March 19, 2010

A Fuss Over Semi-Annual Bonuses

Here is something I recently blogged on’s “The Advisors Blog“:

Just when “bonus” has become the equivalent of a four-letter word in households across the country, the WSJ ran this article noting that at least 50 companies have recently disclosed plans to pay semiannual bonuses, with more than half of them having adopted the plans since 2008 (fyi, the Hay Group did the research for the WSJ on this). This piece ignited a hailstorm in my world as nearly 2 dozen journalists called me yesterday seeking comment.

My immediate take was that there wouldn’t seem to be justification for such a widespread move and that this short-term approach fostered by more frequent bonuses could cause even more managers to manipulate the numbers and all the other perils of short-termism. And for the most part, that is still my position.

However, I checked in with some of the responsible experts that we deal with frequently and got this feedback:

Semi-annual bonuses were adopted by a small fraction of companies due to those companies’ inability (or unwillingness) to set 12 month financial targets due to the uncertainty of the economy. I’ve seen companies adopt the semi-annual approach and they seem to only pay the bonus when the calendar year is over. I imagine the compensation committees made sure the goals were stretch-based on the best available information at the time the goals were set. Some of these same companies retained the discretion to reduce bonuses prior to payment after taking stock of the year as a whole.

I do not disagree with you that using six-month measurement periods is too short-term, but it’s possible that the compensation committees took comfort in the fact that LTI represented the largest component of pay and most executives have substantial ownership, so the risk of maximizing short-term results at the expense of long-term performance was fairly modest.

This too shall pass, as compensation committees hate negotiating bonus targets two times per year (or even four times if you count the end-of-the-period negotiations on what to include – or exclude – in the final performance calculations).

Another expert noted that the two industries highlighted – tech and retail – are long-time users of semi-annual and quarterly bonuses. Take those out of the data and this is only a handful of companies. See Fred Whittlesey’s blog about “when is a trend not a trend”…

FINRA Files Revised Proposal to Regulate IPO Abuses

In the fall of 2003, the NASD (now, “FINRA”) proposed rule changes to prohibit certain abuses in the allocation and distribution of shares in an IPO – at approximately the same time, the SEC proposed amendments to SEC Regulation M that would have also regulated several of the IPO practices proposed to be regulated by the NASD/NYSE proposed rules. Neither of the proposals have been adopted yet.

Recently, FINRA filed Amendment #3 to the NASD’s rule filing to move this proposal along and the SEC issued this notice to solicit comments (note the comment period is only 21 days long). The revisions proposed by FINRA are intended to address comments submitted so far and to otherwise clarify the proposal- but the scope of the revised proposal is only moderately changed from the original ’04 proposal and would apply to any equity security registered under either Section 12 or 15(d) of the ’34 Act (i.e., the rule is not limited to “hot” IPOs nor does it include the exemptions for REITs, direct participation programs or other securities found in FINRA’s Rule 5130).

More on our “Proxy Season Blog”

With the proxy season in full gear, we are posting new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– “Executive Officers”: One Con of a Larger Group
– How Socially Responsible Investors View Companies in 2010
– Interview: T. Rowe Price’s Donna Anderson
– Even More Samples: Companies Complying with the SEC’s New Rules
– Even More on “Shareholder Proposals: Chevedden Sued Over Eligibility”
– Understanding the New Director Qualification CDI
– Do Last Year’s Risk Factors Look Good? Not So Fast

– Broc Romanek