TheCorporateCounsel.net

As Delphi Corporation prepared to file for bankruptcy last week, the company first increased the severance pay for 21 of its top executives from 12 months of pay to 18 months, plus variances in the severance formula – see this Form 8-K (yesterday’s WSJ also discussed how executives were offered as much as 10% of the restructured company and $90 million in bonuses – but I’m not sure where those details emanate from). All in all, it seems like a textbook example of pay-for-nonperformance!

At the same time it increased the potential severance payouts to its senior managers, the company was telling employees that it needed to cut their pay by more than 60% as well as reduce their health care and retirement benefits.

Here is an excerpt from a Detroit Free Press article: “Patrick Keenan, a law professor at the University of Detroit Mercy, said rich severance packages are difficult for workers to swallow when they are being asked to sacrifice for the company. “The idea is to keep the company’s top executives, but there’s something borderline immoral about these golden parachutes,” he said.” An even stronger statement came from the United Auto Workers union – and here is an interesting editorial.

Learn how to deal with severance arrangements in a responsible way from the panel – “How to Fix Outstanding CEO Pay Packages and Agreements” – during the “2nd Annual Executive Compensation Conference.”

Heads Up for Nevada Corporations!

Here is an answer to a trivia question – according to one study, Nevada ranks fourth among the states when it comes to the number of publicly traded companies (after Delaware, California and New York) and third in all companies going public from 1996-2000. Who would have thunk it?

Thus, I was surprised to recently learn that the Toronto Stock Exchange has decided that corporations incorporated in Nevada are not eligible for listing on the Exchange. The only other jurisdictions that have landed on this proscribed list are the British Virgin Islands and Turks & Cacaos. Look for a full court press from Nevada to get itself taken off this short list.

CII’s New Policy on Director Compensation

One item arising out of the recent annual Council of Institutional Investors conference was a new director compensation policy. Here are some key components of this new policy:

– Only Two Components of Director Pay – director pay should include only cash and equity with some noteworthy exclusions.

– Meeting Fees – CII opposes meeting attendance fees because meeting attendance is the most basic expectation of a director.

– More Pay for More Responsibilities – CII believes retainer fees may be differentiated to recognize that independent board chairs, independent lead directors, committee chairs or members of certain committees are expected to spend more time on board duties than others.

– Equity Holding Periods and Ownership Guidelines – CII believes equity pay should include an ownership requirement (at least 3-5x annual comp) and a minimum hold-til-retirement requirement (at least 80% of equity grants).

– No Perks and No Pay-for-Performance – CII’s policies specify directors should not receive performance-based compensation nor any perks (aside from meeting-related expenses such as airfare, hotel accommodations and modest travel/accident insurance) or change-in-control or severance payments.

– Disgorgement for Malfeasance – CII’s policies support disgorgement, saying directors should be required to repay compensation to the company in the event of malfeasance or a breach of fiduciary duty involving the director.

– Comp Committee’s Role in Setting Director Pay – CII believes the comp committee should understand and value each component of the compensation and annually review the sum potentially payable to each director and be allowed to retain an independent compensation consultant to assist in the evaluation of director pay packages (with a summary of the consultant’s advice disclosed in the proxy statement).

– Proxy Disclosure about Director Pay – Companies should include a table with columns valuing each component of compensation paid to each director during the previous year; another column in the table should show an estimate of the total value, including the present value of equity awards, of each director’s annual pay package and other relevant information; and a third column should indicate the number of board meetings and committee meetings attended by each director. In addition, philosophy for director pay and the processes for setting pay levels should be disclosed (including fleshing out peer group comparisons) – as well as how many committee meetings involved discussions about director pay, and any reasons for changes in director compensation programs.

In addition, the CII recently updated this “spectrum of activism” white paper, which lists 22 actions that investors can take to “reduce risk in their portfolio and enhance performance.” And here is CII’s new 2005 Focus List.