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Longnecker & Associates Blog

Business Judgment, SEC Rulemaking, & Dodd-Frank | January 2012

All of us here at L&A hope everyone is having a great 2012 so far. Before we share some important, new articles with you, we have some exciting announcements:

– Brent Longnecker was named an NACD Governance Fellow and was asked by WorldatWork to help build some new course curriculum on pay,
– Chris Crawford has been elected to the WorldatWork Advisory Board,
– Josh Henke has been elected to the Houston Compensation & Benefits Board,
– Shane Krantz has been promoted to Director at Longnecker & Associates,
– Kevin Kuschel has been promoted to Director at Longnecker & Associates,
– Greg Whittaker has been promoted to Senior Consultant at Longnecker & Associates,

And last but not least, Longnecker & Associates was ranked #3 in Texas Monthly’s Best Companies to Work for in Texas competition!

Business Judgment Prevails
Brent Longnecker and Todd Henke
The latest news for Say on Pay lawsuits comes out of The United States District Court for the District of Oregon, which has ruled that a suit against the Umpqua bank directors arising out of a negative Say on Pay vote will be dismissed. The court determined that the plaintiffs failed to raise a reasonable doubt that the challenged compensation was reasonable exercise of the board’s business judgment — the first federal court decision to dismiss such an action. With the increasing possibility of more plaintiffs’ lawsuits in the future, perhaps this decision will echo loud and clear that the directors of companies are doing the best they can to fulfill their fiduciary roles for shareholders.

SEC Delays Rulemaking on Executive Compensation Yet Again
Reese Darragh of Compliance Week
Here’s a gift from the Securities and Exchange Commission to compliance officers and executive compensation committees to usher in the new year: The SEC recently updated its schedule for Dodd-Frank Act rulemaking for the year, and it has pushed back the deadline to propose and implement some of the rules on executive compensation, including the disclosure of pay-for-performance, pay ratios, the compensation clawback provision, and hedging activities by employees and directors.

Risk Chat: How Will Dodd-Frank Progress in 2012?
Eric Krell of Business Finance
Throughout 2011, I’m pretty sure I heard every possible Dodd-Frank implementation forecast possible. Here are just a few: the new law will require 10 times as much compliance work as Sarbanes-Oxley while squashing U.S. competitiveness and innovation; the new law will become to watered-down that it will stand no chance of preventing a second “Too Big to Fail” global financial meltdown; the new law will be overturned and zapped from existence. These theories sound grand, or scary, depending on your perspective (and politics, I suppose), but they are not much help from a practical perspective.

Apple Clearly Investing in New CEO

With all the media coverage surrounding Apple CEO Tim Cook’s stock grant of $378 million, L&A decided to take a closer look to ease the frustration that is felt by the general public.

RETENTION & LONG-TERM STABILITY is the name of the game for Apple. Mr. Cook’s stock award was awarded in restricted shares that vest over a 10 year period. Based on a 2008 report by Economix, the average American aged 25 or older will stay at their current job for 5.1 years, whereas, Mr. Cook is tied to Apple for almost twice that amount. This 10 year period is imperative to Apple, in light of the passing of Steve Jobs and the succession planning at Apple, this 10 year handcuff is in place to keep Mr. Cook in his seat at the helm of Apple for the foreseeable future or risk forfeiting the unvested shares. Breaking apart the $378 million into 10 equal pieces, assuming the award vests equally over the 10 year period, comes out to roughly $37.8 million annually. Taking this a step further, on a yearly basis $37.8 million is roughly 0.35% of Apple’s annualized 2011 revenue of roughly $108 billion. The award consists of about ⅓ of 1% of Apple’s yearly revenue. Additionally if you look at the discount present value of the award, the award comes in at approximately $232 million or $23.2 million annually; constituting 0.21% of Apple’s annualized 2011 revenue or less than ¼ of 1% of Apple’s yearly revenue. Looking around the publicly traded marketplace, it wouldn’t take an avid investor long to find a litany of other companies that far outpace this award on an annual basis.

We at L&A believe that employees at each company are an ASSET not an expense, whom are in place to drive company performance over the long-term, creating shareholder wealth. Mr. Cook does not have to be Steve Jobs. He merely needs to think of Apple in the way Mr. Jobs did and this INVESTMENT into him compared to the return to stockholders will be worth every penny.

Quick Comments on ISS

ISS recently updated their “performance alignment approach” to better assess how companies are compensating their CEO’s relative to company performance. ISS and shareholders alike are pushing for ways to measure compensation as it relates to company performance. ISS has instituted three measures of alignment between executive pay and performance; relative degree of alignment, multiple of median, and pay-TSR alignment.

1. The relative degree of alignment will measure a CEO’s compensation within a peer group, designated by ISS, to the performance that company had within the same peer group over a one year and three year period. In other words, how did the compensation paid to a CEO rank in relation to performance within the same peer group? 2. The multiple of median approach will measure a CEO’s pay to the comparison peer group by dividing it by the median pay for the group. 3. The measure of pay-TSR alignment will measure the degree to which CEO pay has changed more or less rapidly than shareholder returns over a five year period in order to capture whether or not pay and performance were aligned properly over that period. These three approaches don’t come without their critics as pay and performance have been a hot button for some time now. While ISS claims the new evaluations are a more comprehensive assessment, it appears to us these three approaches are new additional traps to be concerned with. Oh by the way, ISS reserves the right to also further scrutinize companies that narrowly passed say on pay in 2011 as well as apply a qualitative compensation assessment to determine whether a company should pass say on pay.　

While pay and performance should have long-term alignment; performance is not the only factor to determine compensation. Directors of companies should continue to use business judgement rule as they see fit to determine how best to compensate their key employees given the significant number of dynamics that face a company each year. In short, the best companies view and compensate their people as a critical investment for the future, not just an expense tied to past performance. 　

Disclosure Thoughts for 2012

Disclosure was a popular word throughout 2011. But don’t think 2012 will get any easier in terms of enhancing the disclosure of compensation and other information to the SEC and shareholders. A recently released article may just foreshadow the next proxy requirement, actual realized compensation. That’s right, Eaton Corporation took the disclosure of taxable income of its executives, disclosed in the summary compensation table, to the next level by calculating the actual realized income, inclusive of exercised options and payments received from vested retirement plans. At this point its anyone’s guess whether this will become a trend, but don’t be surprised if you see more companies proactively providing additional disclosures such as this in order to stay ahead of the curve.

 At L&A, we believe an “Executive Summary” in the CD&A that is direct and transparent will be useful. It should include a summary of the company’s financial results, key compensation decisions taken from 2011, key corporate governance practices of the company and pay-for-performance statements. We also believe the use of graphics will be key. Considerations may be:

• A chart that sets forth the company’s key financial targets and the company’s actual performance (not giving away competitive info.)
• A bar graph that compares the company’s TSR for the 1 and 3 year periods against its custom peer group.
• A table describing the executive compensation program’s objectives and how each objective is achieved.
• A bar graph that shows the allocation of each named executive officer’s total compensation.
• A line graph that shows the relationship between the CEOs total direct compensation to the company’s performance as measured by the stock price for the past 5 years. And/or
• A series of pie charts showing the relationship between the CEOs and other NEOs performance-based compensation as compared to the average of the company’s custom peer group.

http://blog.cleveland.com/pdextra/2011/12/eaton_corp_goes_extra_step_to.html

Business Judgment, SEC Rulemaking, & Dodd-Frank | January 2012

All of us here at L&A hope everyone is having a great 2012 so far. Before we share some important, new articles with you, we have some exciting announcements:

– Brent Longnecker was named an NACD Governance Fellow and was asked by WorldatWork to help build some new course curriculum on pay,
– Chris Crawford has been elected to the WorldatWork Advisory Board,
– Josh Henke has been elected to the Houston Compensation & Benefits Board,
– Shane Krantz has been promoted to Director at Longnecker & Associates,
– Kevin Kuschel has been promoted to Director at Longnecker & Associates,
– Greg Whittaker has been promoted to Senior Consultant at Longnecker & Associates,

And last but not least, Longnecker & Associates was ranked #3 in Texas Monthly’s Best Companies to Work for in Texas competition!

Business Judgment Prevails
Brent Longnecker and Todd Henke
The latest news for Say on Pay lawsuits comes out of The United States District Court for the District of Oregon, which has ruled that a suit against the Umpqua bank directors arising out of a negative Say on Pay vote will be dismissed. The court determined that the plaintiffs failed to raise a reasonable doubt that the challenged compensation was reasonable exercise of the board’s business judgment — the first federal court decision to dismiss such an action. With the increasing possibility of more plaintiffs’ lawsuits in the future, perhaps this decision will echo loud and clear that the directors of companies are doing the best they can to fulfill their fiduciary roles for shareholders.

SEC Delays Rulemaking on Executive Compensation Yet Again
Reese Darragh of Compliance Week
Here’s a gift from the Securities and Exchange Commission to compliance officers and executive compensation committees to usher in the new year: The SEC recently updated its schedule for Dodd-Frank Act rulemaking for the year, and it has pushed back the deadline to propose and implement some of the rules on executive compensation, including the disclosure of pay-for-performance, pay ratios, the compensation clawback provision, and hedging activities by employees and directors.

Risk Chat: How Will Dodd-Frank Progress in 2012?
Eric Krell of Business Finance
Throughout 2011, I’m pretty sure I heard every possible Dodd-Frank implementation forecast possible. Here are just a few: the new law will require 10 times as much compliance work as Sarbanes-Oxley while squashing U.S. competitiveness and innovation; the new law will become to watered-down that it will stand no chance of preventing a second “Too Big to Fail” global financial meltdown; the new law will be overturned and zapped from existence. These theories sound grand, or scary, depending on your perspective (and politics, I suppose), but they are not much help from a practical perspective.

L-Blast | November 2011

Say-on-Pay Statistics, Legal Questions, & Plans for Upcoming Proxy Season

This article analyzes the impact that the Say-on-Pay vote may have on the upcoming proxy season with an analysis of companies that failed Say-on-Pay earlier this year. L&A answers some of the most common legal questions concerning Say-on-Pay and offers recommendations on what can be done proactively to minimize the risk of being sued in the future. 

Executive Compensation Trends

In addition, here is a link to the PowerPoint we are presently working on. It has some of the same material as above, but in a different format. This is still a work-in-progress, but we thought it worthwhile to send to you now.

L-Blast | October 2011

Say on Pay Rules Don’t Help Boards Manage Executive Compensation

by Michael Cohn, AccountingToday.com

The “say-on-pay” disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act will not help the boards of public companies better manage executive compensation, according to a new survey by accounting and consulting firm BDO USA. The Survey of 101 corporate board members at public companies found that 78 percent of them said they did not believe Dodd-Frank’s “say-on-pay” disclosure rules would them better manage the compensation of their key executives. Only 22 percent described the rules as helpful.

Federal Judge Gives Shareholders Green Light for Say-on-Pay Suit

by Alison Frankel, Thomson Reuters

One of the verdant new fields the Dodd-Frank Act has opened for litigators involves the Securities and Exchange Commission’s Say-on-Pay rule, which requires public companies to put executive compensation up for an advisory shareholder vote every two years. The rule went into effect in January. By May, Dena Aubin of Reuters was already reporting on a surge in shareholder derivative suits claiming boards breached their fiduciary duty by pushing through pay packages that shareholders voted down.

Belts & Suspenders: Compensation Committee Best Practices

by Brent Longnecker, Chris Crawford, & Greg Whittaker

Compensation lawsuits, the Dodd-Frank Act, Say-on-Pay, the media, the IRS looking for more revenue, and “Occupy Wall Street” all have executive compensation at the forefront of a fevered pitch in corporate America. Longnecker & Associates is possibly only firm in the country that has its CEO on public company boards, serve as an expert witness in the courtroom, advise compensation committees as a consultant, have written 14 books and over 400 articles on pay, build and teach the curriculum around pay, and own their own business. As such, we are positioned well to help companies avoid the landmines in today’s complex compensation and governance environment. While not completely comprehensive, the following are several best practices a compensation committee may consider to start navigating the landmines of the current environment.

New Report Details What the IRS Permits and Consequences of Failing to Follow the Rules

by GuideStar

GuideStar — the leading source of nonprofit information — has released a new report, “What You Need to Know about Nonprofit Executive Compensation,” detailing the regulations governing executive compensation. The report, which can be dowloaded for FREE, reviews how nonprofit professionals and board members can maintain public trust and mitigate risk through their compensation packages.

L-Blast | September 2011

Eliminating the Stigma Around Change-in-Control

by Josh Henke, Brent Longnecker, & Chris Crawford

Whether triggered by fear of instituation watchdogs like ISS or the lack of understanding on Section 4999 of Internal Revenue Code (aka 280(G)), there is commonly a negative stigma surrounding Change-in-Control (“CIC”) protection for senior executives. L&A is a proponent of CIC protection for most executive teams, but not so receive unreasonable compensation in the event of a transaction. The following article addresses the fundamentals and original intent of CIC protection to hopefully remove some of the negative optics surrounding 280(G).

Choosing the Right Peer Group

by Kevin Kuschel, Brent Longnecker, & Chris Crawford

Choosing a peer group can be a frustrating, yet necessary task. Companies use peer groups to assess and maintain competitive compensation levels, identify potential competitors, assess relative performance, and defend compensation decisions. Therefore, the importance of creating the right group cannot be overlooked. In fact, creating the wrong peer group not only creates the perception of a lack of governance with regard to the compensation setting process, it often results in compensation that is too high or compensation that is not competitive.

L-Blast | Special Edition | August 2011

Say-on-Pay Year End Review & Notes on Say-on-Pay Lawsuits
ISS recently released its “Preliminary 2011 U.S. Postseason Report.” Key findings of that report are:
– Shareholders voted down management “say on pay” proposals at 37 Russell 3000 companies, or just 1.6% of the total that reported vote results. Most of the failed votes apparently were driven by pay-for-performance concerns.
– During the first year of advisory votes on executive compensation under Dodd-Frank, investors overwhelmingly endorsed companies’ pay programs, providing 91.2% support on average.

SEC Pushes Back Dates for Executive Compensation
As it has done before, the SEC has adjusted its tentative rulemaking calendar to push back some of the expected proposal and adoption dates for the remaining executive compensation and corporate governance items on its agenda. On July 29, the SEC modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation.