Managing Total Compensation in an Economic Downturn: One ... Managing Total Compensation in an Economic

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  • SESSION 4.2

    Managing Total Compensation in an Economic Downturn: One Year On

    Emerging Trends – Edward Graskamp, Frederic W. Cook & Co. The Legal Perspective – Nicholas Greenacre, White & Case LLP

    Trustee and Administration Issues – Lindsey Doud, RBC cees The Issuer’s Experience – Laura Smith, STMicroelectronics

  • •  Emerging Trends – Edward Graskamp, Frederic W. Cook & Co. •  The Legal Perspective – Nicholas Greenacre, White & Case LLP •  Trustee and Administration Issues – Lindsey Doud, RBC cees •  The Issuer’s Experience – Laura Smith, STMicroelectronics

    Session 4.2 Managing Total Compensation in an Economic

    Downturn: One Year On

    Agenda

    •  Emerging Trends – Edward Graskamp, Frederic W. Cook & Co.

    •  The Legal Perspective – Nicholas Greenacre, White & Case LLP

    •  Trustee and Administration Issues – Lindsey Doud, RBC cees

    •  The Issuer’s Experience – Laura Smith, STMicroelectronics

  • Executive Remuneration and Employee Incentive Plans Emerging Trends

    Edward Graskamp Managing Director

    Frederic W. Cook & Co.

    Agenda

    • The Past • The Present • The Future

  • The Past (2008 to mid-2009)

    Widespread fear and trepidation Maintain status quo, if at all possible Corrective action, often needed for survival Some over-reaction, perhaps opportunistic Broad-based “retention” programs discredited Attack on “pay for failure” Expectations generally reshaped Regulators licking their chops

    The Present (mid-2009 to mid-2010)

    Cautious approach with residual restraint Avoid change for change sake...let the dust

    settle Do not let pay fall too far behind Regulatory onslaught Increasing “cost of compliance” Risk assessment and avoidance Eliminate red flags

  • The Future (mid-2010 and beyond)

    Longer time horizons More “sticks” (versus “carrots”) Deleveraging...risk-adjusted values changing Focus on delivery True reform (probably not, unfortunately)

    •  Simplification and streamlining •  Elimination of legacy benefits and perquisites

    Unintended consequences?

    The Legal Perspective

    Nicholas Greenacre Partner

    White & Case LLP

  • Agenda

    • Shareholder activism • Some tax…… • …..and some employment issues

    Say on Pay in Europe

    Binding votes •  Netherlands

    •  binding shareholder vote on any change in executive remuneration policy, but no vote on remuneration report

    •  Sweden, Norway •  annual binding shareholder resolution re guidelines for compensation of

    senior executives •  Denmark

    •  binding shareholder vote on material change (not annual) Non-binding votes

    •  France •  Germany •  Spain •  UK

  • Weapons •  LTI approval vote •  “Say on pay” vote •  Sell shares

    Key players •  Association of

    British Insurers •  Risk Metrics •  A few other thought

    leaders

    Who’s interested? •  Primarily UK institutions

    • US and other funds more relaxed •  Passive “index trackers” particularly

    • Can’t sell shares in protest • Corporate governance function has a strong role

    Investor activism in the UK

    UK lessons

    • Positive and negative investor influence •  Increasing conflict

    •  Shell •  Bellway

    • Where are we now? • US developments

  • Tax

    •  High income tax rates for high earners •  UK 40% rising to 50% (65% with NICs) •  US 35% rising to 39.5% from 2011 •  Germany 45% (approx 55% with solidarity surcharge) •  Japan 40% (approx 50% with municipal & prefectural tax) •  Hong Kong 15% (standard flat rate)

    •  Capital gains rates generally much lower •  UK 18% flat rate •  US 15% (long term) and 20% from 2011 - 35% (short term) •  Germany 25% (approx 28% with solidarity surcharge and

    church tax) •  Japan 1.05% (regardless of whether profit made) •  Hong Kong 0%

    Tax Consequences

    • Bank Payroll Tax •  UK example to be followed elsewhere?

    •  Increased use of restricted stock •  At least in UK and possibly US

    • Tax planning structures •  Increasing regulation •  Reputational risk •  Particular pressure on offshore “havens”

  • Employment

    •  Issues with deferrals and clawback •  The use of discretion •  Restraint of trade

    • Has it been “earned”? • Re-designing plans and contractual rights

    Trustee (and administration) issues

    Lindsey Doud Director & Head of London Office

    RBC Corporate Employee & Executive Services

  • General themes

    Trustee’s perspective •  Ever-increasing regulation e.g., KYC, AML, data protection/

    privacy….list goes on! •  Global focus on offshore centres/ “tax havens”/tax avoidance

     OECD report – white list •  Security of trust assets and sustainability of trust company

     Who is underlying custodian (counterparty risk)?  Need for demonstrably robust risk and governance processes

    •  Exercise of fiduciary duties – continuing increased scrutiny  Always seek external specialist advice if in doubt  Need to demonstrate considered, consistent approach, and no

    “rubber-stamping” •  Dealing with non-US resident US taxpayers – increasingly

    complex from international perspective

    General themes

    • Administrator’s perspective •  Need for robust, highly controlled processes and procedures •  Increasing need for processes to be underpinned by

    technology  Demands for quicker, streamlined and more cost effective delivery   Limit trustee’s exposure by ensuring e.g., no slippage in completion of

    investment requests in required timeframe  Participants seeking more information on underlying funds and

    performance

    •  Increased compliance checks and safeguards e.g., to accommodate involvement of discretionary trust

    •  Increased reporting requirements •  Adapting processes and procedures to accommodate new,

    and potentially complex, plan design developments and tax changes

  • Specifics – Share plans

    •  Use of unallocated cash in share trusts •  Time to acquire shares? •  Time to repay/partially repay outstanding loans?

    •  Underwater options •  Implications of corporate actions

    •  Rights issues •  Buy outs •  Companies going into administration

    •  Consolidation of trusts •  Activity relating to tax changes e.g.,

    •  New plan designs (e.g., in UK plans which benefit from capital gains tax regime)

    •  Accelerating vesting •  Maximising use of approved/qualified plans

    Specifics – Deferred compensation

    •  Wealth management issues for deferred compensation (and pension) plans   Investment and portfolio reviews – trustee governance  Diversifying cash holdings across banks and potentially currencies  Diversifying portfolios, e.g., government bonds (yield v. security)  More bespoke investments  Security on loans

    •  Adapting to tax and regulatory changes and impact on plan design, e.g.,  Administering clawback provision for vested awards  Challenges of tax changes, e.g., UK Bank Payroll Tax, changes to tax rates and reliefs  Clearly map and document plan requirements against processes at outset  Record keeping, monitoring and tax withholding

  • Deferred compensation – the regulatory environment

    Emphasis on aligning comp with appropriate risk, deferral of comp and claw back of benefits

    UK Financial Services Authority Code of Conduct & Walker

    Review

    Canadian OSFI review and CCGG guidance

    US Pay for Performance Act Financial Stability Forum

    G-20 Report

    The Issuer’s Experience

    Laura Smith Executive Compensation & Employee Ownership Director

    STMicroelectronics

  • Automotive 12%

    Computer 13%

    Communications* 39%

    Industrial & Others 8%

    Consumer 12%

    Distribution* 16%

    STMicroelectronics at a Glance

    Sales: 12% Employees: 4%

    Americas

    Sales: 28% Employees: 51%

    EMEA

    Sales: 5% Employees:

  • Long Term Incentives – Historical Perspective

    •  Stock Options until 2004 •  Performance Shares starting in 2005

    •  Eligibility reduced from stock option levels •  Grant size approximately one-third of options level •  Company performance criteria determine level of shares to vest

    Performance Criteria - Historical Results

    Implications of Economic Environment – LTI

    •  Stock Options •  All underwater; no plans to take action to address

    •  Performance Shares •  2009

    •  Share value decline roughly 30% versus 2008 •  Share pool remained same •  Reduced eligibility levels