February 14, 2008

One “Must” Fix This Season: Full “Walk-Away” Value Disclosure

As part of its executive compenation review project, the SEC Staff has issued many comments on change-of-control and severance disclosures. We have urged companies to improve the clarity of disclosures in this area by providing full walk-away values in a table this year – including not just unvested grants, but previously exercised grants and projecting out future grants (here is a model table; learn more how to do this in our “4th Annual Exec Comp Conf” Archive). This is something that shareholders clearly want to see – and can help companies shorten their executive compensation section.

Below is a recent blurb from Mark Borges’ “Proxy Disclosure” Blog on (and since Mark posted the blog below, he has added another one about a different company):

Out on the speaking circuit, one of the more provacative executive compensation disclosure topics is whether companies should be reporting the “walk-away” number as part of their termination and change-in-control disclosure. While I can’t say that I’ve seen any trend start to emerge yet, it’s a subject that never fails to stimulate strong positions and lively debate.

Recently, Scott Spector pointed me to the Starbucks proxy statement (filed on January 24th) which contains the first “walk away” numbers I’ve seen this year. As part of its “Potential Payments Upon Termination or Change in Control” disclosure, the company provides a table showing the fiscal year-end value of outstanding vested stock options, aggregate deferred compensation plan account balances, and unvested stock options that would accelerate upon the occurrence of certain specified triggering events. It also totals these amounts, with and without the accelerated vesting portion, essentially showing what its named executive officers would receive if they left the company under any circumstance.

Since this is Starbucks’ first filing under the new rules, I can’t tell if they elected to provide this disclosure to get out ahead of the issue or because this level of transparency made sense given the relative simplicity of their executive compensation program. In any event, it will be interesting to see whether other companies follow their lead this proxy season.

How Many Companies Will Disclose Performance Targets This Year?

A recent poll by Watson Wyatt Worldwide got a bit of play in the mainstream press; in the poll, the consulting firm found only 42% of companies plan to disclose the specific goals used in their executive compensation plans for the 2007 fiscal year; 31% have no plans to reveal the goals and the remaining 27% are unsure.

However, this “poll” was far from being scientific – just like our “Quick Surveys” aren’t – since it encompassed only 135 representatives from companies that were listening to a Watson Wyatt webcast. So I would take these numbers with a grain of salt – particularly given the SEC Staff’s continued strong interest in this area (see our recent webcast where a SEC Staffer addressed this topic at length) and institutional investors very strong interest in improved performance target disclosure this year. This was a hot topic during RiskMetric’s Conference last week and those companies that don’t adequately disclose performance targets should expect to become targets themselves during ’09.

Update: We now have over 80 comment letters (and their responses) posted in the “SEC Comments” Practice Area on

Directors Speak Out on Internal Pay Equity

According to a recent survey by Heidrick & Struggles and the Center for Effective Organizations, 90% of director respondents said CEO pay should be no more than two to three times higher than the next highest paid executive. And 85% said the mix was right at their company right now.

But I wonder whether these directors truly conduct an internal pay analysis since only a few hundred companies (out of 10,000; thus a small fraction) disclosed last year that they consider this benchmarking tool as a factor in their decisionmaking – and even those few companies that truly do consider internal pay equity don’t always conduct the analysis properly (eg. neglecting to include equity grants in the calculation). This issue of the Compensation Standards print newsletter from last year has an article explaining “How to Implement Internal Pay Equity.”

Also in the survey: 32% of the director respondents said CEOs are overpaid; up from 25% in the past – the respondents blamed it on compensation consulting firms and the creation of new incentive compensation programs.

A Rememberance: Sadly, Anita Karu passed away on Sunday after a brief illness. As many of you know, Anita was a senior attorney that worked in Corp Fin for over 25 years (much of it in Chris Owings group). She was a true believer in the Commission’s mission – very dedicated. We will all miss her!

– Broc Romanek