January 22, 2008

The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!

On tomorrow, join Dave, Mark Borges, Ron Mueller, Alan Dye – and SEC Staffer Mike Reedich from Corp Fin’s Exec Comp Task Force – for the first part in a two-part webconference: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!”

Among the important topics that will require up-to-the-minute guidance, the Conference will cover:

– What are the SEC Staff’s latest positions from their recent waves of comment letters – and upcoming Staff Report – such as the Staff’s new expectations for the CD&A, including specific suggestions and examples
– How to overcome the unexpected challenges from the Staff’s comment letters
– What are examples of what companies intend to change in this year’s proxy disclosures
– How to analyze and disclose perks, including how to determine whether something is a “perk”

Upcoming House Hearing on Severance Pay

Rep. Henry Waxman (D-Cal.) has asked Charles Prince, Stanley O’Neal, and Angelo Mozilo to testify at a February 7th hearing on severance pay (here are the letters sent to the executives and other requests for testimony). Until recently, Mr. Prince was the CEO of Citigroup and Mr. O’Neal was the CEO of Merrill Lynch; each took home around $40 million and $161 million, respectively, after being forced to retire after their firms suffered heavy losses from mortgage investments. Mr. Mozilo is the CEO of Countrywide Financial, who is expected to receive a $115 million payout if a planned buyout by Bank of America is completed.

According to RiskMetrics: “You should plan to address how [your severance package] aligns with the interests of … shareholders and whether this level of compensation is justified in light of your company’s recent performance and its role in the national mortgage crisis,” Waxman wrote in his letter to the three executives.

On Jan. 17, Waxman’s committee sent out another round of letters–this time to current employees of the three companies, requesting documents and testimony on the process used to decide on severance packages for O’Neal, Prince, and Mozilo. Waxman called on John Thain, Merrill Lynch’s new CEO; Vikram Pandit, the new CEO of Citigroup; and Mozilo himself, who still serves as CEO at least until the Bank of America takeover, to submit to the committee copies of all documents related to drafting the severance agreements at each company – including the names of outside consultants hired to help the board’s compensation committee draft the agreements. The executives will have until Jan. 25 to submit the documents to the oversight committee, the letter states.

Three additional letters, also sent on Jan. 17, went to the respective chairmen of each company’s compensation committee. Harley Snyder of Countrywide, John Finnegan of Merrill Lynch, and Richard Parsons of Citigroup were asked to appear at the Feb. 7 hearing committee hearing to address how the executives’ severance pay was determined, and “on what basis [the] [b]oard of [d]irectors decided to approve [the] pay package,” Waxman wrote.

Survey Results: Compensation Committees and Compensation Consultants

Speaking of Rep. Waxman, given his keen interest in compensation consultant conflicts, it’s a good time to report the survey results from our most recent Quick Survey, repeated below:

1. Does your compensation committee:

– have a policy that it will not employ any compensation consultants who perform services for management – 16.1%
– not have such a policy, but does not intend to employ any of the same compensation consultants as management – 51.6%
– employ some (or all) of the same compensation consultants used by management – 32.3%

2. In practice, how does your compensation committee go about hiring an expert for making recommendations regarding CEO compensation?

– Management offers up a consultant to the compensation committee that it finds acceptable, subject to committee approval – 44.3%
– Compensation committee left completely on its own to find and hire whatever consultant it wants – 50.8%
– Compensation committee has not hired an expert for setting CEO compensation – 4.9%

3. Assume the company already is using consultant A for general compensation advisory purposes, will your compensation committee:

– Use the same consultant to help set executive compensation – 36.1%
– Use a different consultant to help set executive compensation – 37.7%
– Too early to tell what the compensation committee will do going forward – 26.2%

4. Regarding compensation committee charters, the committee has:

– A charter that states that the compensation committee will be the sole entity in the company to hire compensation consultants specifically related to CEO compensation – 59.0%
– A charter that states that both the compensation committee and management have the authority to hire compensation consultants specifically related to CEO compensation – 18.0%
– A charter that does not address who hires compensation consultants – 23.0%

My Ten Cents on Consultant Conflicts: I think Rep. Waxman’s interest in conflicts is somewhat unfounded. My experience is that the relatively few board advisors on CEO pay within big consulting firms really are walled off from the much larger departments doing more general HR work. There are more important processes broken in the CEO pay area that are more worthy of attention, such as the severance pay area for which Rep. Waxman has called this hearing on…

– Broc Romanek