April 15, 2008

Obama Pushes “Say on Pay” to the Fore

As noted in this WSJ article, both Senator Barack Obama and Senator John McCain attacked executive compensation last week. You may recall that Senator Obama introduced a bill on “say on pay” in the Senate after it passed in the House last year. Below is an excerpt from Sen. Obama’s Friday speech (and here is a video and full text of the speech):

We all believe in that fundamental, American value that if you do good work, if you’re successful, you should be rewarded. But if you’re a Wall Street CEO today, it doesn’t seem to matter whether you’re doing a good job or a bad job for your shareholders and workers: You’ll be rewarded either way.

Take the home building company, KB Home. They lost nearly $1 billion last year. But their CEO walked away with a $6 million cash bonus, and that’s on top of his $1 million base salary. And just the other week, we learned that when Countrywide Financial was sold a few months ago, its top two executives got a combined $19 million. Nevermind that Countrywide is as responsible as anyone for the scandalous mortgage crisis we’ve got today – a crisis that’s the source of many of our other economic problems.

This is an outrage. But as I said in a recent speech at the Cooper Union in New York City, this isn’t an accident. It’s because of decisions made, not just in boardrooms or trading floors, but in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales, using their clout to rig the game against everyday Americans.

So what we need to do is restore balance to our economy and put in place rules of the road to make competition fair, and open, and honest. One place we can start is by restoring common sense to executive pay.

That’s why last year, I proposed legislation that would give shareholders a say on what CEOs are getting paid, and help ensure that companies are disclosing the rationale for the salary and benefits that CEOs are getting. This isn’t just about expressing outrage. It’s about changing a system where bad behavior is rewarded – so that we can hold CEOs accountable, and make sure they’re acting in a way that’s good for their company, good for our economy, and good for America, not just good for themselves.

We’ve seen what happens when CEOs are paid for doing a job no matter how bad a job they’re doing. We can’t afford to postpone reform any longer. That’s why Washington needs to act immediately to pass this legislation.

And here are some tidbits from the WSJ article:

– Obama on his “say on pay” bill: “Washington needs to act immediately to pass this legislation” and change “a system where bad behavior is rewarded.”

– If the “say-on-pay” bill doesn’t pass this year, it “will be a priority for Sen. Obama as president,” campaign policy director Heather Higginbottom says. A spokesman for New York Sen. Clinton’s Senate office says she also favors additional federal rules on executive-pay disclosures.

– Sen. McCain hasn’t taken a stance on the say-on-pay bill, and opposes legislative or regulatory cures for executive-pay problems, says senior policy adviser Douglas Holtz-Eakin.

– In a campaign appearance Friday, Sen. McCain said he strongly endorsed Aflac Inc.’s voluntary decision to become the first public U.S. company to give investors a say on pay; the vote is to occur at Aflac’s May 5 annual meeting.

– An Obama commercial that has aired in 14 states assails chief executives “who are making more in 10 minutes than ordinary workers are making in a year.”

– Sen. McCain recently blasted what he called the “outrageous” and “unconscionable” rewards received by leaders of Bear Stearns Cos. and Countrywide Financial Corp. despite the credit crisis

My Ten Cents: Say on Pay

For what its worth, here is my current thinking on “say on pay.” And maybe it’s a cop-out, but I would say that I’m torn at this moment in time. On the one hand, I find the arguments that it’s a slippery slope to have shareholders vote on a matter that is supposed to be a board task (ie. that shareholders will eventually be voting on all sorts of board tasks) and that shareholders won’t have the requisite knowledge to vote on a complex pay package convincing.

On the last point, I worry that say on pay will provide RiskMetrics with even more clout given that most investors will need help deciphering 30 pages of pay disclosure across the many companies in which they invest (although a partial fix for this is for boards to simplify their pay packages so that CEOs aren’t getting paid in a dozen different ways – why is there a need for such complex pay packages?).

I also worry that most shareholders will blindly vote in favor of pay packages, thereby arguably providing directors a shield from liability for the poorly designed pay packages they give a CEO (a theory espoused by the wise Professor Charles Elson, who points out how ironic it is that most directors oppose say on pay). And there are more convincing arguments, including those espoused by some investors who would rather just vote against/withhold directors than participate in a non-binding vote. Or those who say a simple “thumbs down” doesn’t help the board understand which aspects of a pay package are objectionable.

On the other hand, I am at my wit’s end to understand why CEO pay packages aren’t changing. I hear a lot about how the behavior of directors has dramatically changed in the boardroom over the past five years. But I really don’t see much evidence of that when reviewing proxy disclosures. Some commentators claim that the stories in the mainstream media about CEOs getting paid for non-performance are only outliers – but then I look for a CEO whose compensation I can point to as a model and I come up fairly empty.

So maybe “say on pay” is necessary to shake up the boardrooms of this country so that directors truly understand that the excesses of the past need to be reversed. That the 15 years of being paid in the top quartile have added up to a batch of inflated data in peer group benchmarks – and the sole cure is to wind back the clock and take a huge pay cut. Boards may need to be pushed by “say on pay” to see daylight on this issue, because nothing else seems to work.

So I’m personally at a crossroads regarding this issue. There was a “Say on Pay Roundtable” organized by the Working Group on Advisory Votes on Compensation last week; Carol Bowie of RiskMetrics reports on what happened there in this article (scroll down) – and check out the many resources we have on this topic posted in our “Say on Pay” Practice Area on And then there is this hopeful article from yesterday’s WSJ. Maybe this information can help you make up your own mind. It’s a challenging issue and an important one that needs to be addressed before it’s legislated for us…

Judging the Judge

Here is a recent entry from Mark Borges’ “Compensation Disclosure Blog” on

Last Tuesday, I attended a roundtable in New York City on the advisory vote on executive compensation (otherwise known as “Say on Pay”). I was sitting through a panel discussion featuring representatives of the various proxy advisory firms, listening to them talk about the criteria that they would use to analyze a Compensation Discussion and Analysis when formulating a voting recommendation on a Say on Pay proposal when it occurred to me that one of them, RiskMetrics Group (which acquired ISS last year), is itself a reporting company that has to comply with Item 402. I was immediately curious about what was in its executive compensation disclosure.

So yesterday, I took a look at the RiskMetrics’ information. Although the company just filed its first annual report on Form 10-K, it won’t file its first proxy statement until later this month. Consequently, I had to go back to the Form S-1 registration statement from its initial public offering earlier this year.

Like many other newly public companies, the Form S-1 disclosure is on the light side. At 10 pages, it features a Compensation Discussion and Analysis (which clocks in at 2,871 words), a Summary Compensation Table, and four of the other required disclosure tables (a Grants of Plan-Based Awards Table, an Outstanding Equity Awards at Fiscal Year-End Table, an Option Exercises and Stock Vested Table, and a Director Compensation Table).There’s no Pension Benefits Table or Nonqualified Deferred Compensation Table, which isn’t too surprising, and no severance and change in control disclosure (it doesn’t appear that the company has any such arrangements in place).

I noted two interesting features in the disclosure. First, in the CD&A (which starts on page 105) the company describes the five corporate objectives used in determining its 2007 bonus compensation, but doesn’t give the performance target levels. Instead, the company provides the following statement:

“Our corporate objectives for 2007, particularly the specific financial targets for revenues, EBITDA and cash flow, which we used for purposes of determining our 2007 bonus and equity compensation for our executive officers, were set at levels which our board of directors intended to be challenging and which provided an incentive for our executive officers to meet our corporate objectives, including increasing our revenues, earnings and cash flow. However, our corporate objectives were (and are) also intended to be attainable if we have what we considered to be a successful year. We believe that a senior management team that is providing strong performance should be able to achieve our corporate objectives in most, but not all, years.”

I interpret this as a “degree of difficulty” statement as specified by Instruction 4 to Item 402(b). It’s a statement that may come in handy if you run into an issue with this type of disclosure down the road.

Also, the company provides an alternative summary compensation table (at page 114), which adds the anticipated grant date fair value of the equity awards it intended to grant to its named executive officers for fiscal 2007 to the other compensation elements reported in the required Summary Compensation Table (these awards had not been granted at the time of the IPO). I guess this is a pretty strong endorsement of these alternative tables and another not-so-subtle criticism of the current equity award reporting requirements.

RiskMetrics status as a reporting company puts the ISS business in a unique position. Its executive pay disclosure is going to be closely scrutinized each year; particularly given its new policy on evaluating executive pay disclosures to make voting recommendations on Say on Pay proposals. (By the way, RiskMetrics has announced that it intends to give its shareholders an annual advisory vote at each annual meeting to approve its executive compensation policies and practices.) I’m probably not the only one who is looking forward to taking a look at its proxy statement in a couple of weeks.

The Section 162(m) Workshop

We have posted the transcript from our recent webcast: “The Section 162(m) Workshop.”

– Broc Romanek