Transcript Slide 1

NASPP Chapter Meeting
Compensation Concerns Amidst Economic Strife
Speakers:
Brian Scheiring  Towers Perrin
Steve Kline  Towers Perrin
Steve Pakela  Towers Perrin
February 4, 2009
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Agenda
 NASPP Housekeeping
 Highlights from Towers Perrin’s Compensation in Crisis Pulse Survey
 Brian Scheiring, Towers Perrin
 RiskMetrics Group 2009 Compensation Policy Updates
 Steve Kline, Towers Perrin
 Say on Pay
 Steve Pakela, Towers Perrin
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NASPP Housekeeping
 Recent meeting agendas
 Compensation Implications of the Emergency Economic Stabilization Act
 Equity Plan Document Review
 SEC Disclosures: Assessing Year 1
 Emerging Trends in Equity Compensation
 Role of Tally Sheets
 Effective Communication of Stock Plans
 Best Practices in Share Plan Administration
 Looking for volunteers
 Identifying compelling topics
 Identifying compelling speakers
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NASPP Housekeeping
CEP Designation
 The Certified Equity Professional Institute (CEPI) was founded in 1989 by a group of equity
compensation professionals
 Their mission was to establish, promote and provide certification and continuing education for
the equity compensation industry
 Self-study curriculum focuses on the core disciplines of equity compensation:
 Accounting
 Equity Plan Design
 Analysis and Administration
 Corporate and Securities Law
 Taxation
 The CEP designation is granted to individuals who have passed all three exams
 Basic (Level 1)
 Intermediate (Level 2)
 Advanced (Level 3) knowledge, skills and abilities related to equity compensation
 The program is also open to individuals seeking only basic or intermediate knowledge
 April 24 is registration deadline for the June 6 exam
 See http://www.scu.edu/business/cepi/ for more information about the program
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NASPP Housekeeping
Top Ten NASPP Resources
 NASPP blog
 NASPP website portals
 Tax withholding and reporting portal
 Stock plan expensing portal
 Global stock plans portal
 New NASPP search functions (powered by Google)
 International alert subscription service
 Compliance-O-Meter
 Stock plan design and administration survey
 NASPP document library
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Compensation in Crisis Pulse Survey
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Background and Overview of Key Findings
 In late 2008, Towers Perrin conducted a pulse survey to examine how companies
were reacting to market turmoil in their compensation actions
 As an update to that survey, we conducted a similar survey in January 2009 in order
to gain real time insights into market trends
 This report summarizes the 513 U.S. responses
 Industry cuts (Energy, Financial, High-Tech and Insurance) will be available
 The vast majority of U.S. companies are adjusting their pay programs in response
to the economic crisis
 Most companies are holding the line on salaries by cutting merit budgets,
freezing salaries or even cutting base pay (in that order)
 Many employees will see smaller bonuses for 2008 performance, commensurate
with lower financial results in a challenging economy
 Companies are rethinking their approach to determining the size of their 2009
long-term incentive grants and considering what to do, if anything, about
underwater stock options
 Virtually all companies are taking steps to retain high-performers and people in
pivotal business roles
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Most of the companies surveyed have taken significant hits
to their stock price
Q.
Roughly speaking, how does your company's stock price today compare to a year ago?
28%
Down more than 50%
37%
Down 30% to 50%
21%
Down 15% to 30%
7%
Down less than 15%
4%
About the same
3%
Up
 Survey respondents represent a good cross-section of midsize and large companies
in the United States
 Stock price movements reported by the survey participants are generally
representative of the S&P 500
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Companies are taking a range of pay and workforce actions
…
Q.
Which of the following actions did your company take, are you taking, or do you expect to
take in response to the financial crisis?
Not
Considering Considering
Too Soon
To Tell
Completed
Planned
Significant reduction in headcount (10% or more) *
11%
8%
11%
55%
15%
Targeted reduction in headcount
19%
21%
18%
30%
12%
Implement mandatory unpaid leave
4%
1%
6%
84%
5%
Freeze or reduce hiring
42%
18%
14%
22%
4%
Reduce salaries across the board
1%
1%
7%
85%
6%
Freeze salaries
18%
7%
16%
50%
9%
Reduce pay/merit increase budget
36%
24%
21%
14%
5%
Delay planned merit increases
12%
6%
14%
62%
6%
Provide lump-sum increase in lieu of merit increases
2%
1%
7%
84%
6%
Reduce FY 2008 annual incentives/bonuses (by formula)
9%
9%
8%
68%
7%
Reduce FY 2008 annual incentives/bonuses (by discretion)
8%
6%
11%
69%
7%
Reduce number of people receiving annual incentives
4%
2%
7%
81%
6%
Reduce number of people eligible to receive annual incentives
1%
2%
6%
86%
6%
* Average reduction in headcount for Completed/Planned = 13%
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… with most immediate cuts to hiring, merit increases, T&E,
employee events and (targeted) headcount
Not
Considering Considering
Too Soon
To Tell
Completed
Planned
Reduce FY 2009 annual incentive target opportunities
4%
3%
10%
69%
13%
Reduce FY 2009 annual incentive funding pool
5%
4%
14%
61%
16%
Reduce fixed pay
1%
1%
5%
86%
7%
Reduce number of people receiving long-term incentives
4%
4%
11%
72%
10%
Reduce long-term incentive eligibility
3%
4%
12%
71%
9%
Cut back on benefits
7%
3%
14%
68%
8%
Cut back on perquisites
10%
3%
20%
58%
9%
Reduce training budgets
20%
12%
26%
32%
10%
Cut travel and entertainment spending
40%
20%
22%
12%
6%
Scale back employee events
36%
15%
24%
17%
8%
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2009 salary increase budgets have been scaled back across
all job levels
Q.
Please indicate how the financial crisis has affected your 2009 salary increase budget
originally planned (i.e., projected in 2008 before the financial crisis) versus the actual or
revised salary increase budget (i.e., what the budget is now). Provide the TOTAL salary
increase budget  including merit, statutory increases, promotions and cost of living
adjustments.
2009 Total Market Average Salary
Budget Including Zeros
2009 Average Salary Budget of
Companies That Did Not Freeze
Original
Actual / Revised
Original
Actual / Revised
Senior Executives
3.7%
1.9%
3.8%
3.2%
Professional / Management
3.7%
2.3%
3.8%
3.1%
Technical / Admin Staff
3.6%
2.4%
3.7%
3.1%
Other Exempt Employees
3.7%
2.4%
3.7%
3.1%
All Collectively Bargained
3.0%
2.4%
3.6%
3.4%
Overall budget
3.7%
2.4%
3.7%
3.0%
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The financial crisis caused most companies to cut their 2009 salary
increase budgets or entirely freeze salaries
 Approximately 75% have decreased their 2009 salary budgets and 25% have not yet
made a change
 Approximately 40% of companies have frozen executive salary budgets for 2009 and
20% - 30% have frozen the budget for all levels of employees
Increased Budget
No Change
Decreased Budget
Salary Budget
Frozen
Senior Executives
0%
25%
75%
40%
Professional / Management
1%
24%
75%
26%
Technical / Admin Staff
1%
25%
74%
22%
Other Exempt Employees
1%
25%
74%
23%
All Collectively Bargained
1%
67%
32%
30%
Overall budget
1%
23%
76%
21%
Note: These results represent average values based on all reported data, including 0s
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Bonuses for 2008 performance will be down at a majority of
companies … some to zero
Q.
How did/will your annual incentive/bonus payments for 2008 performance compare to
annual incentive/bonus payments for 2007 performance?
Not Paying
Bonuses
More Than
50% Lower
25%50%
Lower
< 25%
Lower
About
The
Same
Paying
Larger
Bonuses
Senior Executives
10%
13%
19%
17%
30%
12%
Professional / Management
8%
13%
19%
18%
31%
11%
Technical / Admin Staff
8%
11%
17%
17%
34%
12%
Other Exempt Employees
7%
12%
17%
18%
34%
12%
All Collectively Bargained
8%
13%
18%
14%
36%
7%
* The above statistics exclude those that are not eligible to receive annual incentive/bonus payments.
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Many companies are rethinking how they set annual and
long–term incentive goals
Q.
In what way, if any, did or will the financial crisis impact your company’s goal setting
approach for annual and long-term incentive plans?
Annual*
Long-Term**
Greater use of discretion in goal setting
33%
36%
Lower threshold performance levels
26%
28%
Greater use of relative performance measures
21%
32%
Other
15%
19%
* Based on the 73% of companies that reported an impact on their annual incentive goal setting approach.
** Based on the 30% of companies that reported an impact on their long-term incentive goal setting approach.
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Decisions about 2009 long-term incentive (LTI) grants are still
in process
Roughly speaking, how do or will your overall 2009 long-term values compare to last year’s?
Q.
41%
Less than last year
57%
About the same
2%
Larger than last year
 On average, the survey respondents expect their 2009 LTI grant values will be
approximately 15% lower than last year’s
 When the dust settles, our consulting experience suggests that average grants will
be 10% to 20% lower than last year – maybe even as much as 25% lower,
depending upon how things play out
 Among those companies that are cutting the value of their 2009 long-term grants,
survey respondents said they’d average 36% lower than in the prior year
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The survey responses show a wide range of adjustments in
2009 LTI grants
Q.
Roughly speaking, how do or will your overall 2009 long-term values compare to last year’s?
2%
5% 1%
17%
About the same
Down by 5% to 15%
Down by 15% to 25%
Down by 25% to 50%
57%
10%
Down by 50% to 75%
Down more than 75%
Higher by as much as 15%
8%
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Companies are considering one or more changes to their
long-term incentive programs
Q.
Which of the following changes, if any, has your company made or is considering making to
its long-term incentive programs? (Check all that apply)
29%
Change long-term incentive vehicles
49%
Change the mix of long-term incentive vehicles
40%
Change performance measures
31%
Change threshold, target and maximum payout levels for performance plans
24%
Other
* Based on the 52% of the sample that reported changes have been made or are being considered.
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As the market downtown continues, underwater options are a
growing concern
Q.
In view of how the financial crisis has affected the price of your company’s stock, has your
organization addressed underwater stock options?
9%
Most of our options are not underwater
65%
We do not currently plan to address any underwater stock options
3%
We have addressed or plan to address underwater stock options
23%
We are currently reviewing the issue
 In our fall 2008 survey, only 16% of the respondents were considering taking action to
address underwater options
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Yet, relatively few companies are resetting performance
goals for outstanding LTI awards
Q.
Has or will your company reset performance targets for outstanding awards that were
granted prior to 2009 under long-term incentive plans?
1%
We have reset performance targets for outstanding awards
1%
We plan to reset performance targets for outstanding awards, but have not done so yet
11%
We are considering resetting performance targets for outstanding awards
87%
We will not be resetting performance targets for outstanding awards
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Companies remain concerned about losing talent and are taking
steps to retain key people
Q.
Q.
Is your company concerned that high performing employees or employees in pivotal roles
may leave your organization as a result of actions you’re planning or considering in response
to the financial crisis (e.g., layoffs or hiring freezes, reductions in merit budgets or bonuses,
etc.)?
13%
Very concerned
49%
Somewhat concerned
31%
Not very concerned
7%
Not at all concerned
What actions would you consider taking to retain these high performing employees or
employees in pivotal roles who are a retention risk?
35%
Retention awards in cash
30%
Retention awards in stock
42%
Salary increases
25%
Higher bonus payouts
18%
Other
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RiskMetrics Group
2009 Compensation Policy Updates
Background
 RiskMetrics Group (RMG, formerly known as ISS) is a prominent participant in the
national dialogue about executive pay
 Updated policies have been influenced by institutional investors who identified
certain practices which may cause them to vote against compensation committee
members
 Updated policies generally apply to all U.S. companies in 2009
 CEO pay-for-performance
 “Poor pay practices”
 Equity plan evaluations
 Stock dilution: burn rate thresholds
 Incentive bonus plans
 Peer groups
 Other
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Background
 Potential consequences for falling out of RMG’s favor
 “No” votes for equity plans
 “No” votes for re-appointments of directors
 Shareholder proposals related to executive compensation
 Embarrassment and surprise outcomes
 RMG recapped the effect of its voting recommendations for 2008
 27% of the Russell 3000 companies analyzed were subject to the CEO Pay-for-
Performance test
— 7% of these companies received negative voting recommendations from
RMG as a result of this test
— The test does not apply where CEO pay decreased or CEO had served for
less than 2 years
 RMG noted that directors at 24 S&P 500 firms received more than 10%
opposition due to compensation concerns, up from 18 S&P 500 firms in 2007 and
6 in 2006
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CEO Pay-for-Performance
 Historically defined pay-for-performance disconnect as:
 Negative one- and three-year total shareholder return (TSR)
 CEO pay increases
 Broad market down 40% prompts reconsideration
 Updated pay-for-performance disconnect defined as:
 TSR for prior one- and three-year fiscal periods in the bottom half of their four-
digit GICS industry group (versus old rule of any negative TSR), and
 The CEO’s total direct compensation (TDC) increased over the prior year, and
 More than half the increase in CEO TDC is due to equity compensation
 Potential consequences of pay-for-performance disconnects:
 Recommend that shareholders vote against a long-term incentive plan
 Recommend that shareholders withhold their support or vote against
compensation committee members or other directors
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CEO Pay-for-Performance
 Test is applied annually for Russell 3000 companies unless:
 The company has not been publicly-traded for at least three full years
 The individual serving as CEO has not been serving for at least two full fiscal
years, or
 If the company can demonstrate it has strengthened the link between pay and
performance by disclosing
— That the compensation committee has reviewed all elements of CEO pay
— Providing a tally sheet under various termination scenarios
— Disclosing performance measure and goals for all performance-based pay
— Committing to grant at least 50% of equity awards tied to pre-established
performance criteria
— Committing that the compensation committee has the sole authority to hire
and fire compensation consultants
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Pay Practices Test
 RMG’s pay practices test is highly qualitative and uncertain
 Believes practices should be evaluated in the context of the specific industry and
situation, and on a case-by-case basis
 Policies reflect feedback from institutional investors as well as RMG’s own views
about what constitutes best practices
 Poor pay practices may lead RMG to issue negative voting recommendations
 To vote against or withhold votes from members of a company’s compensation
committee or the entire board
 To vote against an equity plan being put to a shareholder vote
 Depending on the nature of any poor pay practices identified by RMG, it may
issue cautionary statements about the pay practices in their report without
recommending a negative vote against any of the directors
— If the company has not remedied the practices in question in the following
year, RMG will then issue negative voting recommendations
 Bottom line:
 Possible to identify pay practices likely to attract scrutiny by RMG
 But hard to predict the likely outcome
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Best Practices
 No evergreen contracts
 Use of average actual not max pay in SERPs
 Remove failure to renew contract from definition of good reason
 Plain English proxy disclosures
 Stock policies
 No hedging
 No pledging
 Hold to retirement
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Examples of “Poor Pay Practices”
Area of Concern
Examples
Egregious employment contracts
 Multi-year guarantees for salary increases, bonuses and/or equity compensation
Excessive perks/tax
reimbursements
 Overly generous provisions for personal use of corporate aircraft ($110,000)
personal security systems, car allowances ($100,000)
 Perks for former executives
 Tax gross-ups on perks (NEW for 2009)
Abnormally large payouts without
appropriate performance linkage
disclosed
 Performance metrics that are changed, cancelled or replaced during performance
Egregious supplemental
executive retirement plan benefits
 Credit for additional years of service that were not worked
Unearned dividend or dividend
equivalents
 Paid on unvested performance shares or performance units even if performance
Internal pay disparity
 Excessive differential between total pay for CEO and other named executives
Overly generous new hire
package for new CEO
 Excessive “make whole” provisions
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period without adequate explanation of linkage to performance
 Inclusion of performance based equity awards in pension calculation
targets are not met (NEW for 2009)
 Any other poor pay practices listed in this policy
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Examples of “Poor Pay Practices”
Area of Concern
Examples
Excessive severance and/or CIC
provisions
 Severance multiples in excess of 3X cash pay
 Payments upon an executive’s termination in connection with performance failure
 Single-trigger payments (without loss of job or substantial diminution of duties)
 New or materially amended employment or severance agreement with walkaway
(modified single trigger) provisions (NEW for 2009)
 Liberal CIC definitions in contracts or equity plans that could result in payments
without actual CIC occurring (NEW for 2009)
 New or materially amended employment or severance agreements that provide for
an excise tax gross-up, including conditional gross-ups (NEW for 2009)
 Continuation of significant perquisites for former executives (e.g., car allowances,
personal use of corporate aircraft)
Poor disclosure practices
 Unclear explanation of how the CEO is involved in pay-setting process
 Retrospective performance targets and methodology not discussed
 Methodology for benchmarking practices and/or peer group not explained
Option backdating
 Addressed by separate RMG policy
Other excessive compensation
payouts or poor pay practices
 Evaluated on case-by-case basis
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Equity Plan Approval – Changes to SVT Test
 Changes to Shareholder Value Transfer (SVT) test:
 Volatility  Will consider 400 days of stock price volatility instead of 200 days
— Change is intended to smooth impact of recent spikes in volatility and lower
option valuations in the ISSue Compass model
 Stock price  Will use 90 day average stock price instead of 200 days
— Both changes are being made for 2009 only and will be re-evaluated for 2010
 Change in Control (CIC) definition: Will be examined to see if vesting could be
triggered even if a CIC isn’t consummated – e.g., by:
 Announcement or commencement of a tender offer
 Acceleration upon a "potential" takeover
 Shareholder approval of a merger or other transaction
 Such triggers may cause RMG to recommend a vote against an equity plan even
if other modeling results are favorable
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Equity Plan Approval – Burn Rate Test
 Burn rate thresholds: Allowable burn rates for 2009 stayed the same or were
increased for 18 GICS industry group categories for Russell 3000 companies
 Only four industry groups experienced modest declines
 Burn rate multipliers: Last year’s multipliers (from 1.5 to 4, based on volatility) will
be retained for full value shares
 Similar to the change in the SVT test, RMG will use a 400 day lookback (from the
respective quarterly update) when calculating volatility in the burn rate test in
2009
Annual Stock Price Volatility
54.6% and higher
36.1% to 54.6%
24.9% to 36.1%
16.5% to 24.9%
7.9% to 16.5%
Less than 7.9%
Multiplier (Options per Full Value Share)
1.5
2.0
2.5
3.0
3.5
4.0
 While higher burn rate thresholds are favorable, lower share prices may lead to
greater share use, potentially making it more difficult for companies to remain under
the RMG burn rate thresholds
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Incentive Bonus Plans
 In order for an incentive bonus plan to receive a favorable voting recommendation from RMG,
all compensation committee members must meet RMG’s independence standard (which is
stricter than NYSE and NASDAQ definitions)
 If additional shares are being sought for new or amended incentive plans, RMG will also base
recommendations on results of the ISSue Compass model
 RMG generally will not require retesting for administrative amendments
Inside Director
■ Employee or listed as a Section 16 officer of the company or one of its affiliates
■ Non-employee officer of the company if among five most highly paid individuals
■ Beneficial owner of more than 50% of the company’s voting power
Affiliated Outside Director
■ Board attestation that an outside director is not independent
■ Former CEO (or executive) of the company or of a company acquired within 5 years
(Detailed list of affiliated
outside director
classifications can be found
in the “ISS 2009 Policy
Updates” p.9)
■ Any material financial tie or transactional relationship with the company or its affiliates
■ Founder of the company but not currently an employee
■ Relative of a current or former employee of the company or its affiliate within the last 5
years
■ Has (or a relative has) an interlocking relationship as defined by the SEC involving board
or compensation committee members
Independent Outside
Director
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■ No material connection to the company other than a board seat
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Peer Groups
 RMG is revising its methodology for constructing peer groups used to display CEO
pay data at Russell 3000 companies. The changes in methodology include:
 Company size  from 0.5 to 2 times company size
— Generally by revenue
— Financial services companies generally by assets
 Number of companies  RMG will lower the minimum number of companies
necessary for a peer group from 12 to 8 companies
 Mega-cap companies  For extremely large companies, RMG may use wider
industry sectors or a market index to develop a peer group
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Other Observations
 Repricing/Option Exchanges – No changes were made to existing RMG policies
 Performance Goal Resets – RMG said it will carefully scrutinize performance
goals that are reset, reiterating that market deterioration alone doesn’t constitute a
sufficient reason for changes
 Shareholder Proposals – RMG said it will now evaluate certain compensation-
related shareholder proposals (including those related to clawbacks and executive
holding periods) on a case-by-case basis, depending on how company practices
compare with what RMG considers to be best practices
 Say on Pay – RMG made no changes to polices related to shareholder or
management proposals related to advisory votes on executive compensation
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Say on Pay: Shareholder Advisory Votes
on Executive Compensation
© 2009 Towers Perrin
What is “say on pay”?
 The term has been used in the U.S. to describe the concept of advisory votes on a
company’s executive compensation
 Activist investors have encouraged companies to voluntarily conduct such votes
 In 2008, shareholders voted at 78 companies on shareholder proposals to
institute nonbinding advisory votes on pay
— The average level of support for these proposals was between 40% and
45%
— A majority of shareholders supported the proposals at Alaska Air Group,
PG&E, Apple, Motorola, Lexmark, Ingersoll-Rand, Rackable Systems,
Tech Data, South Financial Group and Valero Energy
 For 2009, the number of shareholder proposals related to advisory votes on pay
is expected to exceed 100
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Say on pay has become a hot political issue in the U.S.
 Legislation was passed in 2007 in the U.S. House of Representatives and is
pending in the U.S. Senate to require companies to:
 Conduct a nonbinding shareholder advisory vote each year on the company’s
executive compensation disclosures
 Conduct an additional nonbinding shareholder advisory vote on any new golden
parachute packages adopted at the time of a corporate transaction
 The legislation is expected to be reintroduced in the new Congress
 Some observers predict the measure will become law in the near future given
the support by President Obama
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Exactly what’s being voted on?
 That’s a good question and there’s no general agreement; the possibilities include:
 The company’s public disclosures
— CD&A narrative only (the RiskMetrics Group model), or
— CD&A narrative plus tables, which implies approval of the level of pay for
named executives (the AFLAC model)
 The company’s compensation philosophy and practices (the RiskMetrics Group
model)
 Something else?
 Some or all of the above
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U.S. experiences with advisory votes so far
 In 2008, AFLAC became the first public company in the U.S. to invite shareholders to
vote on this management proposal:
 “Resolved, that the shareholders approve the overall executive pay-for-
performance compensation policies and procedures employed by the
company, as described in the Compensation Discussion and Analysis and the
tabular disclosure regarding named executive officer compensation (together with
the accompanying narrative disclosure) in the proxy statement” (emphasis added)
 AFLAC received a favorable voting recommendation from RiskMetrics/ISS, although
some areas were flagged for improvement
 High security-related benefits compared to market practices
 Inadequate disclosure of benchmarking process and prospective goals for non-
equity incentive plan
 Relatively short vesting periods on stock options
 No discussion about how increased target bonus will affect SERP payout
 On May 6, 2008, AFLAC issued a press release reporting that 93% of the votes cast
supported management’s proposal, with only 2.5% against it
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U.S. experiences with advisory votes so far
 In its first proxy statement filed as a public company (dated April 23, 2008),
RiskMetrics Group sought three separate shareholder advisory votes on:
 The company’s overall executive compensation philosophy
 The compensation decisions made by the board with respect to named
executive officers for 2007, as described in the CD&A
 The application of the compensation philosophy, policies and procedures to
evaluate 2008 performance and award compensation based on certain key
objectives, as described in the CD&A
 All three of the proposals received approval levels of over 94%
 Since last proxy season, several prominent companies such as Verizon,
Blockbuster, MBIA, Intel and others announced they would conduct an advisory
vote on executive compensation in 2009 or later
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Experience outside of the U.S.
 Since 2003, annual shareholder advisory votes on companies’ remuneration reports
have been required in the U.K.
 More recently, other countries (including France, the Netherlands and Australia)
have adopted similar requirements
 By and large, institutional shareholders feel satisfied with the outcome, and
companies have come to accept the process
 In the U.K., over 90% of shareholders typically vote in favor of the remuneration
report
 One concern is that the process has fostered a “one-size-fits-all” approach to
executive compensation in the U.K. and a lack of flexibility in devising arrangements
the address the unique business needs of each company
 For example, relative TSR has become something of a “holy grail” as a
performance measure under performance share plans, while option plans have
been vilified
 However, there appears to be a growing appetite and tolerance for company-
appropriate plans  often based on absolute measures
 Given that U.K. advisory votes haven’t focused on the level of pay, they have had
minimal impact on executive compensation levels in U.K. companies
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Some important differences between the U.K. and the U.S.
 It is accepted practice in the U.K. to lobby shareholders in support of a resolution,
often with the remuneration committee chairman directly involved
 In the U.S., by contrast, companies cannot formally seek shareholders’ support of
a particular plan or program outside of the normal proxy solicitation process
 Institutional shareholders in the U.K. have been active in issuing voting guidelines
and conducting dialogues with companies for many years, but labor unions have had
very little direct involvement
 In the U.S., labor unions have taken the lead in submitting shareholder proposals
concerning executive compensation
 U.K. institutional shareholders focus mainly on program design, rather than pay levels
 U.S. investors do not restrict their comments to any particular subject
 U.K. companies tend to have far fewer investors than U.S. companies and most
investors are fairly concentrated in key financial centers (London and Edinburgh)
 Share ownership is typically not as concentrated in the U.S.
 As with accounting, the U.K. adopts more of a principles-based approach, in contrast
to the “rules-based” approach traditionally used in the U.S.
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What would RiskMetrics/ISS consider in its voting
recommendation?
 Around the globe, RiskMetrics/ISS evaluates companies in terms of five key
principles
 Maintain appropriate pay-for-performance alignment
 Avoid arrangements that risk “pay for failure”
 Maintain an independent and effective compensation committee
 Provide shareholders with clear, comprehensive compensation disclosures
 Avoid inappropriate pay to non-executive directors
 In the U.S., additional principles would be considered on a case-by-case basis,
including:
 “Fit” of performance metrics
 Pay-for-performance alignment, including the balance of fixed vs. variable pay
 Disparity between CEO compensation and pay for other officers
 Excessive levels of perks, severance packages, SERPs and equity burn rates
 The rationale for pay-setting decisions
 The board’s responsiveness to shareholder inputs (e.g., majority-approved
shareholder proposals relating to executive pay)
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Many questions surround the need for or potential
effectiveness of a required annual advisory vote on pay
 Will positive or negative votes on pay as a whole (as opposed to specific elements
or features) provide much insight into investors’ concerns?
 We believe more targeted input would be more instructive
 Would votes be a distraction and drain on the time of directors and executives?
 This is a significant concern for U.S. companies given the number, diverse
investment strategies and geographic dispersion of their shareholders
 Are shareholders properly equipped to evaluate, understand and engage with each
of their portfolio companies, especially in the compressed proxy season?
 Would this type of vote give too much power to proxy advisors such as
RiskMetrics/ISS?
 Absolutely, although we’ve begun to see a growing recognition in the U.K. that
companies must be allowed to thoughtfully tailor their pay arrangements to their
own needs and circumstances
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Many questions surround the need for or potential
effectiveness of a required annual advisory vote on pay
 Why are votes necessary for companies that already maintain regular channels for
their investors to express opinions about compensation? And shouldn’t other
governance reforms be allowed to work?
 In general, more can be done to facilitate two-way communications between
companies and shareholders, although recent governance and pay
transparency developments should address most shareholders’ concerns about
executive pay
 For the exceptions, a more targeted approach should be used
 Wouldn’t shareholder votes encroach upon the proper role of the board? What is
the relevant threshold (e.g., percentage of negative votes) that should compel a
board to take action? And what liability exists if a board fails to take action?
 We have serious concerns about how advisory votes might muddy the waters
about the ultimate accountability for pay decisions
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Towers Perrin’s perspective on say on pay in the U.S.
 We believe shareholders should have an opportunity to make their views about
executive pay known to a company’s board or compensation committee, but
question whether an advisory vote is the best method for expressing such views
 The primary channels for shareholders to express their views should be periodic
meetings or phone conversations with board/committee members and
management, conference calls, blogs, message boards or other virtual means
 No constraints (e.g., Regulation FD) should stand in the way of allowing
companies to engage with their shareholders and vice versa
 In the end, boards of directors and compensation committees are the ones charged
with making compensation decisions on behalf of shareholders, notwithstanding the
outcome of shareholder advisory votes or other input
 Given that boards carry the ultimate responsibility, there needs to be a well-defined
line between providing input and making decisions
 If shareholders feel their views are not being heard or board members are not
taking their views into account, they should have opportunities to ultimately replace
those board members
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What’s ahead?
 Say on pay votes will continue to gain prominence, both through shareholder
proposals and congressional pressure
 Greater clarity will be gained around how such proposals work as more early
adopters work through the details
 If the potential homogenizing influence of say on pay is left unaddressed, certain
plan types and practices will become the accepted norm – even though they may
not be appropriate for many organizations
 Well-designed pay programs, with a solid business rationale for all components, will
be unaffected by say on pay votes, although the work required to prepare for such
votes will be significant
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