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1October 21, 2010High Performance Equity Compensation
Dodd-Frank Wall Street Reform
and Consumer Protection Act
Presented to the Bay Area Compensation Association (BACA) 10/21/2010
What should Compensation Professionals be doing right now?
Action Steps for Executive Compensation ©2010-Performensation - all rights reserved
©2010-Performensation - all rights reserved
2
The following presentation discusses the highlights of the executive compensation provisions contained in the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
This presentation is based on the final version of the bill dated July 16, 2010 and posted on the Government Printing
Office’s Web page: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf (under Title IX—Investor Protections and Improvements to
the Regulation of Securities Sections 951–957 and 971–972).
President Obama signed the Dodd-Frank Act into law on July 21, 2010To protect the confidential and proprietary information included in
this material, it may not be disclosed or provided to any third parties without the prior consent of Performensation Consulting LLC.
This presentation was created in cooperation with: Ed Hauder, Senior Advisor, Exequity
©2010-Performensation - all rights reserved
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Today’s PresenterDan WalterPresident and CEOPerformensationEmail: [email protected]: (415) 625-3406Web: www.performensation.com
mobile: +1-917-734-4649Twitter: @performensation Skype: performensationLinkedIn: www.linkedin.com/in/danwalter
Compensation Cafe Blog: www.compensationcafe.comPresentation Library:www.slideshare.net/performensationEquity Compensation Experts: www.equitycompensationexperts.groupsite.com
High Performance Compensation
©2010-Performensation - all rights reserved
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About the Speakers: Dan Walter
President and CEO of Performensation
Broad experience: Dan has more than 15 years of experience assisting companies with both executive and broad-based compensation programs. He provides end-to-end solutions for private and public companies in both the United States and abroad. His clients have ranged from entrepreneurial start-ups to established Fortune 100 companies providing him with a unique perspective on compensation issues.
Incentive compensation futurist: Dan is frequently recognized for being an industry leader in compensation design, philosophy, and execution. He provides solutions that start with your corporate culture and end with your corporate success. Performensation’s solutions also include GEMS, the only tool designed to automate the tracking of complex goals against equity plans.
Deep expertise: Dan’s expertise includes equity compensation, executive programs, performance-based pay, and talent management issues. His experience with these programs includes diagnosis, design, communication, administration, and reporting. Dan has experience with all forms of equity, including stock options, restricted shares and units, and stock purchase and performance-based programs. Dan’s past clients include: Yahoo, Google, IBM, Microsoft, JDSU, ION Geophysical, Redback Networks, BGI (now BlackRock), and others.
Industry educator: Dan is currently writing a book on performance-based equity and contributing to another. He is a frequently requested speaker at compensation, stock administration, human resources, and accounting events, covering a wide range of topics. Dan is the founder of Equity Compensation Experts, the largest networking group for professionals who touch equity compensation, a regular contributor to the Compensation Café blog (rated one the top 10 talent management blogs on the web), and a co-producer of the ShareComp 2010 virtual conference
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: SAY ON PAY PROVISIONS
What you need to do:
Create say on pay (MSOP) stakeholder team
Determine your say on pay philosophy and approach:
Aggressive:
Actively move to more performance-based pay
Move to annual shareholder votes
Passive:
Wait for others in your peer group to announce their position
Push for vote triennially
Understand what your shareholders want
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: SAY ON PAY PROVISIONS
What you need to do:
Understand how your company has linked pay to company has linked pay to performance in the past
Explain anomalies
Calculate full potential payout given the expected and projected combination and projected combination of corporate and stock price performance
Perform similar comparisons for peers
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: SAY ON PAY PROVISIONS
How an experienced compensation consultant can help:
Evaluate content and presentation of executive compensation disclosures
Review alignment of pay to performance
Reach out to your shareholders to find out what they think and identify any “hot button” issues that could impact their vote on say on pay
Review past recommendations from ISS, Glass Lewis, and others regarding companies in your peer group
Review how your your compensation plan, design, and program compare to the policies of your institutional shareholders
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: GOLDEN PARACHUTE VOTES
What you need to do:
Review change-in-control (CIC) provisions in all compensation programs and ensure that they represent your current philosophy
Determine go-forward philosophy in regard to golden parachutes
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Determine current golden parachute liability assuming a CIC event in the next 12 months; use different deal price assumptions to get a feel for the sensitivity of your golden parachutes to the deal price
Determine Top 5 NEO golden parachute liability as a percentage of deal price and premium over current and 200-day average stock price
Perform same calculations for your peers
Review compensation arrangements that may be subject to a separate shareholder vote if a transaction were to occur; ensure the terms are consistent with intent, and disclosure is covered by a management say on pay vote
ACTION ITEM: GOLDEN PARACHUTE VOTES
How an experienced compensation consultant can help:
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: COMPENSATION COMMITTEE INDEPENDENCE
What you need to do:
Review independence standard for audit committee members
Review how the audit committee independence standards might apply to your current compensation committee members
Review independence of compensation committee members and adjust as needed
Move to switch out non-independent directors before next applicable proxy period
Committee charter may need to be updated, but wait for SEC to issue rules
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: COMPENSATION COMMITTEE INDEPENDENCE
(You’re on your own)
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM:CONSULTANTS AND ADVISERS INDEPENDENCE
What you need to do:
Determine what independence standard the compensation committee will apply to its advisers
Create a list of qualified compensation consultants who do not provide any other services to the company
Review current compensation consultants and other committee advisers for independence as related to the new rules
Review with your compensation committee possible advisers that may suit their needs
Determine whether the compensation committee wants to change any of its advisers as a result of reviewing their independence
Review the independence factors to be issued by the SEC
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Performensation is a completely independent consulting firms
We can provide assistance with your compensation programs
We can provide assistance in evaluating the independence of your current consultants and advisers
ACTION ITEM:CONSULTANTS AND ADVISERS INDEPENDENCE
How an experienced compensation consultant can help:
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: EXECUTIVE COMPENSATION DISCLOSURES
What you need to do:
As part of say on pay review and philosophy, document relationship between pay and performance
Determine the tools, time, and budget required to calculate employee annual compensation in the same manner as required for the Summary Compensation Table (SCT)
Provide input to the SEC now [http://www.sec.gov/spotlight/regreformcomments.shtml]
Contact your Congressman and Senators
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Evaluate whether a historical look at pay versus performance of your company and its peers would assist the development of disclosure and/or message to shareholders
Determine current ratio of CEO pay to employee pay
Determine if any other pay ratios should be considered for disclosure purposes, i.e., CEO to other NEOs, CEO as a % of total compensation expense, etc.
Review peer group ratios, using compensation survey data as a guideline
Evaluate if your ratio is “media worthy”. Will news outlets report on your ratio as a positive or negative?
ACTION ITEM: EXECUTIVE COMPENSATION DISCLOSURES
How an experienced compensation consultant can help:
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: CLAWBACK PROVISION: RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY
What you need to do:
Evaluate your current philosophy on clawback provisions
Can your current position be communicated as supporting the new regulations?
If not, what changes must be made to comply?
Determine if those changes can be made (some may require significant legal work or plan redesign)
Identify potential legal issues (wage laws, etc.)
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Review your clawbacks to determine any necessary changes
Set out a plan to get necessary changes implemented so your clawbacks comply with the new requirements
Create clawback “best practices” guidelines that can be applied to current and prospective programs
ACTION ITEM: CLAWBACK PROVISION: RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY
How an experienced compensation consultant can help:
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: DISCLOSURE REGARDING EMPLOYEE AND DIRECTOR HEDGING
What you need to do:
Review current hedging positions with all executives, directors, and employees
Evaluate the disclosure requirements for each individual’s current transactions
Determine the modifications, if any, that each individual must make
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Define a clear anti-hedging policy as part of your insider trading policy
Create a communication program explaining the variants of hedging and how your anti-hedging policy works
ACTION ITEM: DISCLOSURE REGARDING EMPLOYEE AND DIRECTOR HEDGING
How an experienced compensation consultant can help:
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: ENHANCED COMPENSATION STRUCTURE REPORTING FOR FINANCIAL COMPANIES
What you can do:
If you are not a financial company, disregard for now, but keep an eye on this so you know what some shareholders might ask you to adopt if the changes are viewed as beneficial by shareholders
If you are a covered financial company with more than $1 billion in assets:
Start evaluating your compensation programs now
Determine how you will communicate the structure of these arrangements to determine:
Possibility of providing excessive compensation fees or benefits
Risk profile and association with possible material loss to the company
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Prepare initial approach to modifications such as:
Mandatory holding periods and stock ownership guidelines
A significant portion of compensation to be deferred
Introducing an absolute metric governing payouts of any performance-based compensation subject to relative performance measures, e.g., relative total shareholder returns
ACTION ITEM: ENHANCED COMPENSATION STRUCTURE REPORTING FOR FINANCIAL COMPANIES
How an experienced compensation consultant can help:
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: VOTING BY BROKERS
What you can do:
Evaluate voting standards and determine impact
Determine whether more aggressive outreach to shareholders is warranted to gain support of retail shares
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Evaluate employee equity compensation accounts to determine if the individuals can and do vote their shares
If you have a strong employee ownership culture, assist with the creation of a communication program that explains the importance of employee voting
Determine the potential need for a proxy solicitation campaign, based on the likelihood of un-voteable, broker-held shares
ACTION ITEM: VOTING BY BROKERS
How an experienced compensation consultant can help:
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: CORPORATE GOVERNANCE
What you can do:
Keep your eyes open for final decisions regarding Proxy Access
Draft out the rationale for your company having the Chairman/CEO structure it has
Why was this structure selected?
What does it enable the company to do?
How does this structure impact your company’s corporate governance?
Did you consider alternatives?
If so, why were they not selected?
How often does the company review its Chairman/CEO structure?
Does this structure increase or decrease your company’s risk profile?
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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ACTION ITEM: CORPORATE GOVERNANCE
What you can do:
Compensation Risk Factor
Calculate the impact of goals being met early goals being met early
What is the impact of lost retention power if executive held shares are executive held shares are sold
Determine the true weighting of goals related weighting of goals related to STI and LTI and its potential impact on your corporate risk profile corporate risk profile.
Where possible express this in dollars or in $/share.
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Update you when final proxy access rules are available
Provide insight into rationale for peer group Chairman/CEO structure
ACTION ITEM: CORPORATE GOVERNANCE
How an experienced compensation consultant can help:
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
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Short-term
Opening of communication lines in both directions
Conservative voting until more data is gathered
Long-Term
Clearer guidelines on linking pay to performance
Consolidation around a few key metrics as indicators of performance
Addition of experts well versed in compensation
WHAT WILL CHANGE:
Shareholders
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
28
Short-Term
Focus on “poster-child” companies to serve as examples (good and bad)
General acceptance of all but the most egregious pay programs
NO votes where BOD has discretion to pay out on under-performance
Long-Term
Continued outcry when small percentage of companies have unusually high compensation
Focus on Pay Vs. Performance, not CEO Pay Ratios
WHAT WON’T CHANGE:
Shareholders
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
29
Short-term
Increased communication to justify pay structure
More companies using multiple compensation consultants
Growth in performance-based equity
Smaller companies more likely to utilize additional outside expertise’
Reduction of lucrative Golden Parachute programs
Long-Term
Less fear of Say on Pay as votes become more predictable
Return to historical Golden Parachute policies
Evolution of Clawbacks as they are tested in practical application
WHAT WILL CHANGE:
Compensation
www.performensation.com415-625-3406
©2010-Performensation - all rights reserved
30
Short-Term
Use of time-based equity
Will simply will add new performance equity
Base-compensation philosophy
Unless it has already been called out by shareholders
Long-Term
Growth in Executive Pay levels, especially CEO
Pay frequency
WHAT WON’T CHANGE:
Compensation
©2010-Performensation - all rights reserved
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We’ve probably been out of time for a while,
but…any Questions?
©2010-Performensation - all rights reserved
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Today’s PresenterDan WalterPresident and CEOPerformensationEmail: [email protected]: (415) 625-3406Web: www.performensation.com
mobile: +1-917-734-4649Twitter: @performensation Skype: performensationLinkedIn: www.linkedin.com/in/danwalter
Compensation Cafe Blog: www.compensationcafe.comPresentation Library:www.slideshare.net/performensationEquity Compensation Experts: www.equitycompensationexperts.groupsite.com
High Performance Compensation