A 2012 Step Program for Detoxifying your Executive Pay Plans
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A 2012 Step Program for Detoxifying your Executive Pay Plans

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Presented at WorldatWork 2012 by Hay Group's Dan Moynihan

Presented at WorldatWork 2012 by Hay Group's Dan Moynihan

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A 2012 Step Program for Detoxifying your Executive Pay Plans A 2012 Step Program for Detoxifying your Executive Pay Plans Presentation Transcript

  • A 2012 Step Program for Detoxifying yourExecutive Pay PlansMay 22, 2012
  • Discussion areas 1 Introductions 2 Current Environment 3 2012 Step Program 4 Key Learnings at CEDC 5 Q&A© 2012 Hay Group. All rights reserved 2
  • 01Introductions
  • Introductions Presenter  Dan Moynihan, Principal, Executive Compensation, Hay Group  Daniel.Moynihan@haygroup.com | 201.557.8423© 2012 Hay Group. All rights reserved 4
  • About Hay Group Global organizational and human resources consulting firm  Compensation and benefits consulting  Employee, organizational and customer research  Executive coaching/leadership development  Organizational effectiveness and management development  Work design/strategy alignment  Information business  Founded in 1943  Offices in 49 countries  Ten US offices© 2012 Hay Group. All rights reserved 5
  • About Central European Distribution Corporation  CEDC is one of the world’s largest vodka producers - $2B annual revenues  It maintains leading positions in all of its key markets:  Poland, Russia and Hungary  Our brand portfolio includes valuable and recognized brands like BOLS, Żubrówka, Absolwent and Soplica in Poland; Green Mark and Parliament in Russia; and Royal Vodka in Hungary.© 2012 Hay Group. All rights reserved 6
  • 02Current Environment
  • Overview What are the key issues?  Dodd-Frank provided a “perfect storm” of shareholder empowerment around executive pay  The Act arms shareholders with more information, power, access and ultimately responsibility than before, while making it harder for management to accumulate votes  In response to increased pressure from shareholders and proxy advisory firms, as well as recent Say on Pay legislation, companies continue to monitor their executive compensation programs  Only 41 companies failed in 2011, and thus far we have had 4 fail in 2012…is the hubbub worth it? (as of 4/20/2012)  Given today’s intense scrutiny of executive compensation, we are seeing companies and compensation committees re-evaluate their programs annually and to make changes to comply with stakeholder concerns© 2012 Hay Group. All rights reserved 8
  • Whats next? A false sense of security?  The 2011 voting results have some compensation committees more relaxed than they were before the results were known.  Too soon to tell for 2012  We believe that the single biggest factor influencing the say on pay voting trends this proxy season has been strong company performance  The fact that pay programs have been “cleaner” has certainly had impact  But at the end of the day, shareholders will make 2012 all about company performance  Don’t be fooled by the modest shareholder reaction of 2011 – if performance declines while pay does not, you can be sure that shareholders will make themselves heard in 2012!  Citibank is the most notable case to date© 2012 Hay Group. All rights reserved 9
  • The situation at CEDC  In 2009, ISS withheld their votes on several directors for PFP issues and excise tax gross-ups  The pay packages were not in line with the market  The Compensation Committee chair resigned from the Board  A new Committee was formed and a new Chair named  Clean-up began on  Employment Agreements  Ownership Guidelines and better shareholder alignment  Removal of gross-ups  Realignment of equity plans  More performance based pay© 2012 Hay Group. All rights reserved 10
  • The situation at CEDC  In 2010, changes to the LTIP, and a clean bill of health from ISS – Low concern  In 2011, redesign of AIP to better meet the needs of business  In 2012, stock performance and pay may be misaligned  The Company is working closely with Hay Group and ISS to rectify prior to the proxy release© 2012 Hay Group. All rights reserved 11
  • 032012 Step Program
  • 2012 Step Program 1. Admit we are powerless over scrutiny 7. Ask to fix the shortcomings 2. There is a power greater than our 8. Make a list of the problems, and compensation plan share with your team 3. Turn our plans over to the path of 9. Fix the issue, and make amends with righteousness stakeholders 4. Do an inventory of our plans and issues 10. Continually take an inventory of 5. Admit we have made mistakes with our where we are, and fix any on going pay plans issues 6. Admit we are ready to fix our plans 11. Focus on carrying out the plan 12. Spread the message to others who need help fixing their plans© 2012 Hay Group. All rights reserved 13
  • 1. Admit we are powerless over scrutiny  Evaluate the stakeholder base  Employees  Unions  Shareholders Critical to understand where the issues are with these groups, and  Institutional shareholders be proactive in approach to  Media working with them  Watchdogs  ISS, Glass Lewis, etc.  Begin pro active communication with affected groups  Stay true to yourself  Best practice vs. Best fit© 2012 Hay Group. All rights reserved 14
  • 2. There is a power greater than our compensation plan  ISS and their ilk  Once we accept that we must deal with these activists, we are better prepared  A force to be reckoned with  Their power is perceived, and not always real  Success with outreach  In order to get to a successful Say on Pay vote, shareholder outreach is advisable  Build the story of why, not just what you did  There is power to the story  ISS/Glass Lewis can be reasonable  Work with them towards a satisfactory outcome  Begin the conversation off cycle© 2012 Hay Group. All rights reserved 15
  • 2. There is a power greater than our compensation plan (cont.) ISS – Losing Influence?  Shareholders seem to be less influenced by ISS on say on pay – at least this proxy season  Only small number of companies that ISS recommended AGAINST lost their votes in 2011  However, a number of companies changed programs after receiving the ISS recommendation and before the shareholder meeting  Direct shareholder outreach may be able to overpower ISS recommendations  More pressure on shareholders to not “rubber stamp” their vote  Investment manager proxy voting will be a matter of public record  More institutions developing their own “books” All that said, every compensation committee in America continues to be aware of the ISS standards around executive pay© 2012 Hay Group. All rights reserved 16
  • 3. Turn our plans over to the path of righteousness  Live by the rule of business judgment  Develop a Compensation Philosophy that is fair and just, and works for the business  If you have 75th percentile performance, then you can justify 75th percentile pay  Strategy  Make sure that the HR and pay philosophies match with current business strategy  Too often we change the course of the business, but forget to adapt our pay strategy to match  Develop a story line that connects the dots between business strategy and reward strategy  Charter  Review the Compensation Committee Charter  Ensure that they are overseeing the right things  Best Practice  Does not always equal best fit Just because others are doing it, does not make it right for your business!© 2012 Hay Group. All rights reserved 17
  • 4. Do an inventory of our plans and issues  Compensation program audit  Need to really understand all of your plans and practices  Great time for tally sheets for the Committee  Problematic Pay Practices  Gross-Ups  Higher than 75th percentile pay  Inexplicable peer group  Be honest with yourself  PFP Analysis  Be proactive with this, and understand when you will have an issue  If company performance and/or stock performance over time is declining, need to be aware that issues with PFP will arise  Again, BE PROACTIVE© 2012 Hay Group. All rights reserved 18
  • 5. Admit you have made mistakes Did your audit uncover any of these hot buttons? “Hot Button” Description  Egregious employment contracts with multi-year pay guarantees, non- 1. Employment contracts performance based bonuses and/or equity compensation 2. New CEO with overly  Excessive “make-whole” provisions without sufficient rationale generous package 3. Large bonus payouts  Performance metrics that are changed, canceled or replaced during without justifiable the performance period without explanation of the action and link to performance linkage or performance proper disclosure 4. Egregious  Inclusion of additional years of service not worked or inclusion of pension/SERP payouts performance-based equity awards in the calculation© 2012 Hay Group. All rights reserved 19
  • 5. Admit you have made mistakes Do you need to fess up to these? “Hot Button” Description  Perquisites for former executives, such as lifetime benefits, car allowances, or personal use of corporate aircraft 5. Excessive perquisites  Extraordinary relocation benefits (including home buyouts)  Other perquisites including personal use of corporate aircraft, home security systems and car allowances  Change in control payments exceeding 3 times base salary and bonus or without loss of job or substantial diminution of job duties  New or materially amended employment or severance agreements that provide for modified single triggers, under which an executive may 6. Excessive severance voluntarily leave for any reason within 1 month period following the 12 and/or change in month period and still receive the change-in-control severance package control provisions or that provide for an excise tax gross-up  Payments upon an executives termination in connection with performance failure  Liberal change in control definition in individual contracts or equity plans which could result in payments to executives without an actual change in control occurring© 2012 Hay Group. All rights reserved 20
  • 5. Admit you have made mistakes Need to make amends for these? “Hot Button” Description  Reimbursement of income taxes on certain executive perquisites or other 7. Tax Reimbursements payments (e.g., personal use of corporate aircraft, etc; see also excise tax gross-ups on previous page)  Without prior shareholder approval (including cash buyouts) 8. Repricing or replacing  Voluntary surrender of underwater options by executive officers may be of underwater stock viewed as an indirect option repricing/exchange program, especially if options those cancelled options are returned to the equity plan, as they can be regranted to executive officers at a lower exercise price and/or the executives can subsequently receive unscheduled grants in the future  Significant differential between CEO total pay and that of next highest- 9. Internal pay disparity paid named executive officer (NEO)© 2012 Hay Group. All rights reserved 21
  • 6. Admit we are ready to fix our plans 7. Ask to fix the shortcomings Step away from the bar…  Ok, so you have made some mistakes  Disclose it  Amended proxy filings explaining why ISS/Glass Lewis “got it wrong”  Shareholder calls and meetings  8-Ks disclosing new programs  We will fix it  Commit to making it right  Most difficult areas are gross up’s and elimination of single trigger  Want to keep executives engaged and motivated  They see the removal of these as huge take-aways  New philosophy  Outline the changes, and how your philosophy on pay has shifted  Use CD&A for this© 2012 Hay Group. All rights reserved 22
  • 8. Make a list of the problems, and share with stakeholders  Outreach is essential  Create the full list of issues  Prioritize and identify any unintended consequences of change  Create a timeline for reparations  May not be possible to make all changes in one year  Especially if making complex changes to LTI plans, which often include a shareholder request for more shares  Communicate  Good to involve multiple parties, based on your unique situation  Board  Compensation Committee  Executive Management  Internal Compensation, Finance, and Legal Teams  External Consultants and Legal Team  ISS and/or Institutional Investors© 2012 Hay Group. All rights reserved 23
  • 9. Fix the issue, and make amends with stakeholders 10. Continually take inventory, and fix on going issues  Fix it  Say mea culpa  Monitor the plans to ensure they don’t get away from you  Review the plans as things change  Clawback policies will be a big issue for the 2013 proxy season  Final rules should be available, and ISS will expect swift action to ensure that companies are complying with the new regulations© 2012 Hay Group. All rights reserved 24
  • 11. Focus on carrying out the plan  Stay committed to the cause  Remember, that Compensation has four goals:  Helps to attract new talent  Helps with retention of talent  Acts as a motivational tool  Helps to focus the executive on what is important to the business  Solid compensation plans will fit the business, link to shareholder return, and will be a tool for helping to run the business© 2012 Hay Group. All rights reserved 25
  • 12. Spread the message to others who need help  Once you have seen the light…  Share the vision with others  Become a compensation evangelist© 2012 Hay Group. All rights reserved 26
  • 04Key Learnings at CEDC
  • The CEDC Story From ISS Withhold to Positive Outcomes  Withheld votes on 2 directors in 2009  PFP disconnect  Excise tax gross ups  Subsequently eliminated from new contracts  2010 – low concern  There is no disclosure regarding a holding period for stock option grants to executives  Created holding period  2011 – median concern  Directors are subject to sub-standard stock ownership guidelines  Fixed in mid-2011, and disclosed in July  The company did not disclose a clawback provision for variable cash compensation  Awaiting final Dodd Frank rules  2012 – PFP likely to be an issue again© 2012 Hay Group. All rights reserved 28
  • What was learned  Audit revealed issues that were forgotten or missed due to piecemeal approach to compensation  New committee re-evaluated the entire package  Reviewed tally sheets to understand the historical issues for their executives  Fixed problematic pay practices  Better outreach to shareholders on key issues  For 2012, in the process of a share request for a new LTI plan  Got ISS involved at the beginning© 2012 Hay Group. All rights reserved 29
  • What to Expect in 2012 and 2013 Overview  Continued government interest and involvement, specifically through Dodd-Frank  Due to shareholder and proxy advisory firm influence, continued conservatism around the optics of certain pay program features and design:  Double triggers on equity plans  Lower severance multiples  Elimination of excise tax gross-ups and less perquisites  Increased share ownership guidelines or holding requirements  However, due to current performance equity designs, more volatility of outcomes  More pay for performance alignment  Companies using stock options and PSUs have significant leverage in their LTI program  Increased use of TSR-based performance plans to ensure executives don’t win if shareholders lose  More companies will defer a portion of bonuses into stock  Both a “risk in compensation” issue as well as a mechanism to enforce clawbacks  Don’t be fooled by the modest shareholder reaction of 2011 – if performance declines while pay does not, you can be sure that shareholders will make themselves heard in 2012© 2012 Hay Group. All rights reserved 30
  • What to Expect in 2012/2013 Companies need to be aware of the “breaking point” for each pay element What Makes What Do Where’s The Issue for Topic Business Sense? Shareholders Want? Breaking Point? CEDC? Pay positioning that Targeting P75 Pay Pay positioning that maps to maps to competitive without P75 Not an issue Philosophy competitive positioning positioning performance Mapping pay mix to key time Pay Mix >50% in LTI for CEOs >50% in STI Not an issue horizons for the business A balance that rewards High absolute returns Have paid $0 Performance something when returns are Big payouts when AND relative bonuses in Measures low but the team outperforms shareholders lose outperformance last 2 years plans and the market Overriding the Allowing some discretion when STI / Formula-driven formula with big Limited warranted; Balancing financial Bonuses financial performance discretionary discretion and strategic measures payouts LTI plans Performance vesting when Less dilution Lack of a balance time LTI linked to the “right” measures performance-vested Performance vesting and and key milestones vehicle performance© 2012 Hay Group. All rights reserved 31
  • What to Expect in 2012/2013 Companies need to be aware of the “breaking point” for each pay element What Makes What Do Where’s The Issue for Topic Business Sense? Shareholders Want? Breaking Point? CEDC? Gross-ups, Some of these, some of the None Perquisites None of them excessive personal time anymore use of plane Incentive for executives to be Double-triggers Single triggers – , Double Change in aligned with the best interest even on equity – Trigger for Control 2x payouts (from 3x) of shareholders and gross-ups other NEOs Some balance – but not too Not an issue. much Balance, but with a One measure that Managing Multiple focus on shareholder drives most of the Risk in Pay Pay profile that maps to the metrics to value pay risk profile balance risk© 2012 Hay Group. All rights reserved 32
  • Q&A
  • Presenter  Dan Moynihan, Principal, Executive Compensation, Hay Group  Daniel.Moynihan@haygroup.com | 201.557.8423© 2012 Hay Group. All rights reserved 34