DAN WALTER, CEPDan Walter CEP,
is the President of Performensation(www.performensation.com). For more than 15 years, Dan has assistedcompanies with equity and performance-based compensation issues. Danhas extensive experience with both executive and broad-based programs. Aunique focus is the design and management of performance share and units.Dan provides end-to-end solutions for private and public companies based inboth the United States and abroad. Dan is a popular speaker on topicsinvolving equity compensation and success growth. His extensive work withboth very small and very large companies provides his clients with a uniqueperspective. He creates effective, company-speciﬁc solutions paired withpost-consultation support. Dan’s expertise includes diagnosis of issues, plandesign, communication, administration and reporting solutions.
The Winds of ChangeChanging Faster
Than Some Can Handle • ISS and Glass Lewis Policies • Say on Pay (and SOP Frequency) • Academic Research • Media Scrutiny • Activist Shareholders • Political Capital • Underwater options (exchanged or not) • Lions and Bulls and Bears ...Oh My!
Corporate Governance• Inﬂuence of ISS
and Glass-Lewis inﬂuence has continued to grow• Average CD&A has grown from about 20 pages to approximately 30• Linking pay to performance consistently mentioned as a key goal for both proxy advisors and boards• Executive compensation now synonymous with equity compensation
What Does ISS Want?• Always
recommends annual vote for Say on Pay Frequency• Negative Say on Pay recommendation if: • Perception that CEO compensation is not aligned with corporate performance • Board has not been willing to discuss compensation with ISS • History of Problematic Pay Practices
Shoot-out at the Triple P!Beware
of Problematic Pay Practices• Any new or extended CEO contract that includes: • Excise tax gross-up for CIC payments • Single or Modiﬁed trigger CIC payments • CIC payments >3 times current base and bonus• Excessive perqs or tax gross-ups• Ability to reprice/exchange underwater options without shareholder approval The Good, the Bad and the Ugly
ISS Writes a New Rulebook
You’re Doing it Wrong If...• CIC deﬁnition is deemed too • The total cost of equity plans liberal is deemed unreasonable• The company has a history of • Three year burn rate, exceeds the “Triple P” and the equity deﬁned limitations. Currently: plan was in same way involved. • 2% of the mean plus 1 standard deviation of the• There is a disconnect between company’s industry group company performance and CEO Pay and at least 50% of • But, no more than 2 percentage points (+/-) year-over-year increase in in from the PY industry group equity compensation cap
Say on Pay More than
Many Planned for• About 2% of companies had failed SOP votes• Multiple lawsuits ﬁled on behalf of shareholders• Not a “check the box” process• Several companies have modiﬁed equity programs prior to ﬁnal vote Courtesy Ed Hauder: www.say-on-pay.com
Say on Pay Concede, Correct
or Fight?• Eliminated tax gross-ups • Disney• Added/modiﬁed performance for equity • Alcoa • GE • Lockheed Martin• Filed additional info, new communications • Tyco International • Conoco Phillips • Pﬁzer / Johnson & Johnson
Academic Research More Volume, Less
Conclusions• Optimal Contracts or Managerial Power? • Manipulation and Equity-Based Compensation Evidence on the Impact of CEO Compensation on American Economic Review, Vol. 98, No. 2, pp. Bank Risk in Europe 285-90, 2008 Andre Uhde and Payam Elahi Lin Peng and Ailsa Röell University of Bochum and University of Bochum Zicklin School of Business, Baruch College / CUNY Date Posted: May 30, 2011 and Columbia University, School of International and Public Affairs• Share Repurchases, Equity Issuances, and the Date Posted: April 24, 2011 Optimal Design of Executive Pay Texas Law Review, Vol. 89, No. 5, p. 1113, 2011 • Seven Myths of Corporate Governance Jesse M. Fried Rock Center for Corporate Governance at Stanford Harvard Law School University of California, University Closer Look Series: Topics, Issues and Berkeley - School of Law Controversies in Corporate Governance No. Date Posted: May 20, 2011 CGRP-16 David F. Larcker and Brian Tayan• The Valuation Differences between Stock Option Stanford University - Graduate School of Business and Restricted Stock Grants for US Firms and Stanford University - Graduate School of Journal of Business Finance & Accounting, Vol. 38, Business Nos. 3/4, pp. 395-412, 2011 Date Posted: June 2, 2011 James H. Irving , Wayne R. Landsman and Bradley P. Lindsey • Optimal Contracts or Managerial Power? College of William and Mary - Mason School of Evidence on the Impact of CEO Compensation on Business , University of North Carolina (UNC) at Bank Risk in Europe Chapel Hill - Accounting Area and College of Andre Uhde and Payam Elahi William and Mary University of Bochum and University of Bochum Date Posted: May 11, 2011 Date Posted: May 30, 2011
Equity Compensation MixPercentage of Shares
Awarded 100% 27% 31% 35% 90% • This and the preceding 80% charts clearly show the 70% miscommunication 60% regarding the growth of 50% full value equity usage 40% 73% • All of the growth full 69% 65% 30% value equity 20% compensation can be 10% attributed to the 0% 2007 growing use of 2008 2009 performance equity Stock Options Restricted / Performance
Equity Compensation Mix Values 100%•
CEO Stock Options 90% 37% 41% 80% • 44% in 2008 40% 43% 49% 48% 70% • 34% on 2010 60% 16%• CEO Restricted Equity 22% 17% 20% 50% 17% 20% 40% • 16% in 2008 30% 44% • 17% in 2010 41% 39% 39% 20% 34% 31% 10%• CEO Performance Awards 2008 CEO 2008 CFO 0% 2009 CEO • 40% in 2008 2009 CFO 2010 CEO 2010 CFO • 49% in 2010 Stock Options Restricted Performance
The Indomitable Stock Option Stock
Options Are Here To Stay• Nearly all S&P 1500 companies still have stock options (approximately 98% have outstanding options)• Lately they just use LESS of them• Outstanding Options were about 35% lower in 2010 as compared to 2004• Less companies are granting options and many grants are several year old. We will see a continued drop-off in outstanding options as a percentage of total outstanding equity awards.
Stock Options Less shares, more
value• The percentage of companies granting options dropped from 2004 to 2010 BUT• The value being granted dropped from 2004-2007, then rose back to 2005 levels by 2009!
Stock Options It’s good at
the top• In 2004 NEO’s received one out of every ﬁve stock option shares granted• In 2010 NEO’s received one out of every THREE stock options shares granted• 2009 median NEO stock option value was at its highest point since prior to 2004
Time-Based Full Value Awards Restricted
Shares and Units• In many industries a higher percentage of companies use restricted awards than stock options!• Overall growth in the use of time-based restricted equity has leveled off• Programs have generally remained linked to three-year vesting scheduled with annual vesting events• Most plans are RSUs due to more simplicity their use globally• We will probably see a small surge of Restricted Stock Shares as IPOs pickup, then a drop-off shortly after
Performance Equity Awards High Growth
Instruments!• Recent surveys claim 50%-80% of companies use performance awards• Surveys are at least 8-12 months behind reality• Most live polls show the percentage of companies who use equity and incorporate performance goals to be 75-85%
Performance Equity Awards• Performance-based Stock
Options: Trend or Fad? • Several companies have added performance criteria to outstanding options in response to ISS or Glass Lewis comments • Example GE added performance to Jeffrey Immelt’s 2010 stock options (linked to cash ﬂow and stock performance) after a negative recommendation during the recent proxy season. • Opinion: FAD!
High-Level Issues• Bow to the
pressure and modify the obvious• A struggle to balance poor predictability for deﬁned metrics against growing cry against goals discretion• Clean-up the last few options while there may still be time• Performance, Performance, Performance• In many cases executive values are now above pre-recession levels• In nearly every case broad-based values still trail pre-recession levels• Some increased interest in IRC 423 ESPP
DON’T DO THIS• Equity Don’t
1 This• Stop granting stock options without considering is intrinsic, modeled and worth... expected potential value • as if each stock option share is a legitimate form of currency regardless of Variable price and value amounts of this
DON”T DO THIS• Equity Don’t
2• Don’t think that your company will avoid performance-based equity. 95%+ of publicly traded companies in the US will have performance equity, at least for executives, by Q1 2012.
DON’T DO THIS•Equity Don’t 3•Stop
using compensation expense as an excuse for a poor (or no) IRC 423 ESPP. •Broad-based grants are probably a long-way off. •ESPP’s provide a tangible attraction and motivation device, while provide a perfect focal point for communications from management.
DON’T DO THIS• Equity Don’t
4• Stop waiting for the big turn- around to reevaluate and improve your equity compensation plans. Start correcting your design, communications and administrative systems and providers while things are still calm enough to do it right.
EQUITY ISSUES REVIEW• THE MORE
THINGS CHANGE, THE MORE THEY CHANGE• SAY ON PAY• PROBLEMATIC PAY PRATICES• ACADEMIC RESEARCH HAS GROWN-UP• OPTIONS ARE HERE TO STAY• PERFORMANCE IS THE ONLY INSTRUMENT GROWING
EQUITY TREND REVIEW• BALANCED MEAL
APPROACH TO EQUITY• LEAVE MARKET DATA FOR LAST• FOCUS EQUITY ON MANAGEMENT• STRUCTURE PERFORMANCE TO PAY MORE THAN 100%• GENERIC AGREEMENTS WITH LOCATION-SPECIFIC ADDENDUM• 3 YEAR PERFORMANCE WITH ONE YEAR GOALS
Questions? Da n Walt erP
r esid en t a n d CE O, Pe r for m ensationEm ail : dw al te r@ per for m ensa ti on. comP ho ne : 415 -6 25- 3406m obi le : + 1 -917-734-4649T witter: @per fo r mensa tionSkype: per for mens ationLinkedI n: www.lin ke din.com /in /danwa lterPresenta tio n Librar y: www.slides hare. ne t/pe r for men sation WWW.PERFORMENSATION.COM! 37
Other online places to learn
(or ﬁnd Dan Walter) Equity Compensation Experts FREE Online Networkingwww.equitycompensationexperts.groupsite.com ShareComp 2011 FREE Online Conference and Portal (up to 16 houres of CEP credit) www.bit.ly/sharecomp2011 (use passcode “GEMS”) Compensation Cafe Top 10 HR/Compensation Blog 2010 www.compensationcafe.com 38