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Executive Compensation in the 2012     Proxy Season     Year Two of Say-on-Pay — and BeyondPresenters: Doug Friske, James ...
Today’s experts                   Doug Friske is the global leader of Towers Watsons Executive Compensation business and i...
The say-on-pay era so far: What we know   Vast majority of companies are doing just fine       Russell 3000 received an ...
The say-on-pay era so far: What we know   The negative consequences of standing out are significant       Companies with...
Today’s discussion Topic                                                                                                  ...
Trends in Pay Levels and Practices                                                                                        ...
The sample…    To understand trends in pay and pay practices, we examined 225     Fortune 1000 companies that filed proxi...
Growth in CEO pay opportunity slowed last year                                                                            ...
Trends in target and actual incentive levels                   16% of companies exercised discretion to reduce bonuses,   ...
CEO annual bonuses are moving back toward normaldistribution around target                         Percent of CEOs Receivi...
The LTI mix continues to evolve toward performance-based plans…                   2009                                    ...
…and the pay/performance alignment remains strong                                                       2009              ...
We also saw a close correlation between investor returnsand the value of LTI granted that the CEO realizes                ...
The Say-on-Pay Experience                                                                                                 ...
Say-on-pay voting: Early Year Two experience   Most companies (about 82% of the Russell 3000) will hold say-on-pay    vot...
Say-on-pay voting: Early Year Two experience   Recommendations from proxy advisory firms show continuing influence    on ...
Drivers of negative vote recommendations…   Pay-for-performance alignment remains the biggest driver of negative    recom...
…and drivers of negative votes   Companies with poor performance (low TSR) were three times as likely    to receive less ...
How companies responded to 2011 say-on-pay votes Level of Shareholder                    Number of                        ...
Common actions taken in response to 2011 votes             Pay Program Changes                                            ...
Supplemental filings are making a strong return in 2012   Topics frequently addressed include       Rebuttals to proxy a...
The Regulatory Horizon                                                                                                    ...
Our analysis also examined how say-on-pay has affectedCD&A quality   Most continue to get longer, but some are being tigh...
Pay-for-performance disclosures remain a weak spot    Most companies (89%) say they pay for performance         However,...
We continue to wait for key Dodd-Frank regulations 1 Disclosure of pay for performance           How will pay be measured...
Recent PCAOB proposal could prompt auditor scrutinyof pay plan design   Proposed amendment to PCAOB Auditing Standard No....
At least the politicians have been largely quiet   None of the candidates has made executive pay regulation a major    po...
Where do we go from here? Some possibilities   Total pay caps   Late-year equity grants   Standardized peer groups   E...
Questions?   doug.friske@towerswatson.com   james.kroll@towerswatson.com   steven.seelig@towerswatson.com   olivia.wak...
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Executive Compensation in the 2012 Proxy Season Year Two of Say on Pay and Beyond - Towers Watson

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Most companies gained strong shareholder support for their executive pay programs in last year’s first round of mandatory say-on-pay votes. Will year two of say on pay play out differently, given the lackluster shareholder returns that some companies delivered in 2011?

Towers Watson’s top executive compensation experts look at the results of the early say-on-pay votes in 2012, along with their observations on emerging trends in pay levels, program design and companies’ continuing efforts to ensure close alignment between executive pay and performance.

For more information, please visit: http://towerswatson.com/services/Executive-Compensation and http://www.towerswatson.com/blog/executive-pay-matters

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Transcript of "Executive Compensation in the 2012 Proxy Season Year Two of Say on Pay and Beyond - Towers Watson "

  1. 1. Executive Compensation in the 2012 Proxy Season Year Two of Say-on-Pay — and BeyondPresenters: Doug Friske, James Kroll, Steven Seelig, Olivia WakefieldApril 5, 2012 © 2012 Towers Watson. All rights reserved. © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  2. 2. Today’s experts Doug Friske is the global leader of Towers Watsons Executive Compensation business and is based in Chicago. He has more than 20 years’ experience advising a wide range of organizations on all aspects of executive compensation. James Kroll is a senior consultant in Towers Watson’s Executive Compensation practice, based in New York. He specializes in corporate governance and executive compensation issues and assists clients with shareholder approval of equity plans, advisory votes on executive pay and other compensation-related governance issues. Steve Seelig is the executive compensation counsel for Towers Watson’s Research and Information Center in Washington, D.C. His expertise includes the taxation, accounting and legal implications (including SEC disclosure requirements) of all forms of executive compensation and perquisite programs. Olivia Wakefield is a director in Towers Watson’s Executive Compensation practice, based in Boston. Specializing in executive compensation programs, she advises clients on topics such as annual and long-term incentive performance metric calibration and plan design, equity pool management and corporate governance. 2towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  3. 3. The say-on-pay era so far: What we know Vast majority of companies are doing just fine  Russell 3000 received an average of 90% shareholder support in 2011  Similar pattern is taking shape in the early 2012 votes Pay practices in general haven’t changed that much  CEO compensation levels are up slightly, despite improved financial results  Incentive designs, by and large, are unchanged  High correlation between performance and pay 3towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  4. 4. The say-on-pay era so far: What we know The negative consequences of standing out are significant  Companies with high pay opportunities (75th percentile or above) were twice as likely to receive low shareholder support (below 70%) in 2011…  …while those with poor (bottom third TSR) performance were three times as likely to receive low shareholder support (even if CEO had below-median pay)  Unusual plan design features or perquisites remain lightning rods  Disclosures that don’t conform to expectations attract scrutiny  Peer group selection is also attracting closer scrutiny in 2012 In the say-on-pay environment, companies are increasingly sensitive to shareholder concerns and see a growing need to be vigilant about pay program design and operations 4towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  5. 5. Today’s discussion Topic Presenter Trends in Pay Levels and Practices Olivia Wakefield The Say-on-Pay Experience James Kroll The Regulatory Horizon Steve Seelig Wrap-up and Q&A Doug Friske 5towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  6. 6. Trends in Pay Levels and Practices 6towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  7. 7. The sample…  To understand trends in pay and pay practices, we examined 225 Fortune 1000 companies that filed proxies by late March Annual Revenue* Market Capitalization* 25th Percentile $3,000 $2,500 50th Percentile $6,500 $5,900 75th Percentile $14,100 $16,200*In millions of dollars. Source: Standard and Poor’s Compustat® database. 7 towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  8. 8. Growth in CEO pay opportunity slowed last year Median change Median change Pay Element Includes 2009 – 2010 2010 – 2011 Base salary Annual salary 0.0% 2.6% Target cash Base salary + target bonus 3.3% 3.3% compensation (discretionary + short-term non-equity incentive compensation) Total pay (SCT) Total pay reported in the 23.8% 1.9% Summary Compensation Table (SCT) Total direct Target cash + grant date value 14.5% 5.6% compensation for stock options, restricted (TDC) stock and performance plansSource: Towers Watson Executive Compensation Resources. 8towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  9. 9. Trends in target and actual incentive levels 16% of companies exercised discretion to reduce bonuses, while 6% reduced LTI payoutsSource: Towers Watson Executive Compensation Resources analysis of 171 Fortune 1000 companies that filed 2012 proxiesby late March 2012 and had an incumbent CEO for the entire three year period of review. 9towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  10. 10. CEO annual bonuses are moving back toward normaldistribution around target Percent of CEOs Receiving an Actual Bonus That is...Source: Towers Watson Executive Compensation Resources. 10towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  11. 11. The LTI mix continues to evolve toward performance-based plans… 2009 2010 2011 34% 37% 34% 38% 40% 43% 23% 25% 26%  Stock Options  Restricted Stock  Performance PlansSource: Towers Watson Executive Compensation Resources. 11towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  12. 12. …and the pay/performance alignment remains strong 2009 2010 2011Total Direct Compensation Total Direct Compensation Total Direct Compensation Above Market Above Market Above Market 17% 20% 18% 70% 64% 65% Below Market Below Market Below Market 13% 16% 17% Below Industry Above Industry Below Industry Above Industry Below Industry Above Industry Total Shareholder Returns Total Shareholder Returns Total Shareholder Returns Source: Towers Watson Executive Compensation Resources. 12 towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  13. 13. We also saw a close correlation between investor returnsand the value of LTI granted that the CEO realizes Three-year TSR LTI Realized/ (2009 to 2011) LTI Granted* Top-third TSR performance 26% 124% Middle-third TSR performance 9% 73% Bottom-third TSR performance -2% 66%*Values include equity awarded to CEOs in fiscal years 2009, 2010 and 2011. Source: Towers Watson Executive Compensation Resources; Standard and Poor’s Compustat® database. 13 towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  14. 14. The Say-on-Pay Experience 14towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  15. 15. Say-on-pay voting: Early Year Two experience Most companies (about 82% of the Russell 3000) will hold say-on-pay votes in 2012 as a result of decisions to hold votes annually Early 2012 results at 103 companies suggest support levels will remain fairly consistent year over year Year One Year Two Number of say-on-pay resolutions that failed 3 1 Average support for say-on-pay resolutions 89.5% 89.8% Percentage of resolutions that ISS recommended a vote against 10.7% 13.6%Source: Towers Watson Executive Compensation Resources review of 103 companies holding say-on-pay votes in 2011 and 2012through late March. 15towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  16. 16. Say-on-pay voting: Early Year Two experience Recommendations from proxy advisory firms show continuing influence on shareholder support for say-on-pay resolutions Average Average Percentage ISS Say-on-Pay Resolution Number of Support Support Change in Recommendation Companies (Year One) (Year Two) Support “Against” recommendations for both 2011 3 63% 64% 1% and 2012 resolutions “Against” recommendation in 2011; “for” 8 58% 90% 32% recommendation in 2012 “For” recommendation in 2011; “against” 11 89% 65% -24% recommendation in 2012 “For” recommendations for both 2011 and 81 94% 94% 0% 2012 resolutionsSource: Towers Watson Executive Compensation Resources review of 103 companies holding say-on-pay votes in 2011 and 2012through late March. 16towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  17. 17. Drivers of negative vote recommendations… Pay-for-performance alignment remains the biggest driver of negative recommendations for most companies  Concerns over peer group selection are overtaking severance agreements (primarily excise tax gross-ups) for second place so far in 2012Concentration of “High Concern” Ratings Among Negative Say-on-pay Recommendations by ISS Pay-for-performance evaluation Non-performance-based pay Peer group benchmarking Compensation committee communication and effectiveness Severance/CIC arrangementsSource: Towers Watson Executive Compensation Resources review of ISS reports for say-on-pay resolutions that received negative voterecommendations from ISS; categories and ratings are as designated by ISS. Percentages do not add to 100% because companies could be rated a“high concern” in multiple categories. 17towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  18. 18. …and drivers of negative votes Companies with poor performance (low TSR) were three times as likely to receive less than 70% shareholder support last year  Regardless of the CEO’s pay level Three-year TSR (2008 – 2010) % of companies with <70% support 11.5% — High 9.6% 0.6% — Med 18.3% -12% — Low 34.0% Companies that provide high CEO pay opportunities were almost twice as likely to receive less than 70% support Median Pay Opportunity % of Companies with <70% vote $6.5m — High 32.4% $4.1m — Med 18.6% $2.0m — Low 9.0%Source: Towers Watson analysis of 2011 say-on-pay voting results for 728 midsize and large U.S. companies 18towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  19. 19. How companies responded to 2011 say-on-pay votes Level of Shareholder Number of Changed Pay Engaged With Support Companies No Action Program Shareholders Below 70% 15 7% 87% 93% 70% – 90% 31 68% 29% 35% Over 90% 99 90% 0% 5% All Companies 145 77% 15% 21%Source: Towers Watson Executive Compensation Resources; based on the 145 companies in our 225 Fortune 1000 sample that had a previous say-on-pay vote. 19towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  20. 20. Common actions taken in response to 2011 votes Pay Program Changes Shareholder Engagement  Add or replace performance-based  More transparent CD&A disclosure equity  Discussions with major  Eliminate gross-ups shareholders (before and after the shareholder meeting)  Changes to peer group  Detailed proxy disclosure of  Lengthen long-term performance engagement actions award life  Supplemental filings  Add performance metricsSource: Towers Watson Executive Compensation Resources. 20towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  21. 21. Supplemental filings are making a strong return in 2012 Topics frequently addressed include  Rebuttals to proxy advisor policies ― Validity of peers selected by companies compared to those used by proxy advisors and selection criteria ― Differing views of pay-for-performance definitions and measurement periods  Affirming key decisions and actions ― Recent actions taken and rationale for key pay decisions  Actions taken in response to previous say-on-pay votes ― Scope of shareholder engagement and key themes Pros and cons of supplemental filings should be carefully considered to determine the most effective course of action 21towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  22. 22. The Regulatory Horizon 22towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  23. 23. Our analysis also examined how say-on-pay has affectedCD&A quality Most continue to get longer, but some are being tightened up  64% are longer; 36% are shorter Three-quarters of all companies now provide executive summaries  Up from 55% last year Almost every company discloses annual incentive plan goals, and most disclose details of LTI plan goals  63% disclosed the goals for 2011 grants under their LTI plans CD&A quality remains a mixed bag, with the best providing a concise yet complete description of:  Pay earned during the year and the corporate performance justifying that pay  Pay set for the year and the reasons it increased or decreased  Any changes made in pay design for the year and the reasons whySource: Towers Watson Executive Compensation Resources. 23towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  24. 24. Pay-for-performance disclosures remain a weak spot Most companies (89%) say they pay for performance  However, only 19% provide an analysis of that linkage (up from 10% in 2010)  Those that do take a range of approaches Definition of Pay Definition of Performance Summary Total Direct Single or Compensation Compensation Metrics combination of Table Pay different variable plan from variable metrics plan metrics Realized Pay Pay Realizable Variable plan metrics + TSR as an additional measureSource: Towers Watson Executive Compensation Resources. 24towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  25. 25. We continue to wait for key Dodd-Frank regulations 1 Disclosure of pay for performance  How will pay be measured?  What is the time period required?  How will performance be measured — only TSR?  Will this be in place for the 2013 proxy? 2 Disclosure of CEO pay versus median employee pay  Lobbying to eliminate requirement or simplify calculations is ongoing  SEC head Schapiro still predicts proposed regulation within a “few months” 3 Clawbacks of compensation paid based on misstated financial results  Recent study shows that almost 4% of companies have an annual restatement, so these happen with a fair degree of frequency  Can discretion be exercised in enforcing the clawback?  Would existing contracts be grandfathered?  How is incentive compensation defined?  Would the SEC regulate indemnity clauses? 25towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  26. 26. Recent PCAOB proposal could prompt auditor scrutinyof pay plan design Proposed amendment to PCAOB Auditing Standard No. 12 would require auditors to more carefully consider executive compensation practices in the context of risks of material misstatements during the audit process  Certain pay programs may create potential incentives for executives to exaggerate corporate financial gains or minimize losses  This may mean that conventional wisdom regarding executive pay designs will guide audit firms in their reviews, such that certain designs that include stock options would be deemed inappropriate by auditors  It’s equally plausible that audit firms will be willing to accept statements from the company as to the reasons its pay programs would not encourage manipulation of financial results Public comments are due by May 15 26towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  27. 27. At least the politicians have been largely quiet None of the candidates has made executive pay regulation a major point in their campaigns Sen. Carl Levin (D-Mich.) continues to push for a tax deduction at grant date for options The legislative push to repeal the CEO pay ratio disclosure is not expected to have much traction Only repeal of the “carried interest” tax break seems to have much momentum, but not likely to be considered until after the election 27towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  28. 28. Where do we go from here? Some possibilities Total pay caps Late-year equity grants Standardized peer groups Elimination of non-median pay philosophies TSR as the only incentive performance measure Increased use of realizable pay and other alternative methods for disclosing pay for performance Changes in supplemental pensions to avoid big spikes in reported values due to changes in economic assumptions 28towerswatson.com © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  29. 29. Questions? doug.friske@towerswatson.com james.kroll@towerswatson.com steven.seelig@towerswatson.com olivia.wakefield.lee@towerswatson.com If you don’t already subscribe to Executive Pay Matters, sign up today to stay on top of the latest trends and emerging issues in executive pay at http://www.towerswatson.com/newsletters/executive-pay-matters/ 29 © 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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