlands, Australia, Sweden, Norway

• Symbolic or does it change policy?


SAY ON PAY

The companies that will be most impacted

• Companies with excessive or ineffective executive compensation

• Companies with independent-mind shareholders who are willing to challenge management

• Companies that have historically responded positively to shareholder pressure


SAY ON PAY

Subtitle D Executive Compensation SEC. 941 SHAREHOLDER VOTE ON EXECUTIVE COMPENSATION DISCLOSURES

• (a) AMENDMENT TO SECURITIES EXCHANGE ACT OF 1934.Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) is amended by adding at the end the following new subsection:– (i) ANNUAL SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION.

• (1) ANNUAL VOTE. Any proxy or consent or authorization for an annual meeting of the shareholders (or a special meeting in lieu of the annual meeting) occurring on or after December 15, 2009, shall provide for a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the Commission compensation disclosure rules (which disclosure shall include the compensation committee report, the compensation discussion and analysis, the compensation tables, and any related materials). The shareholder vote shall not be binding on the corporation or the board of directors and shall not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board, nor shall such vote be construed to restrict or limit the ability of shareholders to make proposals for inclusion in such proxy materials related to executive compensation.

• (2) SHAREHOLDER APPROVAL OF GOLDEN PARACHUTE COMPENSATION.– (A) DISCLOSURE.In any proxy or consent solicitation material for a meeting of the shareholders (or a special

meeting in lieu of the annual meeting) occurring on or after December 15, 2009, that concerns an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer, the person making such solicitation shall disclose in the proxy or consent solicitation material, in a clear and simple tabular form in accordance with regulations to be promulgated by the Commission, any agreements or understandings that such person has with the executive officers of such issuer (or of the acquiring issuer, if such issuer is not the acquiring issuer) concerning any type of compensation (whether present, deferred, or contingent) that is based on or otherwise relates to the acquisition, merger, consolidation, sale, or other disposition of all or substantially all of the assets of the issuer, and the aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of such executive officer.

– (B) SHAREHOLDER APPROVAL.Any proxy or consent or authorization relating to the proxy or consent solicitation material containing the disclosure required by subparagraph (A) shall provide for a separate shareholder vote to approve such agreements or understandings and compensation as disclosed. A vote by the shareholders shall not be binding on the corporation or the board of directors of the issuer or the person making the solicitation and shall not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board, nor shall such vote be construed to restrict or limit the ability of shareholders to make proposals for inclusion in such proxy materials related to executive compensation.

• (b) DEADLINE FOR RULEMAKING. Not later than 1 year after the date of the enactment of this Act, the Securities and Exchange Commission shall issue any rules and regulations required by the amendments made by subsection (a).

• (a) AMENDMENT TO SECURITIES EXCHANGE ACT OF 1934.Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n) is amended by adding at the end the following new subsection:– (i) ANNUAL SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION.

• (1) ANNUAL VOTE. Any proxy or consent or authorization for an annual meeting of the shareholders (or a special meeting in lieu of the annual meeting) occurring on or after December 15, 2009, shall provide for a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the Commission compensation disclosure rules (which disclosure shall include the compensation committee report, the compensation discussion and analysis, the compensation tables, and any related materials). The shareholder vote shall not be binding on the corporation or the board of directors and shall not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board, nor shall such vote be construed to restrict or limit the ability of shareholders to make proposals for inclusion in such proxy materials related to executive compensation.

• (2) SHAREHOLDER APPROVAL OF GOLDEN PARACHUTE COMPENSATION.– (A) DISCLOSURE.In any proxy or consent solicitation material for a meeting of the shareholders (or a special

meeting in lieu of the annual meeting) occurring on or after December 15, 2009, that concerns an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer, the person making such solicitation shall disclose in the proxy or consent solicitation material, in a clear and simple tabular form in accordance with regulations to be promulgated by the Commission, any agreements or understandings that such person has with the executive officers of such issuer (or of the acquiring issuer, if such issuer is not the acquiring issuer) concerning any type of compensation (whether present, deferred, or contingent) that is based on or otherwise relates to the acquisition, merger, consolidation, sale, or other disposition of all or substantially all of the assets of the issuer, and the aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of such executive officer.

– (B) SHAREHOLDER APPROVAL.Any proxy or consent or authorization relating to the proxy or consent solicitation material containing the disclosure required by subparagraph (A) shall provide for a separate shareholder vote to approve such agreements or understandings and compensation as disclosed. A vote by the shareholders shall not be binding on the corporation or the board of directors of the issuer or the person making the solicitation and shall not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board, nor shall such vote be construed to restrict or limit the ability of shareholders to make proposals for inclusion in such proxy materials related to executive compensation.

• (b) DEADLINE FOR RULEMAKING. Not later than 1 year after the date of the enactment of this Act, the Securities and Exchange Commission shall issue any rules and regulations required by the amendments made by subsection (a).


SAY ON PAY

Empirical Evidence: Research from the UK

• Say on Pay does not have a great impact on most companies• June 2008 Study

• Academic Paper by Fabrizio Ferri and David Maber Harvard Business School

– No evidence that Say on Pay changed the levels or growth of executive compensation

– Higher sensitivity of CEO cash and total pay to negative operating performance


SAY ON PAY

Empirical Evidence: Cautionary UK research

• August 2009 Study• Jeffrey N. Gordon, Columbia University

– The details of pay-for-performance may be too complex to effectively communicate to shareholders

– Annual voting requirement may result in a narrow range of compensation best practices

– Smaller firms would be unlikely to benefit for Say on Pay and restrictions to act like larger firms, may negatively impact their ability to grow

– Truly abnormal pay may be limited to a large companies in a small group of industries


SAY ON PAY

Empirical Evidence: Research from the US and UK

• Say on Pay may create shareholder value• August 2009 Study

• Jie Cai and Ralph A. Walkling, Drexel University

– Stocks of firms with the highest abnormal CEO pay and low pay-for-performance sensitivity react in a significant, positive manner to the Say-on-Pay

– More value created in companies with strong ownership by “vote-no” mutual funds. Dissenting voice creates pressure for change.


SAY ON PAY

Who has done it in the US?

• Companies across industries including:– Aflac, Intel, Alaska Airlines, Motorola, Blockbuster, Verizon, Apple,

MBIA– Most of the recent votes in favor of these companies executive

compensation were generally above 90%• Motorola - 63%• MBIA - 72%

– More than 20 companies have had shareholder votes requesting Say on Pay• Most votes have fallen below 50%, with none exceeding 62%• Ironically:

– Research shows that the companies that have had shareholder driven initiatives generally do not have “excessive” executive compensation

AND– These companies see negative returns when shareholders initiate this issue


SAY ON PAY

So what does it all mean?

• Say on Pay is not a harbinger of doom• Executive compensation at most companies will not be

dramatically impacted• We will continue to see growth in performance-based pay, but

variety may be stifled• Companies with poor remuneration practices may see

positive shareholder value• The real impact may be the need for improved

communication and explanation of compensation practices– This may be especially important for companies with adversarial

shareholder, but reasonable executive remuneration policies


SAY ON PAY

Panel Discussion

• How have you seen Directors and Executives react to Say on Pay?

• Do you believe that companies will suffer a loss of control as a result of Say on Pay?

• Do you agree that shareholder may see an increase in value as a result of Say on Pay?

• Is there any aspect of Say on Pay that seems particularly problematic, or do you believe the outcry against it is based on a general push-back against the encroachment of shareholders and governing bodies?


SAY ON PAY

Thank You

Dan Walter, CEPPresident and CEOPerformensation

[email protected]

www.equitycompensationexperts.groupsite.com
