1 / 29

Compensation Spotlights for 2014 Boston NASPP Chapter Meeting December 20, 2013

Compensation Spotlights for 2014 Boston NASPP Chapter Meeting December 20, 2013. Theo Sharp 781-591-3397 tjsharp@fwcook.com Dana Etra 781-591-3398 dwetra@fwcook.com. Agenda. ISS policy update CEO pay ratio Realized / realizable pay Performance equity trends IPO preparation.

triage
Download Presentation

Compensation Spotlights for 2014 Boston NASPP Chapter Meeting December 20, 2013

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Compensation Spotlights for 2014Boston NASPP Chapter MeetingDecember 20, 2013 Theo Sharp 781-591-3397 tjsharp@fwcook.com Dana Etra 781-591-3398 dwetra@fwcook.com

  2. Agenda ISS policy update CEO pay ratio Realized / realizable pay Performance equity trends IPO preparation 2

  3. ISS Policy Update – Background • ISS performs annual evaluations of CEO pay to recommend say-on-pay vote Test 1: Relative Degree of Alignment Test 2: Absolute Alignment Test 3: Multiple of Median Qualitative Assessment Factors • The ratio of: 1) performance- to time-based equity awards and 2) performance-based compensation to overall compensation • The completeness of disclosure and rigor of performance goals; • The company's peer group benchmarking practices; • Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative • Special circumstances (e.g., new CEO in prior FY, multi-year awards) • Realizable pay compared to grant pay* • Any other factors deemed relevant

  4. ISS Policy Update – Changes to Evaluation • Key Changes: • Changed the calculation of the first quantitative test, the relative degree of alignment (RDA) • Lessened the weighting on the most recent year’s TSR and TDC • Impact of the change • Easier to understand, simpler to calculate • Diminishes effects from timing of equity awards • Longer-term, more balanced quantitative view of pay-for-performance alignment 4

  5. ISS Policy Updates – Effect on Equity Compensation • Grant timing (quantitative test policy change) • Prior methodology: advantageous to make a grant by the end of a good TSR year • New methodology: the most recent year’s TSR is won’t dictate a company’s overall performance rank to mask higher compensation • Realizable pay (qualitative test) • Companies need to review realizable pay on a regular basis • Best practice will likely be at least an annual review of realizable pay by the Compensation Committee • Better understand ISS outcomes • As input to annual grant decisions 5

  6. CEO Pay Ratio – Background September 18, 2013 SEC votes 3-2 to propose a new rule to require public companies to disclose the ratio of CEO pay to median employee pay (required under Dodd-Frank Act) Median Employee Pay Calculation Methodology 6 Median of “all employees”, including full- and part-time, temporary, seasonal, and non-U.S. employees Does not prescribe a specific methodology for calculating pay ratio Companies have the flexibility to determine the median pay of employees in a way that best suits their particular circumstances Companies required to disclose the methodology used to identify the median Must determine actual pay using SCT methodology

  7. CEO Pay Ratio – Effect on Equity Compensation • Grant timing (again) • Companies may consider making mega-grants every few years • Time the grants so that a mega-grant happens when the company is doing well and has top ranked TSR to diminish backlash for high ratio • In other years, the ratio will be low due to no equity grants • Renewed focus on option/restricted stock valuation • Adjustments to expected life and volatility can swing CEO compensation numbers significantly • Performance-based share valuation can increase grant value (market-based awards) • Administrative burden • Stock plan administrators will need to be ready to report grant value for input in to median employee calculation • Different payrolls for multiple subsidiaries and countries will be a burden • Alternative reporting? • Even larger administrative burden for the company and the administrators • Will some companies also report realized/realizable pay ratio? 7

  8. Realized / Realizable Pay – Background • ISS realizable pay calculation uses current Black-Scholes value of options granted (based on current assumptions and full remaining term) 8

  9. Realized / Realizable Pay – Calculation Example Grant date Period end • Stock price: $10.00; BSV $6.00 • 100 stock options • 100 restricted shares • 100 performance shares (1-year period) • Stock price: $15.00 • Exercise 50 options • 50 restricted shares vest (50 unvested) • Payout of 50 performance shares (50 forfeited) Reported (SCT) Realizable Realized Stock options $600 $500 $250 Restricted shares $1,000 $1,500 $750 Performance shares $1,000 $750 $750 9

  10. Realized / Realizable Pay – Disclosure • Disclosure in the CD&A • Past: • SEC discouraged alternative views of the Summary Compensation Table (SCT) in the CD&A • Highlighted the difference between grant value and realized/realizable value • Median hyped the SCT grant values of options and excessive grants regardless of in-the-money value • ISS and Glass Lewis focused on the SCT grant values (and still do to an extent) • Present: • SEC had accepted CD&A reporting of realized/realizable compensation in tabular format • ISS is implementing a realizable pay analysis for certain companies • Glass Lewis is considering similar analyses 10

  11. Realized / Realizable Pay – Disclosure Example from United Technologies proxy: 11

  12. Realized / Realizable Pay – Disclosure Example from ISS report: 12

  13. Realized / Realizable Pay – Effect on Equity Compensation • Real-time calculations • Companies need to know what the realized/realizable pay is several times throughout the year • Flexibility in the definition will be key for administrators • Vested vs. unvested • All outstanding vs. options only, etc. • Increased or decreased grants based on current values • Renewed discussion of “how much is enough” • Renewed discussion of “granting at the bottom” • Renewed discussion of “rewarding failure” 13

  14. Performance Equity Trends – Background • Data shows that the majority of equity-granting public companies utilize some form of performance-based grant • These plans have become more prevalent and bring a host of decisions along 14

  15. Performance Equity Trends Executive Long-Term Incentive Grant Type Usage Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 15

  16. Performance Equity Trends Long-Term Incentive Grant Type Usage By Sector Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 16

  17. Performance Equity Trends Number of Performance Measures Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 17

  18. Performance Equity Trends Performance Measure Categories Measurement Approach Relative Absolute Both Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 18

  19. Performance Equity Trends Performance Award Period Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 19

  20. Performance Equity Trends Performance Award Maximum Source: FWC 2013 Top 250 Report on Long-Term Incentive Grant Practices for Executives 20

  21. Performance Equity Trends – Effect on Equity Compensation • Valuation is getting more complicated (specifically for market-based awards) • Market-based / absolute TSR plans often require complex valuation • Generally, need to hire a outside valuation expert • Fees run $5,000 - $20,000+ • Administrators may start getting into the business • Modeling is becoming more prevalent • Comparing potential payouts to increases in financial performance is prevalent • Increased market cap • Increased profits • Increased revenue • Ties in with realized/realizable pay 21

  22. Performance Equity Trends – As An Aside… Some have questioned whether performance-based equity aligns with performance Not really, but it may be just as powerful as an incentive and a pay-for-performance control 22

  23. IPO Preparation – Background • The IPO market has been robust • An IPO brings executive compensation issues, many of which have to do with equity compensation • Pre-IPO grants • When • To whom • How much • Instrument • Option / SARs • Time-based restricted stock / units • Performance-based stock / units • Plan terms • Evergreen • Fungible • Plan limits • Instruments • Employment terms are also important 23

  24. IPO Preparation – Award Opportunity Median Equity Grant Opportunity (as a % of fully diluted shares) Post-IPO Pre-IPO

  25. IPO Preparation – Award Timing Prevalence of Equity Grant Timing Life Sciences Software

  26. IPO Preparation – Realizable Value of Awards Value 1 Year After IPO Post-IPO Grants Pre-IPO Grants

  27. IPO Preparation – Severance & CIC Equity Acceleration – Absent CIC Life Sciences Software

  28. IPO Preparation – Severance & CIC Equity Acceleration – Following CIC Life Sciences Software

  29. Frederic W. Cook & Co. Theo Sharp 781-591-3397 tjsharp@fwcook.com Dana Etra 781-591-3398 dwetra@fwcook.com 29

More Related