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Executive Compensation News

August 6, 2009

What’s Inside:

• “The Future of Executive Compensation” Model ©Longnecker & Associates
• SEC Disclosure of Services Performed by Compensation Consultants
• SEC Approves Amendment to NYSE Rule 452 to Eliminate Broker Discretionary Voting in Director Elections
• “Say on Pay” Legislation Update

Compensation insights provided by the L&A team

THE FUTURE OF EXECUTIVE COMPENSATION

SEC Disclosure of Services Performed by Compensation Consultants

The proposal would require the company to disclose whether any “other” services (e.g., benefits, HR and/or actuarial services) have been performed for the company by compensation consultants. If the consultant does provide “other” services, then: (i) a description of these services must be set forth, (ii) the fees paid to consultants and affiliates must be set forth, (iii) disclosure is required on whether the decision to engage the consultant was made, recommended or subject to screening by management, and (iv) disclosure is required on whether the Board approved the “other” services.  Notably, this additional disclosure is not required if the consultant advised solely on broad-based, non-discriminatory plans that are generally available to all salaried employees (and that, by their nature, includes Named Executive Officers). However, if the consultant was retained to advise on executive or director programs, the company must then disclose information on any additional services provided, including for any broad-based, non-discriminatory plan.

Although the SEC proposal would only require disclosure, Treasury Secretary Geithner has suggested that the administration may introduce legislation that would actually prohibit compensation consultants from performing other services for the company, reflecting a perception that compensation consultants who receive other business from the company have a conflict of interest that may cause them to recommend excessive compensation for senior management. A Fact Sheet issued by the Treasury on July 16, 2009 directs the SEC to create new standards of independence for any advisors to the Compensation Committee — including consultants, attorneys and others.

SEC Approves Amendment to NYSE Rule 452 to Eliminate Broker Discretionary Voting in Director Elections

This amendment, which will apply to proxy voting for shareholder meetings held on or after January 1, 2010, may have a significant effect on director elections, especially at companies with a large percentage of retail beneficial owners of shares held in street name. Public companies with a substantial percentage of shares held in street name may no longer count on those shares routinely being voted in favor of management’s slate by brokers. As a result it is expected:

• Vote “no” or “withhold” campaigns led by institutional investors will no longer be offset by a large block of broker discretionary votes in favor of management’s slate.
• Many estimate that 10 — 20% of votes are currently broker discretionary votes in favor of management.
• Voting recommendations to institutional investors by proxy advisory firms, such as RiskMetrics Group and Glass Lewis, may consequently be expected to have even greater influence once the revised rule goes into effect. This could have a significant impact on obtaining shareholder approval for new and amended executive and/or employee equity plans.
• Companies with majority-voting bylaws or policies may have to work much harder to ensure election of management’s slate.
• Companies that do not currently include another routine matter in their annual proxy, such as ratification of auditors, may wish to begin doing so to help ensure a quorum at their annual meetings.
• The increasing movement of director elections to a majority vote requirement along with the loss of the broker discretionary vote will raise the bar for directors to be successfully elected.

“Say on Pay” Legislation Update

On July 16, 2009, the US Treasury delivered draft legislation to Congress concerning advisory “say on pay” votes. The next day, Congressman Barney Frank unveiled draft legislation, entitled the “Corporate and Financial Institution Compensation Fairness Act of 2009,” incorporating those proposals, which he intends to officially introduce before Congress’s August recess. In addition, the Frank bill includes a new proposal regarding “perverse incentives” in financial institution pay structures. We summarize the key provisions of each of these proposals below.

The proposed say on pay legislation is substantially similar to the say on pay legislation that Mr. Frank sponsored in 2007 and was passed by the House in that year. The key provisions of the renewed say on pay legislation would:

Require a non-binding annual shareholder vote on compensation for all public companies (not just TARP recipients as is currently the case). The vote to approve the compensation of the company’s executives as disclosed in its proxy statement would encompass the compensation committee report, the compensation discussion and analysis, the compensation tables, and any related materials.

Require specific disclosure of, and a separate non-binding shareholder vote on, certain executive officer “golden parachute” arrangements in the case of certain mergers and acquisitions transactions. Disclosure would have to be made, in a “clear and simple tabular form,” with respect to any agreements or understandings the company has with any “principal executive officer” (under the Frank bill) or “executive officer” (under the Treasury proposal) concerning any type of compensation based on the transaction, along with the aggregate total of all such compensation that may be paid or become payable to the relevant executive officer. In the non-binding proposal, shareholders would be asked to approve the agreements or understandings and the compensation as disclosed.

“Frankly Speaking, Say on Pay is No Way to Act,”
by Brent Longnecker and Chris Crawford, Houston Business Journal, June 22, 2007.
www.longnecker.com

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