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 ceesThe 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: <1%
Japan
Sales: 30% Employees: 29%
Asia Pacific
Sales: 25% Employees: 16% Greater China
2009 Sales : US$ 8.51 billion*
45,000 employees; 38 countries
13 main production sites
16 advanced R&D centers
* Including ST-NXP Wireless contribution starting August 2, 2008
* Including ST-NXP Wireless for Jan09 & ST-Ericsson starting Feb09
Major Customers
Revenues by Market Segment
Implications of Economic Environment
• Cost Control Measures in 2009 • Restructuring, hiring freeze, shutdowns, mandatory vacation use, etc.
• Base Salary • 2009 Salary Freeze • 2010 Conservative Increase Budget
• Cautious regarding market data in 2009 & projections 2010 • Emphasis on differentiation (target portion of population for no increase)
• Short Term Incentives • Plan provisions include company performance factor • 2008 payout reduced due to company performance level • 2009 special measure increased impact for 1st half
• Final result for full year was reduced payout equivalent to normal year when company performance level not met
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 • Increased average number of shares granted
• 2010 • Share value up roughly 15% versus 2009 • Share pool remains constant • Maintain eligibility levels • Slightly increase average number of shares granted
Percent Receiving
Average Shares
Other Challenges
• Competitive Intelligence • Insufficient & inconsistent market data • Industry competition primarily US headquartered
• LTI • Performance Shares still somewhat less prevalent than options • USD shares vs majority recipients in Europe (many also in Asia) • Regulatory environment
• France requirements • Italy fiscal matters • China SAFE
• Mobility tracking • M&A Activity
• Acquisitions • Joint Ventures
Questions?
Email Addresses
• Edward Graskamp – [email protected] • Nicholas Greenacre – [email protected] • Lindsey Doud - [email protected] • Laura Smith - [email protected]
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