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30 Nov. 2010 | Comments (0)

Armed with a new white paper from the Council of Institutional Investors and the recently released Institutional Shcii wall street pay coverareholder Services’ 2011 updates for its U.S. Corporate Governance Policy, shareholders seem well-equipped to tackle a myriad of executive compensation issues in the next proxy season. The Nov. 30 CII paper, which was written by The Corporate Library’s Senior Research Associate Paul Hodgson, Advisory Services Manager Greg Ruel and Research Associate Michelle Lamb, concludes that while executive compensation packages among Wall Street firms has improved, banks are still not tying compensation to long-term performance. The report was meant to be a comparison of Wall Street firms to other large U.S. companies. The timing of the report was meant to help shareholders make decisions about advisory votes on executive compensation plans in the first year of the so-called Say on Pay rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. iss 2011 governance policy updatesMeanwhile, the long-awaited ISS updates to its governance policies for 2011 [Read press release] mostly address executive compensation and perquisites. Among the many changes to its existing voting policies, ISS – now flying under the MSCI brand – added new policies on Say When on Pay and Say on Golden Parachutes. The new policies are:
  • Frequency of Advisory Vote on Executive Compensation (Management Say When on Pay): New Recommendation: Vote for annual advisory vote, which provides the most consistent and clear communication channel for shareholder concerns about company executive compensation plans. (Recommendation is new since the Dodd-Frank Act went into effect.)
  • Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale: New Recommendation: Vote case by case on proposals to approve the company’s golden parachute compensation, consistent with ISS policies on problematic pay practices related to severance packages. It lists several package features that could lead to an against vote – agreements that include excise tax gross-up provisions, single trigger payments that will happen immediately upon change in control, potentially excessive severance payments, an assertion by a company that a proposed transaction is conditioned on shareholder approval of a golden parachute advisory vote. (Recommendation is new since the Dodd-Frank Act went into effect.)
  • Problematic Pay Practices – Commitments: Amended Recommendation: ISS will no longer accept commitments by a company to eliminate problematic pay practices going forward so as to preclude a negative vote recommendation. Instead, companies are encouraged to adopt forward-looking policies to address such practices, such as excise tax gross ups on such perquisites as life insurance, personal use of corporate aircraft, home security; home loss buyouts; guaranteed multi-year incentive awards; and dividend payments on unvested performance shares.
If you recall, The Conference Board Task Force on Executive Compensation has a principle on avoiding such controversial practices. The task force stated: “These ‘controversial’ pay practices can raise special risks for companies, shareholders, and the system of overall executive compensation because they are unrelated to successful performance …” Some of the key findings of the CII white paper include:
  • In the wake of the financial crisis, the structure of compensation on Wall Street has improved. Such Positive changes include substantially improved clawback provisions, longer deferral periods for pay, an increase in equity as a proportion of compensation, and a rebalancing of the fixed pay/variable pay mix to mitigate risk taking.
  • More vigorous federal oversight of Wall Street does not appear to have changed compensation on Wall Street for the better.
  • Concerned shareowners should consider several avenues to address outstanding pay problems. Options include engaging directly with Wall Street firms where compensation is most out of line with best practice, voting against management say-on-pay resolutions at annual meetings and filing shareowner proposals seeking better pay practices. Investors could also lobby Congress and regulators for more effective reforms. Such steps could include mandatory deferral of a percentage of incentive compensation, over specified periods, and clawbacks of deferred compensation if certain long-term performance targets are not met.
  • Shareowners should ensure that if they do vote against compensation, they explain their objections in a letter to the company. A letter to the compensation committee chair with copies to the board chair and corporate secretary is typically the first step in the engagement process, followed by in-person meetings. If change is not forthcoming, owners can let the company know that they will vote against the reelection of compensation committee members.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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