Global Say on Pay: Coming to Your Stock Plan in 2013

The Effects of Global Say-on-Pay:
Coming to Your Stock Plan in 2013

25-September-2012
Compensation Venture Group, Inc.
www.compensationventuregroup.com
fred@compensationventuregroup.com

© Copyright 2012. Compensation Venture Group, Inc. All rights reserved.

About the Speaker
Fred Whittlesey is the Principal Consultant of Compensation Venture Group, a consulting firm specializing in
compensation strategy, director and executive compensation, equity-based compensation, and incentive
design with a primary focus on entrepreneurial growth companies.

Fred was a top-rated faculty member and certification course developer for 13 years for WorldatWork's
"Accounting and Finance for HR Professionals" as well as the basic and advanced executive compensation
courses, delivering instruction both in the classroom and online. His presentation at the 2006 WorldatWork
annual conference “ROI for HR” was recognized with a “Best of Conference” designation. Fred’s May 2012
WorldatWork Conference presentation “Value and Valuation: Making Sense of Long-Term Incentive Data”
will be presented at the NASPP Annual Conference in October 2012.

Fred is co-founder and past Board member of Global Equity Organization (GEO), a Founding Member of
NASPP, past President of the NASPP Orange County chapter, past member of the NASPP Advisory Board, and
a current member of the Advisory Board of CompensationStandards.com. He also is past Chair of the
Advisory Board for the Certified Equity Professional (CEP) Institute.

He has authored dozens of articles in major compensation periodicals and has presented his ideas at
compensation conferences around the world. His most recent published works include “Say on Pay’s Impact
on Equity Plan Design: Horse or Camel?” in GEOnomics 2012; “The Governance Ups and Downs of
Performance Plans” in GEOnomics 2011; “Understanding Executive Pay Equity and Fairness: Ratios and
Rationality” in WorldatWork Journal; “Behavioral Economics and Equity Compensation” in GEOnomics2009;
and “Measuring the ROI of Compensation Expenditures” in The Compensation Handbook.

Fred received his MBA with Distinction from UCLA and a BA in industrial/organizational psychology from San
Diego State University where he graduated Magna Cum Laude and Phi Beta Kappa. He has earned the
Certified Equity Professional (CEP), Certified Executive Compensation Professional (CECP) and Certified
Compensation Professional (CCP) designations.


Discussion Outline

 What is Say-on-Pay?

 Isn’t this just an executive pay issue?

 What is the effect on equity plans?

 What should I be doing now?


But First…

 GEO DACH Chapter Conference (13-September)

 150 attendees – Hot Topics:
 MitarbeiterBeteilegung
 Changing equity mix to manage risk
 Clawbacks
 Shareholder challenges to executive pay

 GEO National Equity Compensation Forum (19-21 September)

 240 attendees – Hot Topics
 Performance plan design
 Pre-IPO and emerging companies
 Accounting/tax/administrative
 Say-on-pay


W hat is Say-on-P ay?

 Process for a company’s shareholders to vote on the company’s
executive compensation program
 Advisory vote only (in most countries) – not binding on the
Board and Compensation Committee
 Say-on-pay was introduced in the US…

 For TARP companies in 2009

 As mandated by Dodd-Frank, for most US firms in 2011

 For small business filers beginning in 2013

 Single vote on overall program, no specifics

 Proxy advisers (ISS, Glass Lewis, etc.) and institutional
shareholders drive the voting outcome for many companies
 Often declare voting recommendation only days before the
shareholders meeting

5


W hat is Say-on-P ay?

 Mandatory say-on-pay started in the UK (2002)
 Now has spread to:
 Netherlands*
 Australia
 Sweden*
 Norway*
 Denmark*
 Portugal
 South Africa*
 Spain
 Belgium
 France (2013?)
 Allowed but not required in Germany, Switzerland, Canada
* = binding vote
6


So W hat Happened?

 Last year only ~42 firms failed the vote (<50% yes) in the US
 Small percentage of the 3,000+ public companies

 This year: 58 failed (so far)
 Many “close calls” (51% to 70% yes) in 2011 failed in 2012

 Some with strong votes (90%+) in 2011 failed in 2012

 Many ISS GRId-scored “high concern” companies passed
but with low approval levels (51% to 80%)

One company without a SOP vote this year had all
Compensation Committee members fail the vote
 Lawsuits have been filed against some companies that lost the
vote
 All suits dismissed due to business judgment rule and/or
lack of pre-suit demand
7


So W hat Happened?

2011 2012

Companies Failing SOP Vote 45 58

Average SOP % Approval 41% 37%

Average LTI % Approval 84% 72%

Number of Companies with 2 Strikes na 4

High Concern 34% 58%
Medium Concern 54% 33%
Low Concern 12% 7%

8


So W hat Happened?

2012 say-on-pay losses: ISS’s GRId no longer matters

Company ISS GRId Ratings
Audit Board Comp S/H Rights

Pitney Bowes L L L L

Gentiva Health Services L L M L

Argo Group International Holdings L L H L

Kilroy Realty L L H M

Chiquita Brands International L L M M

NuVasive L L H M

Big Lots L L H L

Rigel Pharmaceuticals L M L L

9


W hat Happened Outside the US?
 UK: Say-on-CEO
 CEOs of AstraZeneca, Trinity Mirror, and Aviva resigned days
after SOP vote loss

 Australia: Say-on-Board of Directors
 Mandatory Board resignation after “two strikes” of <75%

 South Africa: Say-on-Director pay
 Binding vote on Director pay in advance

 Sweden: (…crickets…)
 Appliances maker Electrolux was slammed for awarding its CEO,
one of only a handful of foreign top executives in Sweden, a one-
time pension contribution of 45 million crowns (US$6.2 million)
when he took the helm in 2010, though it largely blamed it on the
fact he is American. 10
2011.

I sn’t This Just an Ex ecutive P ay I ssue?

 For many investors, #1 issue was dilution from employee plans
 In 2012, new “pay for performance” became leading issue
 Equity award grants cause calculated “disconnect” in pay-
performance analysis – use of grant date fair value
 Little correlation between companies’ “scores” and SOP vote
outcome
 Many companies with high “yes” on SOP saw “yes” levels
declining on share requests
 Some companies deferred share request to 2012
 Many believed SOP would be a 1-year controversy, then
pass
 Some investors/advisers were warning of greater scrutiny in
2012
11
2011.


12
2011.


 From 2011 to 2012, several companies found themselves
“going the wrong way” in the say-on-pay vote
 High pass rate to fail
 “WTF?”
 High pass rate to close call
 “Meh”
 Close-call to fail
 “We told you so”
 Close-call to close-call
 “Living on the edge”
 Many companies ignored, or gave lessened weight to, opinions
of proxy advisers and shareholders in 2011
 “How would they know where we’re going?”

13
2011.


• Infinera
– Say on Pay-2011 98%
– Say on Pay-2012 42%

• High pass rate to fail

• 75th percentile LTI

• Non-performance-based equity
• Time-based vesting – stock options and RSUs

• Performance Stock Option metric disclosure
• Vague qualitative measures on PSOs
• “Related to next generation product”

• Disclosure of “no policy on retroactive revision of metrics”
14


• Juniper Networks
– Say on Pay – 2011 92%
– Say on Pay – 2012 67%
– LTI shares – 2011 58%
– LTI shares – 2012 58%
– ESPP shares 98%

• High pass rate to close-call
• Overhang and burn rate
• Shift away from stock options
• Realizable pay and pay-for-performance
• Supplemental filings included:
• Reminder to all shareholders
• Reminder to employees
• Reminder with slide presentation
• Reminder re: Company performance
15


• Rigel Pharmaceuticals
– Say on Pay-2011 54%
– Say on Pay-2012 45%
– LTI shares (2000 plan) 70%
– LTI shares (2011 plan) 69%
– ESPP shares n/a

• Close-call to fail

• Poor response to close-call in 2011
• Larger time-vested awards
• No STI goal disclosure
• Committee discretion in STI determination

16


• Adobe Systems
– Say on Pay - 2012 58%
– Say on Pay – 2011 59%
– LTI shares – 2012 84%
– ESPP shares - 2011 98%

• Close-call to close-call

• Supplemental filing addressing:
• Pay and performance
• Peer group – ISS vs. Adobe
• Stock option valuation – ISS vs. Adobe
• Stock options “not performance-based”
• Grant date value vs. realizable pay
• Response to 2011 criticisms
17


• Executive Compensation Issues • Equity Compensation Issues
– Pay-performance alignment – Dilution from new plan shares
– CEO pay vs. NEO pay – Disclosure for new plan/shares
– Uncapped incentives – Vesting periods
– Guaranteed bonuses – Time-based vesting
– Peer group construction – Holding periods
– Rigor of goals – Ownership guidelines
– Disclosure of goals – Shareholder approval of repricing
– Performance measures – Type of change-in-control trigger
– Discretion/subjective measures – “Liberal” share recycling
– Tax gross-ups – Burn rate calculation factors
– Perquisites • Volatility
• Net exercise
– Unearned dividend equivalents
– Options not “performance-based”
– Concentration of grants to NEOs
18

W hat is the im pact on equity plans?

 Companies facing a failed vote made changes to executive pay
programs, often focused on equity awards

 Following the failed vote, lawsuits were filed against several
companies naming as defendants:
 Each individual Board member

 Each individual Officer, and/or

 The Compensation Committee’s compensation consultant

 Litigation spread from the SOP process to the process for
requesting additional equity plan shares, resulting in
 Removal of equity plan vote from annual meeting

 Extensive additional disclosures

 Special meeting for the equity plan vote

19

May ‘09 - Apr ‘10 May ‘10 - Apr ‘11 May ‘11 - Apr ‘12 May ‘12- Apr ‘13 May ‘13- Apr ‘14 May ‘14- Apr ‘15
2009 Stock Plan Actuals Actuals Actuals/Frcst Forecast Forecast Forecast
Common Shares O/S -
Ending Balance 443,752,629 476,744,738 459,701,189 469,154,705 481,053,125 490,553,125
Options / Awards O/S -
Ending Balance 113,345,234 87,491,484 68,369,719 50,349,479 36,180,130 23,388,214
Shareholder Approval -
April 2012 35,000,000
Options Available for
Award - Beginning
Balance 45,696,607 29,551,848 17,240,848 46,790,334 34,762,834 21,087,334
Allocations
Options (1,540,000) (402,500) (7,500) (7,500) (7,500) (7,500)
RSUs/PSU’s (12,952,024) (11,717,362) (9,938,691) (11,600,000) (12,400,000) (12,900,000)
Total Allocations (14,492,024) (12,119,862) (9,946,191) (11,607,500) (12,407,500) (12,907,500)
Adjustments
Cancellations
- Add 5,600,398 6,370,585 10,061,344 6,076,000 5,676,000 4,976,000
RSU/PSU
Fungibili
ty Factor
- Delete (7,253,133) (6,561,723) (5,565,667) (6,496,000) (6,944,000) (7,224,000)
Total Adjustments (1,652,735) (191,138) 4,495,677 (420,000) (1,268,000) (2,248,000)
Award - Ending
Balance 29,551,848 17,240,848 11,790,334 34,762,834 21,087,334 5,931,834
PSU
Overachieveme
nt Reserve
PSU - Potential
Allocation
Per Period
Totals (1,405,872) (1,133,030) (507,000) (936,000) (936,000) (936,000)
Cummulative
Totals (1,405,872) (2,538,902) (3,045,902) (3,981,902) (4,917,902) (5,853,902)
Award - Adjusted
Balance 28,145,976 14,701,947 8,744,433 30,780,933 16,169,433 77,933
- If maxiumun MSU
overachievement
is earned

Source: www.sec.gov, Brocade Communications DEFR14A, 12-June-2012
20


May 2011 – April 2012 May 2012 – April 2013 May 2013 – April 2014 May 2014 – April 2015
2009 Stock Plan Actuals/Forecast Forecast Forecast Forecast
Option Grants
— New Hire — — — —
— Focal grants and promotions — — — —
— Board Chair (7,500) (7,500) (7,500) (7,500)
Subtotal Option Grants (7,500) (7,500) (7,500) (7,500)
RSU/PSU Grants
— New Hires (1,320,180) (2,500,000) (2,700,000) (2,700,000)
— Focal grants and promotions (8,618,511) (8,600,000) (9,200,000) (9,700,000)
— Other (Other
Projects/Discretionary) — (500,000) (500,000) (500,000)
Subtotal RSU/PSU Grants (9,938,691) (11,600,000) (12,400,000) (12,900,000)
Total (9,946,191) (11,607,500) (12,407,500) (12,907,500)

FY12 Forecast FY 13 Forecast FY14 Forecast 1H FY 15 Forecast
Issued Overhang % 12.3% 9.0% 6.2% 6.2%
Total Overhang % 20.8% 14.3% 8.4% 7.4%
Gross Burn Rate as a % of O/S 1.8% 2.6% 2.7% 1.0%
Adjusted Burn Rate as a % of O/S 2.8% 4.0% 4.2% 1.6%

Source: www.sec.gov, Brocade Communications DEFR14A, 12-June-2012

21


 Changes to past and future equity awards – to gain SOP
approval - will create vagaries in “market data” and influence
your Compensation Committee
 Performance conditions on shares and options

 Disclosure of policies on repricing, modifications, discretion

 More “formulaic” performance measures

 Discretion and subjectivity viewed negatively

 TSR as a performance measure

 Overcomes goal-setting difficulty

 Basis for pay-performance analysis

 “Ensures alignment” with shareholders

 Tremendous variety of vesting schedules

 Time x performance

22

 May introduce, or further, differences between executive and
employee equity compensation structures
 Many executive compensation consultants are using ISS’s
policies as a playbook
 Many executive compensation consulting engagements are
limited in scope to the NEOs or officers
 Non-executive compensation is often not discussed and is a
result of a separate internal process
 Still constrained by ISS burn rate limits
 Still influenced by executives’ compensation design

23
2011.

 Responses to the say-on-pay process may trigger additional
work around equity award design, pre-proxy and/or post-proxy

 Supplemental filings
 Push-back on proxy advisers’ recommendations
 Charts, graphs, narrative for rationale
 Performance discussion
 Employee voting reminders

 Road shows to meet investors directly

 Webcasts

 Direct negotiations with shareholders
 Pre-proxy
 Post-proxy
24
2011.

W hat should I be doing now ?

 Know the answer to “Who cares about an advisory vote?”
 Your Compensation Committee

 Your CEO

 Reporters following your company

 Be aware that say-on-pay – or even a request for more shares
in the equity plan – may trigger a re-examination of
 Forms of equity
 Mix of equity types
 Eligibility for equity
 Timing of equity awards (December vs. January?)

 Monitor your relative and absolute 1-year, 3-year, and 5-
year TSR – the #1 trigger of greater scrutiny by advisers
25


 Know what’s “good” and “bad” based on:
 Who your shareholders are

 Who their advisors are

 How they feel about your equity compensation program

 Explore opportunities for supplemental filings, roadshows, push-
back
 Alternative equity valuation

 Modeling of equity values in pay-for-performance

 Learn how changes may trigger modifications to awards
 Be aware of administrative, accounting, and disclosure
issues

26


 Be aware of looming regulations coming from the SEC
(already overdue) which will further fuel the fire
 Clawbacks

 Pay-for-performance disclosure

 CEO Pay Ratio disclosure

 All three, like supplemental filings, are going to
 Influence equity compensation granting practices

 Affect employee perception of value of equity

 Further fuel executive pay controversy

 Create additional ripple effects for equity compensation

27

W hat if I w ant to know m ore?

 Read GEOnomics 2012
 Say-on-Pay’s Impact on Equity Plan Design:
Horse or Camel?
 Free download from GEO website www.globalequity.org

 Subscribe to my blog: payandperformance.blogspot.com
 33 Reasons That Your Company’s Say-on-Pay Vote Might Go Sub-
50% in 2013 (26-June-2012)
 Re-posted by CompensationStandards.com on 23-July-2012

 Bullet-Proof Vesting (07-June-2012)

 Follow me on Twitter: @FredWhittlesey

28

Contact I nform ation

Fred Whittlesey, CEP, CCP, CECP

fred@compensationventuregroup.com

www.compensationventuregroup.com

www.effectiveequity.com (coming soon!)

www.consciouscompensation.com (coming soon!)

Blog: payandperformance.blogspot.com

Twitter: @FredWhittlesey

© Copyright 2012. Compensation Venture Group, Inc. All rights reserved. 29

Global Say on Pay: Coming to Your Stock Plan in 2013

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