US companies will disclose the total compensation of their top five executives in more detail. A record number of compensation-related proxy proposals are expected. New summary compensation tables are drawing the attention of ‘proxy geeks’.
When Wrigley filed its 2007 proxy statement in February, it included one of the first examples of the new summary compensation table now required in SEC filings. The inclusion was the ‘wow’ number for total compensation, showing former CEO and president William Wrigley Jr earning $8.6 mn.
The pay for Wrigley, who stepped down as CEO in October but remains chairman, wasn’t even exceptional by executive standards; he actually failed to qualify for a bonus. Yet it drew the kind of attention and criticism that might alarm an IRO.
Financial bloggers at the widely read Footnoted.org and WSJ.com’s MarketBeat seized on some of the details, especially those in the ‘all other compensation’ section relating to Wrigley spending $540,000 to fly by private jet. Footnoted’s author, Michelle Leder, summoned other ‘proxy geeks’ to help examine earlier filings in order to make year-on-year comparisons. She got volunteers.
Companies are at a point where unprecedented disclosure is meeting an ever-more sophisticated audience. As more proxies are filed under the SEC’s expanded compensation disclosure requirements, critics may lose interest in simply average figures like Wrigley’s, but others carry the potential to be explosive.
The new rules, issued last August, require public companies to disclose the total compensation of the top five executives in more detail, giving figures that summarize salary, bonuses, incentives, perks and retirement and postemployment benefits. In the past, companies would scatter this data throughout the proxy, sometimes leaving investors clueless about true totals. The centerpiece of the new rules is the compensation discussion and analysis (CD&A), in which the factors underlying the total must be justified.
Trimming perks
Conscious of stirring up hedge funds, pension groups and governance activists, some companies have already eliminated perks and trimmed other compensation. For example, ExxonMobil recently quit paying country club dues for executives, while General Mills set limits on using the corporate jet.
‘You want to stay away from being an outlier,’ a compensation consultant says. ‘The stakes are very high. If you are deemed to have bad pay or a bad board, that’s a platform issue for investment bankers as to what they might take over by offer or proxy fight.’
The alternative approach is to offer a very good justification for the US companies to disclose total compensation of top five executives in more detail New summary compensation tables are drawing the attention of ‘proxy geeks’ Record number of compensation-related proxy proposals expected level of pay. High compensation can fit into a business model designed to grow shareholder value. ‘Some extremely well-paid CEOs are worth it if their compensation is based on performance that adds significant value for shareholders,’ explains Paul Hodgson, a senior research associate at the Corporate Library.
Governance activists are running their own calculations to see how their estimates match up with what’s reported. If returns are poor and pay is high, expect trouble. Critics will not only be attacking the compensation itself, but also the directors who sign off on it. ‘What we are typically recommending is this: where there is a pay for performance disparity, withhold votes from the compensation committee members,’ says Shirley Westcott, managing director of policy at Proxy Governance.
Companies cannot hide from activist scrutiny. In November, a Wachtell Lipton Rosen & Katz memo described expectations for 250 to 500 compensated-related proposals in 2007, up from 170 in 2006, and 140 in 2005. ‘In this environment, you will get questions from shareholders, from activists,’ says Larry Parnell, a partner with Beacon Advisors, which specializes in IR crises. ‘They’ve adopted it as a cause célèbre. It creates visibility for their agenda.’
But being targeted for excessive executive pay need not be a market event. ‘This is more of a reputational issue than a valuation issue,’ Parnell says. ‘It’s not the same as an accounting crisis that hits the core of the company. Things may be out of line with the industry. You need to separate it from the daily operations of the company and discuss what you are doing going forward.’
Getting ready for questions
Even companies that don’t expect to be outliers should get ready for questions. ‘Figure out where your company is on the continuum to put some perspective on the numbers,’ Parnell says. ‘At least give the market and the stakeholders the benefit of whatever you can share on the context.’
Perks and high salaries are always good fodder for critics, but deferred compensation and severance will also be big issues because their details haven’t been reported before. Deferred payment numbers can look huge, especially for long-serving executives, and shareholders are starting to question the circumstances in which they should be paid.
‘These pieces of compensation are generally objected to because they are not related to performance,’ Hodgson says. ‘The spotlight should make a significant difference.’ Indeed, a Mercer Human Resource Consulting Report surveying 110 firms as the deadline approached for complying with the new compensation rules shows companies have a great deal of interest in modifying nonperformance related benefits.
Of those considering change, 60 percent would like to eliminate tax gross-ups (the little-known payments that have been obscured in footnotes and which can spiral to huge sums), 40 percent might reduce compensation on severance, and 33 percent could stop offering perks on retirement.
Reaching a place where both shareholders and companies are happy with the numbers is a good goal. Even when this year’s proxy statements are history, the issue won’t go away. ‘Compensation is always part of a good governance story,’ Westcott concludes.