governance past present future

© Copyright 2011. Compensation Venture Group, Inc. All rights reserved.© Copyright 2011. Compensation Venture Group, Inc. All rights reserved.

Plan Design Considerations: Governance Past, Present, and Future

December-2011Compensation Venture Group, Inc.

206.780.5547www.compensationventuregroup.comfred@compensationventuregroup.com

© Copyright 2011. Compensation Venture Group, Inc. All rights reserved.

Discussion Outline

Back Then: Where We Started

Past: Roots of Current Design

Present: Where We Are

Future: What’s Next

Other Issues: Threats to Equity


Where We Started

Congress encouraged equity compensation Incentive stock options (422) ESPP (423) ESOP (ERISA) Reg T – cashless exercise

Stock options by far the most prevalent

All-employee equity in technology sector

Restricted stock only in large, mature companies

Performance shares introduced in large, mature companies during flat market (1968-1982)

No expense for options, no Black-Scholes calculations

…and there was cake, and there was negus, and there was a great piece of Cold Roast, and there was a great piece of Cold Boiled, and there were mince-pies, and plenty of beer

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Tax code as punishment for “excess” executive pay

280G - golden parachutes (1984) 162(m) - million dollar cap (1993) 409A – deferred compensation (2004)

Accounting rules as punishment for executive pay

FAS123 FIN 44 FAS123R ASC 718 IFRS2

Regulatory

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Other legislation chipped in

Sarbanes-Oxley: cashless exercise, clawbacks 8-K filing requirements

Disclosure rules became another lever to “embarrass” over executive pay – disclosure requirements increased in:

Compensation Committee Report CD&A Total Compensation in Summary Compensation

Table Tables, tables, and more tables

Regulatory

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Growth of investor activism with equity plans the only way to way to vote “no” on executive pay: proxy advisers

ISS Glass Lewis GMI (Audit Integrity, Corporate Library)

Institutional shareholders develop their own standards

Fidelity Vanguard Dimensional Davis

Environmental

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Examples of proxy advisers micro-managing equity plan design Burn rate Share Value Transfer Stock Ownership Guidelines Minimum vesting period No RSUs for executives Performance conditions (yes/no) Stock options do not count as “performance-based” Change-in-control and severance vesting Concentration of grants to CEO, NEOs

Environmental

Equity plan design norms reflect a collision of ownership-friendly regulation and attempts at punishing executive pay

through constraints on equity compensation

“I told you these were shadows of the things that have been,” said the Ghost. “That they are what they are, do not blame me!”

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Say-on-Pay May have been “SOP lite” in 2011 Push-back on advisers/shareholders PR Roadshows Shareholder-voters with “limited time”

Only 37 (or 41) vote losses in 3,000+ companies 9 lawsuits (so far) Some research on what drove “no” votes

Another 40 were “close calls” – approval rates 51% to 70%

Some lawsuits filed Some suits not referencing SOP votes

Lower % approval for share plan proposals SOP did not relieve pressure on share plan votes Investors OK with executive pay still dislike dilution8



Primary implications for equity design Performance conditions for executives Performance measures that closely correlate to TSR SVT cost and plan features interact to affect votes

New transparency from ISS GRId scoring Points and weightings Allows assessment of trade-offs But no direct link to voting policy

Alternative views of pay (vs. fair value) Supplemental tables Realized pay/realizable pay Intrinsic value

“Independence” trend creates disjointed plan design between Compensation Committees (top five) and Everyone Else 9



Varying approaches for ownership requirements for officers

Multiple of base salary Dollar value Fixed number of shares Retention ratio

Variations in what “counts” as ownership

Unvested RSAs/RSUs In-the-money options (portion) Performance share units (target?)

“There are some upon this earth of yours,” returned the Spirit, “who lay claim to know us, and who do their deeds of passion, pride, ill-will, hatred, envy, bigotry, and selfishness in our name, who are as strange to us and all our kith and kin, as if they had never lived. Remember that, and charge their doings on themselves, not us.”

2012 proxy season may show increased investor activism over 2011

with continued focus on equity compensation10


Future: What’s Next

Dodd-Frank: Great uncertainty in 2012/2013 Clawbacks CEO Pay Ratio disclosure CEO Pay-for-Performance disclosure

Say-on-Pay – Round Two in 2012 More scrutiny likely 2011 “close calls” may fail the vote this time 2011 failed votes provide blueprint for 2012

Risk of another downturn, more underwater equity Windfalls from 2009 exchanges/grants

remembered “Last straw” for equity in long-term flat/volatile

market

Continued move to cash plans Missed by many databases/surveys

This boy is Ignorance. This girl is Want. Beware them both, and all of their degree, but most of all beware this boy, for on his brow I see that written which is Doom, unless the writing be erased.

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Other Issues: The Threat to Equity

European Union opposition to employee ownership

Harvard Business Review “no more equity to execs”

Academic studies: “no relationship to performance”

Company cash “hoards” coupled with dilution concerns

Employee skepticism

High market volatility increases “lottery” feeling

Global macroeconomic forces override companystrategy and performance as stock price driver

“Our EPS or Chinese interest rates and yuan value?”

“Men’s courses will foreshadow certain ends, to which, if persevered in, they must lead,” said Scrooge. “But if the courses be departed from, the ends will change. Say it is thus with what you show me!” The Spirit was immovable as ever.

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© Copyright 2011. Compensation Venture Group, Inc. All rights reserved.© Copyright 2011. Compensation Venture Group, Inc. All rights reserved.

Fred WhittleseyPrincipal ConsultantCompensation Venture Group, Inc.

206-388-9068 mobile206-780-5547 office

[email protected]

www.compensationventuregroup.com

Blog: http://payandperformance.blogspot.com

Twitter: FredWhittlesey

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