During the 2011 proxy season, shareholders seemed to be less influenced by ISS on say on pay, says Fichthorn, vice president in the Philadelphia office of Hay Group. He was joined in his presentation at a recent BLR/HRhero webinar by Martin Somelofske, a senior principal in Hay Group’s Metro New York office.
Only a handful of companies that ISS has recommended AGAINST have lost their say-on-pay votes, Fichthorn notes. However, a number of companies changed programs after receiving the ISS recommendation and before the shareholder meeting.
ISS has a rigid scorecard approach that may not reflect your organization’s philosophy, but the ISS recommendations are very important, Fichthorn says. So, if you get a negative review from ISS, take the initiative and explain to shareholders. Say, this is what we’re doing and this is why we’re doing it. This is why the position of the company is different from that of ISS and this is why it’s fair to shareholders.
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Here’s Fichthorn’s list of ISS “hot buttons.” Looks like it might make a good checklist for evaluating your executive compensation program.
1. Employment contracts
Egregious employment contracts with multi‐year pay guarantees, nonperformance based bonuses and/or equity compensation
2. New CEO with overly generous package
Excessive “make whole” provisions without sufficient rationale
3. Large bonus payouts without justifiable performance linkage or proper disclosure
Performance metrics that are changed, canceled or replaced during the performance period without explanation of the action and link to performance
4. Egregious pension/SERP payouts
Inclusion of additional years of service not worked or inclusion of performance-based equity awards in the calculation
Changes to performance criteria during the year (unless justified)
5. Excessive perquisites
Perquisites for former executives, such as lifetime benefits, car allowances, or personal use of corporate aircraft
Extraordinary relocation benefits (including home buyouts)
Other egregious perquisites including personal use of corporate aircraft, home security systems and car allowances
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6. Excessive severance and/or change in control provisions
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 voluntarily leave for any reason and still receive the change‐in‐control severance package
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
Agreements that provide for an excise tax gross‐up
Payments upon an executive's termination in connection with performance failure
7. Tax Reimbursements
Excessive reimbursement of income taxes on certain executive perquisites or other payments (e.g., personal use of corporate aircraft, etc)
8. Repricing or replacing of underwater stock options
Without prior shareholder approval (including cash buyouts)
Voluntary surrender of underwater options by executive officers may be viewed as an indirect option repricing/exchange program, especially if 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
9. Internal pay disparity
Excessive differential between CEO total pay and that of next highest‐paid named executive officer (NEO)
10. Miscellaneous equity practices by executives or under equity plans
Executives using company stock in hedging activities, such as “cashless” collars, forward sales, equity swaps or other similar arrangements
Dividends or dividend equivalents paid on unvested performance shares or units
In tomorrow’s Advisor, the hay Group experts’ views on executive comp trends for the rest of 2012, plus an introduction to the all-things-comp website, Compensation.BLR.com.
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