Executive Pay and Loyalty

(Jan. 1 to March 31)

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2012.Mar.28  2012's First Failed SOP Lesson: Explain Extraordinary Increases within Summary Comp. Table
Int'l Game Tech received the first failed say on pay vote for 2012, perhaps because (1) its summary comp. table showed that its CEO and CFO received a 60% increase in year-over-year total compensation, and (2) the executive summary in its CD&A merely explains that "This grant was deemed essential to promote the longer-term retention of critical senior leadership.After an unfavorable ISS voting recommendation, the company issued supplemental proxy materials, which includes the ominously telling sentence: "To better understand the rationale behind the special incentive stock grants, it is important to note the context in which the grants were approved." Issuers are best advised to convincingly address extraordinary compensation items in their CD&A's executive summary. Supplemental explanations, after problems emerge, seem generally less effective.  More at 
>>> Failed Say on Pay Votes 2012.  

Consider ASAP Notice to U.S. Taxpayer-Employees re FATCA 
A new and obscure tax reporting requirement under FATCA  requires that certain U.S. individual taxpayers disclose – on Form 8938 attached to their 1040s due April 15, 2012 – interests in specified foreign financial assets which include their equity holdings and awards received from non-U.S. entities. Interests in non-U.S. defined contribution plans, and distributions from non-U.S. defined benefit plans, are also potentially reportable. While failure to file penalties of up to $10,000 would fall on employees, officers, and directors who are U.S. taxpayers, it is nonetheless wise for employers to act ASAP to consider providing a simple heads-up notice to those who are at risk due to their employer-provided stock awards and employee benefits
. More at >>> FATCA 2012 Reporting.

2012.Mar.23  NY Court Dismisses Excessive Compensation Case vs. Morgan Stanley Directors
According to ReutersShareholders [of Morgan Stanley] accused the outside directors of corporate waste and breaching their duties by setting aside 62 percent of net revenue, or $14.3 billion, for compensation in 2009. … They said the amount was excessive given that . . .  A New York State appeals court panel in Manhattan said the shareholders should have . . . More at >>> Excessive Comp Litigation.

2012.Mar.14  "UK's Cable Proposes Annual Binding Vote on Say on Pay" (BloombergBusinessweek), beginning "U.K. Business Secretary Vince Cable backed allowing shareholders a greater say over executive pay, including annual votes on compensation and binding votes on exit payments. Coincidentally, Financial Times reports ... More at Binding Say on Pay, which is tracking developments in a number of countries.

2012.Mar.12  Two More "Failed Say on Pay" Cases Dismissed
Jacobs Engineering:

The directors and officers of Jacobs Engineering, and their compensation consultant, successfully challenged a complaint alleging that the poor financial performance made their authorization of significant pay increases for executives "unreasonable, disloyal, and not in good faith, and violated the Board's pay-for-performance executive compensation philosophy.A Los Angeles Superior Court dismissed the complaint for failure to adequately allege either (1) demand futility or (2) facts sufficient to constitute their claim. Notably, the court observed that "The Dodd-Frank Act did not create any binding obligation on the Board" [through its advisory say-on-pay vote requirement], and that there was "no actionable misrepresentation alleged or culpabilityalleged to support claims based on false disclosures in the company's proxy statements.
Biomed Realty:
The absence of a pre-suit demand also proved fatal to this complaint, with Maryland law driving the result in a decision that both reviewed Delaware law, and considered the failed say-on-pay decisions in Cincinnati Bell and Umpqua. Here is one excerpt fromWeinberg v. Gold (D.MD, 3/12/2012): 
Although it can be reasonably argued that a “say on pay” vote provided the board an opportunity to reconsider its decision regarding executive compensation, it should not be seen as the equivalent of a pre-suitdemand. A shareholder advisory vote is fundamentally different from a demand for litigation.
    >>> See generally Say on Pay Litigation.  (For a copy of the Jacobs Engineering decision, email Mark.)

2012.Mar.10  ISS Releases Updated Governance Risk Indicators (GRId 2.0)
GRId 2.0 Updates indicate: "On top of this list was the inclusion of aspects of ISS’ pay for performance evaluation – which now comprises multiple new questions within the Compensation category, directly drawing upon ISS’ new quantitative methodology."  >>> See GRId 2.0's 26 Compensation Questions. 

2012.Mar.9  Spain limits executive pay state-owned companies and rescued banks
Spain to limit executive pay at state-owned companies -- quoting from the Guardian (2/17/2012), further reporting that Rajoy's government estimates salary cuts of up to 35% (…) in the third of a series of measures designed to assuage anger over tax-funded executive pay. Annual base salaries at state-owned firms would be limited to €105,000 although the government may approve performance bonuses. The Spanish government had already decided to cut salaries of banks (see art. from the Guardian dated 2/10/2012) with upper limit for nationalised or part-nationalised banks set at €300,000 and non-executive directors of such banks capped at €50,000. Former General Manager of the IMF Rodrigo Rato has also recently agreed to have his executive chairman's salary at the Bankia group reduced by 75% down to €600,000 as the government also decided to cut bankers’ pay at rescued banks. >>> See generally International News.

2012.Mar.7  Another Claw-back via Hold-back ... Lloyds Bank
Lloyds bank claws back £1.5m bonuses from directors” -- quoting from the Guardian (2/20/2012), further reporting that Lloyds Banking Group is to claw back at least £1.5m from five former and current executives and eight other senior managers, to penalise them for £3.2bn of losses the bailed-out bank incurred after the bonuses were awarded. It is the first time that a large UK bank has reclaimed executive bonuses, though mostly in the form of hold-backs, as UBS has done (see the 2012.Feb.9 entry below).  All of this suggests banks, and other employers, are likely to pursue better governance and risk management through the increased use of multi-year vesting schedules that basically establish performance-based or discretionary forfeiture risks.
 >>> More at Banking and International Banking.

2012.Mar.6  Aon Enforces Non-Competition and Non-solicitation Covenants via Multi-Layer Approach
In NY County's Sup. Court, Aon succeeded in enforcing post-employment restrictive covenants against a former SVP and his new employer, as a result of what the court described as "their orchestration and participation in a massive raid on the clients and employees" of an Aon division. Aon prevailed both despite an expired employment agreement (with the court enforcing its "survival of covenants" provision), and because its restrictive covenants were also set forth in three different benefit executive incentive plans in which the executive participated. This multi-layered approach tends to make sense for employers who want to best position to enforce post-employment restrictive covenants. >>> More re the Aon case at New York Loyalty.

2012.Feb.28  Say on Pay -- Early Returns Show Reversals Possible, but No Guarantees
Negative say-on-pay votes last year prompted Beazer Homes, Jacobs Engineering, and Hewlett-Packard to respond with positive changes and shareholder outreach. Their 2012 proxy statements tell impressive stories, with the shareholders of Beazer and Jacobs already having more than doubled their favorable say-on-pay voting percentage, in each case from 46% in 2011 to more than 95% in 2012.  
    >>> On the other hand: Johnson Controls dropped from a 62% favorable vote in 2011 to a 58% in 2012.  Its 14A proxy statement discloses total compensation increases averaging 18% for named executive officers (27% for the CEO), with its CD&A beginning without a pay-for-performance explanation (although the CD&A follows with significant detail about performance and improved compensation structures). There was a 
supplemental filing that made the company's pay-for-performance case, although perhaps belatedly.
    >>> See H-P's 2012 14A executive summary re improvements.
    >>> See 
Say on Pay 2012 Planning.

2012.Feb.27  ISS Executive Comp. Survey Results from 2008 to 2010
ISS has released an 8-page report titled Post-Crisis Trends in U.S. Executive Pay, which provides detailed support for findings such as the following: "Mindful of the outcry over particular elements of pay packages, companies began scaling back bonus awards as well as payments related to 'golden parachutes' and other forms of exit pay following the crisis. … But that has been more than offset through increases in other pay elements, most notably awards tied to company stock. The result is a 37 percent surge in total  annual compensation paid to C-suite officers from fiscal 2008 to 2010 with stock awards now constituting more than half of the total pay pie."  >>> See Executive Comp Surveys.

2012.Feb.22  SEC Expert re What is a Perquisite (for Executive Comp Disclosure Purposes)
In litigation against two CFOs re their failure to disclose perquisites that an issuer provided for its CEO, the SEC prevailed in a motion to have its expert testify about a "primary purpose" methodology that is applicable under the Internal Revenue Code for determining whether an item is a business or a personal expense. The federal district court decision in
 SEC v. Das states that ... continued at Perquisites.

2012.Feb.20  Golden Parachutes and Board Accountability
Board members should beware of warnings within the conclusion to a Governance Metrics International analysis of large golden parachute payments: "Directors who approve such awards for an incoming CEO or allow them to continue in place for existing CEOs may be held accountable when CEOs receive tens of millions after a short or unproductive tenure. They may also be held accountable if CEOs are paid twice for their successes."  >>> See Executive Severance.

2012.Feb.20  Say on Pay Votes and CEO Compensation: Evidence from the UK (Ferri and Maber, Review of Finance, pending).
"Overall, our tests suggest that UK investors perceived say on pay to be a value enhancing monitoring mechanism, and were successful in using say on pay votes to pressure firms to remove controversial pay practices and increase the sensitivity of pay to poor performance."

2012.Feb.19  Social Networks and Restrictive Covenants (Bloomberg Article)
"Over the past 10 years, with the advancements in technology and the rapid spread of online networking among professionals, the effectiveness of traditional restrictive covenants (such as confidentiality, noncompetition, and nonsolicitation agreements) has been called into question." >>> Read more re Why Rapid Change Should Meet Rapid Improvement.

2012.Feb.14  SEC Advises re Say on Pay Proposal Text for Voting Cards and Instructions
The SEC has issued guidance about how proxy cards and voting instructions should describe the say-on-pay vote. The top four bullets provide examples of approved language, and the bullet in the last line illustrates an inadequate description (because of its ambiguity). See CD&I 169.07.

2012.Feb.9  Banks Defer 2012 Bonuses, Claw-back 2011 Share Bonuses, and Fail to Recover on Forgivable Loan
Per Reuters, Deutsche Bank will defer any part of an employee's bonus above 200,000 euros ("the deferred portion will also be half cash and half shares, and will be paid out over a period of three years in equal annual installments, beginning in 2013"). Separately, UBS has notified some of its highest-paid investment bankers that they will forfeit the maximum amount (50%) of share bonuses that were awarded in 2011 and that were scheduled to vest in 2012 (in the first of three vesting installments).  See Wall Street Journal

  • The foregoing is consistent with advice Lucian Bebchuk posted on Harvard Law's blog under the title "Executive Pay and the Financial Crisis" where he advises: "Going forward, these two problems can and should be addressed by improved design of pay arrangements.To address the first problem, pay arrangements should generally tie executives’ payoffs to long-term results (along the lines proposed in Bebchuk and Fried (2010) or otherwise). To address the second problem, executives’ payoffs should be tied not only to long-term results for shareholders but also (as Bebchuk and Spamann (2010) advocate) to long-term results for other contributors of capital to their financial firm." 
  • Unrelated to the above, a financial regulatory panel (FIRA) dismissed an action by which UBS sought recover $1,000,000 from a former broker pursuant to a promissory note relating to his signing bonus. See Reuters (2/6/2012) for further information ("rare win for a broker").
  • See generally Banking Exec Comp.   
2012.Feb.8  Clawbacks -- Goldman and JPM Announce Changes that Appease NYC Pension Investor. Articles in Law 360 and the WSJ describe an improved clawback standard (from the investor perspective), reporting that the main clawback changes that Goldman and Morgan Stanley have agreed to implement involve the following: (1) permit recovery of compensation for failure to appropriately supervise or manage an employee; (2) cover actions or omissions; and (3) remove the term “material” re losses as a trigger for recovery.  The utter absence of a clawback policy is a say-on-pay red flag for public companies, with most seeming to tread carefully by either freezing past policies or adopting minimalist ones due to uncertainties surrounding Dodd-Frank. >>> See Clawbacksand Sample Policies.

2012.Feb.8  California Law Rules ... in Choice-of-Law Dispute involving Employee Classification (9th Circuit). For employers outside California, the 9th Circuit's decision in this worker classification case provides a heads-up for the governing law to expect in choice of law disputes involving California-based employees. >>> See relevant quotes from Ruiz v. Affinity Logistics at California Executive Loyalty

2012.Feb.7  Italy's Supreme Court Denies Worker Guarantees to Bank Executive who Breached Fiduciary Duties. Here is interesting info from LinkedIn's international employment group re an Italian Sup. Ct. decision to the effect that, if an employer follows proper dismissal procedures, an employee may be denied -- quoting from R. Ferrario's blog post -- "guarantees under the Workers' Statute" if the employee "seriously breaches his employment contract in a way that permanently jeopardises the fiduciary relationship with the employer."

2012.Feb.3  ISS FAQs re Pay-for-Performance Issues.  ISS has released 20 FAQs that provide some detail about its pay-for-performance testing, such as its total shareholder return (TSR) factor, peer group selection, issuer commitments to make future changes ("not as relevant"), and ISS recommendations for shareholder voting on proposals relating to (i) new or amended stock-based compensation plans, and (ii) the election of directors, especially those on compensation committee.  >>> See Proxy Solicitors (ISS) and Shareholder Approval of Stock Plans.

2012.Jan.26  Actuant's Failed Say-on-Pay Vote:  Performance Connection Needs to be Convincingly Shown
Conventional wisdom counsels public companies to begin CD&As with a pay-for-performance message, and to be alert to conspicuous blips in their summary comp tables. In Actuant's case, its initial 14A seemed on target, and its additional 14A supp expanded upon it pay-for-performance case after ISS and Glass Lewis issued unfavorable vote recommendations based on their total shareholder return tests. That was not enough to sway shareholders, who registered a 46% approval vote (8-K). This should remind issuers to take steps immediately ... continued at Say on Pay 2012 Planning.

2012.Jan.26  Merger-related Disclosures Prompt Shareholder Action -- Dismissed by 7th Cir.
The 7th Circuit's recent decision in Dixon v. ATI Ladish, while focused on Wisconsin law, serves as a reminder that the Dodd-Frank Act's new Say-on-Parachute vote is likely to generate close scrutiny from shareholders with respect to the completeness of the required disclosures. >>> For general reference, see Say on Parachutes.
2012.Jan.23  Credit Suisse Again Bundles Risk and Reward
"Credit Suisse plans to pay a portion of senior employees' bonuses in bonds backed by derivatives, reviving a maneuver from 2008 that helped the firm dispose of risky assets while preserving value for staff" so starts the following Bloomberg article

  Stock Claims by Executives Fall to Straightforward Contract Terms; Survive Ambiguity  
The 4th Circuit has issued two recent decisions illustrating the power of unambiguous plans and award agreements. 
   The first upheld dismissal of a former executive's claim contesting expiration of his stock options three months after his employment terminated (Porkert v. Chevron, stating that "Porkert unequivocally accepted each stock option grant on an annual basis from 1999 until 2004, and did so knowing that each grant was expressly governed by the LTIP terms and rules"). 
    The second decision involved dismissal of a former employee’s claim seeking recovery of unvested equity awards (Kunda v C.R. Bard, Inc.), with the court rejecting Kunda's arguments that Maryland law applied despite the stock plan's designation of New Jersey law as controlling. On the other hand, an executive's claims relating to his stock options avoided dismissal in Rawat v. Navistar, because "the Release does not unambiguously demonstrate Rawat's intent to release the claims alleged" with respect to his inability to exercise stock options due to a blackout period in effect after execution of the claims release.  
  >>> More at Executive Litigation vs EmployersForfeitures.

2012.Jan.12  Say on Pay Claims Receive Adverse Rulings in CA and OR
When it comes to shareholder derivative actions inflamed by failed say-on-pay votes, the court decisions are lining up behind the convincing Beazer dismissal, with a CA district court being the latest to dismiss a shareholder's claim, this one for a declaratory judgment, on the ground that "The Dodd-Frank Wall Street Reform Act did not change state law regarding fiduciary duty or the business judgment presumption." That litigation in Dennis v. Hart (S.D. CA) has not ended, however, because the case was remanded to California state court for consideration of the shareholder's breach of fiduciary duty claims, including whether or not the plaintiff may "use the negative say on pay vote as evidence that the business judgment presumption was rebutted." 
   Meanwhile, an Oregon federal magistrate judge has recommended dismissal of a federal court action involving a s
hareholders' complaint that traces to a 62% unfavorable say on pay vote re Umpqua Holdings (news).  The Oregon magistrate's recommendation rejects the analysis inCincinnati Bell, and applies Oregon and Delaware law principles in finding that the complaint's allegations were insufficient to overcome the business judgement rule's presumption in favor of the board's executive pay decisions. 
   >>> See generally Say on Pay Litigation

  Outside Director's Breach of Loyalty? Shareholders Alone Can Ratify under Bermuda Law - Second Circuit   
Tyco has succeeded in reversing dismissal of its claim that a former director breached his fiduciary duty by secretly receiving a $20 million payment from Tyco in connection with its acquisition by CIT Group. The Second Circuit's decision concludes that "under Bermuda law, [the director's] breach could be ratified only by Tyco's shareholders, not its board of directors." See Tyco v. Walsh (2nd Cir.) 

2012.Jan.8  "Cameron promises powers to limit executives' pay" (BBC News)   
The BBC reports that "David Cameron has promised shareholders a binding vote on executive pay, in an effort to deal with excessive salaries," and that he "also pledged to tackle large payouts for executives dismissed because of poor performance." More at Executive Comp - UK.

2012.Jan.6  Code Section 162(m) Heads Up for Annual Meetings.   
For public companies, higher-than-usual stakes attach this year to proposals for shareholder approval of new (or amended) cash incentive plans and/or equity award plans. This is mainly because of the two Delaware District Court decisions described here, which essentially highlight a litigation risk if a proposal for shareholder approval states or implies that awards "will qualify" -- rather than "are intended to qualify" -- either for exemption from Code §162(m) or as performance-based compensation for Code §162(m) purposes.  While Code §162(m) has your attention, two further caveats are worth mentioning.
   (1) Five-year Rule.  Although the normal life of a stock plan is 10 years, an exemption from Code §162(m) requires shareholder approval every 5 years if the plan follows the common practice of merely identifying a maximum per person limit and a menu of possible performance-based measures (as opposed to locking-in a formula for awards).
   (2) Vesting on Involuntary Termination or Retirement.  The Treasury Department has issued a ruling to the effect that a performance-based award will lose its §162(m) exemption to the extent that the award will be paid-out, regardless of performance outcomes after 2008, in connection with the award holder's termination of employment for a reason other than death or disability.
   As a general precaution, public companies should be sure to carefully vet any proxy statement that proposes a compensation-related plan for shareholder approval (whether the plan involves cash or equity awards, or both). 

2012.Jan.2  Delphi Shareholder Targets Premium Sale Payable for Founder's Shares.
The Pontiac General Employees Retirement System has filed a complaint in Delaware's Chancery Court alleging breaches of fiduciary duty by the Founder and CEO of Delphi Financial Group, as well as by its board of directors, due to a merger agreement under which common shareholders will receive $9 per share less than the founder and CEO (who has super-voting shares.   >>> More at  Law360 Article / ComplaintDelphi 8-K for Merger