APRIL 29, 2013 MATTHEW KLEGER AND TONY WU

Transcription

1 Realizable and Realized Pay: A new world order APRIL 29, 2013 MATTHEW KLEGER AND TONY WU

2 Agenda Introduction: Why is this important? Optimizing disclosure: What are the considerations? What s on the horizon: What to expect in 2013 Q&A 2

3 01 Introduction

4 Presenters Matthew Kleger, CPA, CECP Hay Group, Philadelphia Senior Consultant, Executive Compensation Office: and Tony Wu Hay Group, Metro New York Consultant, Executive Compensation Office:

5 About Hay Group WE HELP ORGANIZATIONS WORK Hay Group consults with 9,000 clients worldwide in a wide variety of areas, including: Organizational effectiveness Managerial and executive assessment Compensation and benefits Performance management Executive remuneration and corporate governance Employee and customer attitude research 85 Offices in 48 countries 2600 Employees worldwide 9000 International clients 5

6 Introduction WHY ARE WE TALKING ABOUT REALIZABLE / REALIZED PAY DISCLOSURES TODAY? Driven by the advent of Say on Pay, corporate issuers, investors (shareholders) and proxy advisory firms are trying to answer the following key questions: Does the pay program and design support the philosophy and pay levels / mix? Support compensation philosophy? What is pay? How do we define pay if not SCT? PAY-FOR- PERFORMANCE LINKAGE? Shareholder communication? How do we disclose in the proxy statement? Support business strategy? Does the pay program align / support the business strategy? 6

7 Introduction WHY USE REALIZABLE / REALIZED PAY DISCLOSURES? Focus on pay-for-performance becoming more acute Companies are starting to change the way they speak to their shareholders about it Realizable / realized pay is an alternative to the SEC disclosure rules Counterpoint to ISS pay-for-performance methodology So what s the problem?...misalignment between performance period (TSR) and the amount of compensation which will actually be delivered at a future point in time! A realizable / realized pay analysis is a snapshot of estimated actual / potential pay delivery over a select time horizon (not accounted for in the SCT) Attempts to measure the value of the largest pay element over the selected time horizon 7

8 Introduction WHO WILL UTILIZE REALIZABLE / REALIZED PAY DISCLOSURES? Proxy Advisory Firms (ISS, Glass Lewis, etc.) Utilization of realizable / realized pay? Shareholders 8

9 Introduction CALSTRS POSITION ON REALIZABLE / REALIZED PAY CalSTRS is one of the largest and most influential pension funds, and very progressive on this issue In the future, CalSTRS hopes we will see more companies include additional tables which describe pay that was actually realized by the executives in an effort to demonstrate a better alignment. In the end, you can t take Black- Scholes to the bank. As a long-term shareholder, reviewing thousands of proxies each year, we believe it is important for issuers to provide data that is easily understood by shareholders and can be compared across companies and industries. CalSTRS believes there is an opportunity for the marketplace, issuers and shareholders, to work together in the development of a realized pay model. After all, without standardized models and calculations these types of figures would only add complexity to what is already a very cumbersome process. Excerpted from CalSTRS white paper - Lessons Learned: The Inaugural Year of say-on-pay, emphasis added 9

10 Introduction COMPANIES CURRENTLY USING REALIZABLE/REALIZED PAY DISCLOSURES According to the 2012 Hay Group / Wall Street Journal CEO Compensation Study, almost 15% of companies provided some form of realizable / realized pay disclosure, up from almost none in 2010 Some of these companies include: 10

11 02 Optimizing disclosure

12 Optimizing disclosure PRESENT FLEXIBILITY Plenty of disclosure flexibility today What tells the most effective story to shareholders? Guidance being delivered from all relevant parties potentially creating more confusion and approaches Proxy advisors (i.e., ISS, Glass Lewis) Compensation consultants Internal HR Hint of a standard may emerge at the conclusion of the 2013 proxy season At this time, there is no right answer the right answer for some companies may be non-disclosure But, for those companies brave enough to disclose, a series of decisions await Proxy Advisors 12

13 Optimizing disclosure MARKET GUIDANCE The definition of pay continues to be a widely debated topic SCT values was considered the most widely recognized and accepted definition of pay and it still is, but purely theoretical in nature and not ideal for pay-for-performance Base Salary Annual Incentives Grant Date Fair Value of Long- Term Incentives Total Direct Compensation A disconnect is evident in the LTI portion the largest and most critical portion of pay! Realizable / realized pay attempts to redefine and revalue the LTI piece to better reflect and convey what is earned or could be earned based on current / actual performance 13

14 Optimizing disclosure MARKET GUIDANCE CONT D Some early guidance from the experts ISS Compensation Consultants Public Companies Cash Compensation Base Salary Base Salary Base Salary Annual Incentives Annual Incentives Annual Incentives Long-Term Incentives (for awards granted during the measurement period) Time-Vested Full-Value Awards Current value of outstanding awards Stock Options Gains realized on options exercised BS value of outstanding options Performance-Based Awards Current value of earned awards; and Current value of outstanding awards at target Time-Vested Full-Value Awards Current value of outstanding awards Stock Options ITMV of outstanding options BS value of outstanding options Performance-Based Awards Current value of outstanding awards at target Time-Vested Full-Value Awards Current value of outstanding awards Stock Options ITMV of outstanding options BS value of outstanding options Gains realized on options exercised Performance-Based Awards Current value of outstanding awards at target Current value of expected awards earned Current value of pro-rata outstanding awards at target General Agreement Varying Opinions 14

15 Optimizing disclosure IS NOW THE RIGHT TIME? External guidance is helpful (but also causes confusion) but before you begin to craft a disclosure, let s ask ourselves the following: Does a realizable / realized pay disclosure make sense? For the company? For shareholders? If yes, then consider the following primary inputs: Absolute vs. relative Measurement period Performance context Comparison to SCT / GDFV Pay elements Additional consideration may be given to select inputs as certain challenges / pitfalls exist based on decisions made 15

16 Optimizing disclosure DISCLOSURE CONSIDERATIONS Additional consideration should be given to other factors that may impact the validity of the initial pay-for-performance results Primary Inputs Overview Additional Considerations Absolute vs. Relative Measuring realizable / realized pay against yourself or against proxy peers Measurement Period 1-, 3-, or 5-year period a period that reflects a longer-term outlook may be appropriate Performance Context Inclusion of TSR at a minimum or performance implied by realizable / realized pay levels relative to SCT / GDFV Relative disclosure may require intensive analyses Lag in reporting of peer pay data prevents a current disclosure A measurement period that aligns with the company s business strategy may be considered Consider alternative ending periods / dates for TSR calculations Broadening the performance context may provide a fuller performance picture as operational and strategic performance may not always show up in stock price performance Comparison to SCT / GDFV Comparison of realizable / realized to SCT / GDFV pay would be consistent with ISS s approach Usually included if electing to disclose a more basic disclosure Pay Elements A more comprehensive pay disclosure or isolation of LTI Adjustments to LTI may be made to ensure a balanced approach Valuation? Grant timing? 16

17 Optimizing disclosure EVOLVING DISCLOSURES ACM 2011 Approach Highlights: 4-year absolute comparison to GDFV Includes TDC and LTI Includes stock price performance Equity valuation based on each fiscal year s closing share price Hybrid approach to valuing performance-based equity (earned and at target) Realizable pay also examined vs. EBITDA and EPS performance Initial realizable pay disclosure exhibits absolute TDC and LTI over a 4-year period 17

18 Optimizing disclosure EVOLVING DISCLOSURES ACM CONT D 2012 Approach Highlights: 3-year absolute comparison to GDFV Isolation of LTI Equity valuation based on FYE12 closing share price Performance-based equity valued at expected payout as a percentage of target (1 st cycle) and at target (remaining cycles) In 2012, ACM transitions to an absolute 3-year look and isolates LTI 18

19 Optimizing disclosure EVOLVING DISCLOSURES AES 2012 Approach Highlights: 3-year absolute comparison to GDFV All NEOs Isolation of LTI Equity valuation based on FYE12 closing share price Performance-based equity valuation reflects the expected performance outcome AES employs a more straightforward disclosure comparing realizable pay to GDFV of award granted over the last three years 19

20 Optimizing disclosure EVOLVING DISCLOSURES SYMC 2012 Approach Highlights: 3-year absolute comparison to GDFV Includes all elements of TDC Earned cash-ltip Equity valuation based on FYE12 closing share price and vesting date share price Performance-based equity valuation reflects the expected performance outcome Symantec elects a realizable / realized hybrid as its initial disclosure 20

21 Optimizing disclosure EVOLVING DISCLOSURES Additional examples of first-time and repeat disclosures by early filers are provided below for reference New Disclosures Repeat Disclosures Type Highlights Air Products Archer-Daniels- Midland Realizable Realizable Sensitivity of absolute realizable pay based on varying TSR scenarios compared to GDFV 5-year absolute realizable pay compared to GDFV with SP performance Deere Realizable 3-year realizable pay and TSR relative to proxy peer group. Revised valuation of PSUs in 2012 Johnson Controls Realizable 3-year realizable pay and TSR relative to proxy peer group Pantry, Inc Realized Transition from 1- and 3-year realized vs target pay graphical disclosure to 1-year realized pay vs. target tabular disclosure Supervalu Realized 3-year absolute realized pay compared to GDFV 21

22 Optimizing disclosure DISCLOSURE CHALLENGES A realizable / realized pay disclosure may not always be a great companion to the CD&A Consider the quality of the message delivered to shareholders what are we really trying to prove? Don t just do it because ISS is doing it Depending on the type of disclosure, may require time-intensive calculations Do we want to add to an already lengthy CD&A? No regulatory requirement of such disclosure at this time Once you start, you likely can t stop While a realizable / realized pay disclosure will likely become the norm within the next two years, public companies today have more than one opportunity to get it right and continue to learn from each other to set the market standard 22

23 03 What s on the horizon?

24 What s on the horizon WHAT TO EXPECT IN 2013 We expect to see continuing trend, interest and discussion, and potential legislation on this topic: Continued momentum Realizable / realized pay will gain further prominence in the Board room Jumping on the band-wagon Institutional shareholders and proxy advisory firms have already begun to consider realizable / realized pay to determine SOP vote recommendations Regulatory involvement SEC to provide clarity on disclosures a requirement under Dodd-Frank? Uniformity of disclosures to emerge This proxy season or next? Lengthier CD&As Realizable / realized pay disclosures will expand on an already extensive CD&A 24

25 What s on the horizon HOW SHOULD COMPANIES BE PREPARING FOR 2014? 1. Assess the need for realizable / realized pay disclosure SOP issues? Current or historical pay-for-performance concerns? 2. Educate the Board and compensation committee Current market trends Company pay program designs and potential risk exposure 3. Establish process for evaluating alternative pay-for-performance definitions Partner with compensation consultants, counsel, and investor relations Gather data inputs 4. Test alternative pay definitions to examine impact of varying inputs Which approach conveys the right message and is defensible from a shareholder and proxy advisor perspective 25

26 04 Q&A

27 Q&A QUESTIONS Matthew Kleger, CPA, CECP Office: Tony Wu Office: