Executive Pay and Loyalty


2011.Dec.21  Clawback Policies should Reach Supervisors, says NYC Comptroller.
From Bloomberg Business Week: "New York City Comptroller John C. Liu, who oversees $108 billion in pension funds, said Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley should target senior executives’ pay to prevent improper or risky practices. ... Liu filed shareholder requests with the three New York- based banks to toughen their so-called clawbacks, which allow the firms to reclaim pay awarded to employees who acted improperly. The lenders, which now limit clawbacks to individual wrongdoers, should target supervisors as well, Liu said in a statement today." >>> More at Clawbacks

2011.Dec.20  Proposed Settlement in One of Two Say on Pay Lawsuits re Cincinnati Bell. 
Quoting from the proposed settlement order filed in Hamilton Co. (Ohio), regarding an action different from the S.D.Ohio action that survived a motion to dismiss this past summer: "Generally, the settlement terms fall into four general categories: (1) empowering and/or improving the policies of the Board's Compensation Committee; (2) improving communications by the Board and the Company to Cincinnati Bell's stockholders, including, but not limited to, any negative compensation votes by stockholders; (3) enhancing the independence of the Board and rotating membership on the Compensation Committee; and (4) providing for the retention of an additional executive compensation consultant if a majority of the shareholders vote against the executive compensation proposed by the Compensation Committee." >>> See Say on Pay Litigation

2011.Dec.16  "Good Reason" Severance Denial Violated ERISA Procedures Applicable to "Top Hat" Plans.
In a comprehensive decision, a Massachusetts District Court orders "that the case be remanded to the plan administrator because of significant procedural flaws that rendered the decision to deny Plaintiff benefits under the top-hat plan unreasonable." >>> See Litigation by Executives

2011.Dec.11  Executive Compensation 2012: Getting Ready ... starting with ISS Policy Updates. 
On November 17, 2011, Institutional Shareholder Services (“ISS”) released its 2012 policy updates to its proxy voting guidelines. In the aftermath of the Dodd-Frank Act’s say-on-pay requirement for advisory shareholder votes on executive compensation, ISS has emerged as the leading proxy advisory firm for public companies. Especially for executive compensation, its policy updates have come to establish best and worst practices by which shareholders and stock analysts hold boards accountable.  >>> More at Full Alert

  Illinois Supreme Court Refines Non-Compete Standard 
Modifying 36 years of precedent, the Reliant Energy decision holds that the "the legitimate business interest test is still a viable test to be employed as part of the three-prong rule of reason to determine the enforceability of a restrictive covenant not to compete," but then articulates a new determinative test: "whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case".  >>> See Illinois Law.

2011.Nov.27  Virginia Supreme Court Refines Non-Compete Standard 
Reviewing a non-competition "provision that prohibits former employees from working for competitors in any capacity," Virginia's Home Paramount decision reverses prior precedent by concluding that "Although we weigh the function element of a provision that restricts competition together with its geographic scope and duration elements, the clear overbreadth of the function here cannot be saved by narrow tailoring of geographic scope and duration."  >>> See Virginia Law.

2011.Nov.21  Shareholder Not Allowed to Inspect Board Records of Internal Investigation 
Delaware's Supreme Court denied a shareholder's action to inspect an internal report prepared for Hewlett-Packard's board in connection with its investigation into sexual harassment allegations against its former chief executive officer, because the shareholder "has not shown that the [report] is essential to his stated purpose, which is to investigate possible corporate wrongdoing(Espinoza v. Hewlett-Packard Co., Del., 11/21/2011).

2011.Nov.14  Inviting Trouble: The Continuing Risks of Executive Perks 
Conventional wisdom should drive the compensation committees of  public companies to be judicious, if not hard-fisted, in providing executives with perquisites.  These special forms of indirect compensation invite scrutiny from shareholders, proxy advisors, and government regulators. Case in point: the SEC investigation relating toNabors Industries. >>> More at Enforcement re 14A Disclosure Obligations.

2011.Nov.10  Cash Bonus Deduction Allowed Despite No Specific Awards
Under its "all events" test, the IRS has approved an employer's deduction for a cash bonus pool liability that becomes fixed in one year, even though awards to eligible employees do not occur until the first 2-1/2 months of the following year. Revenue Ruling 2011-29 describes key requirements, such as that "any bonus amount allocable to an employee who is not employed on the date on which [the employer] pays bonuses is reallocated among other eligible employees."

2011.Nov.09  Candor for Compensation Committees 
The latest edition of Board Member magazine includes an article that concludes "Whatever the shareholder derivative claim relating to executive compensation, directors are the main targets. They cannot afford to be passive, last minute, or reactive. Just the opposite: Directors need to take ownership over executive compensation, from articulating a well-considered philosophy to selecting insightful advisers, to making sound executive compensation decisions and convincing public disclosures."  The complete article appears at Candor for Compensation Committees.

2011.Nov.08  Another Failed Say-on-Pay ... 29% Favorable is Lowest Yet 
In an 11/8/2011 blog entry, Ted Allen of ISS reports that "The investor dissent over pay at Regis appears to be a reaction to the significant payments to executives that were not tied to strict performance conditions. According to the ISS report on the company, the named executives, including the CEO, all received cash incentive payouts at a time of sustained operational and stock price underperformance pursuant to an annual incentive program that appears to be more discretionary in nature than performance-based when the adjustments to metrics are considered."  >>> More at Failed Say on Pay Votes. 

2011.Nov.05  Hot Exec Comp Buttons of Fund Investors and Proxy Advisors 
There were consistent messages from fund investors and proxy advisors at last week's NASPP conference.   >>> More at Exec Comp Governance.

2011.Nov.03  Excessive Compensation Suit Settled -- CEO Returns Part of 2008 Bonus 
The CEO of Chesapeake Energy has agreed to return $12 million of his $100 million total compensation reported for 2008 (essentially undoing his sale of an antique map collection to the company), according to today's Law360.  This action and certain corporate governance improvements are reported to settle an Oklahoma shareholder derivative claim alleging directors breached their fiduciary duty in part through authorizing purchase of the antique map collection.  Reuters reports that "influential proxy advisory service ISS this year opposed McClendon's reelection to the company's board, citing unresponsiveness to investors and compensation issues" and that "At this year's annual meeting in June, more than 40 percent of the company's shareholders rejected Chesapeake's executive pay plan, and McClendon was reelected with 78 percent of the vote." >>> More at  Shareholder Claims re Executive Comp.

2011.Oct.25 Bank Incentive Compensation: Comprehensive Checklist for Compensation Committees.
In the wake of the 2008 financial crisis, the Federal Reserve and other U.S. banking regulators have been forewarning bank boards to rapidly reconsider and improve their incentive compensation structures, mainly in order (i) to customize awards based on the risk-taking activities of the award recipient, (ii) to reduce the sensivity of awards to short-term results, though deferred payouts, and (iii) to deveop "a systematic approach ... supported by formalized and well-developed policies, procedures, and systems to ensure ... safety and soundness." The latter quote come from the Federal Reserve's October 2011 report re its horizontal review of incentive compensation practices at large banking organizations.  >> More at Bank Board Checklist re Incentive Practices.

 2011.Oct.13  Excessive Compensation Complaint Dismissed vs. Goldman Directors
In its Goldman Sachs decision, Delaware's Court of Chancery dismisses a shareholder derivative action claiming that "...the Director Defendants violated fiduciary duties in setting compensation levels and failing to oversee the risks created thereby. The facts pled in support of these allegations, however, if true, support only a conclusion that the directors made poor business decisions."    >>> More at Shareholder Claims vs Board.

2011.Oct.12 "Good Progress" toward Sounder Bank Compensation
The Financial Stability Board has released a report presenting its recent assessment of how well major financial institutions around the world have revised their executive compensation practices.  The FSB cites "good progress," echoing the Federal Reserve's conclusion in its October 2011 report. Notably, the Fed found that "senior executives now have more than 60 percent of their incentive compensation deferred on average."  >>> More at Banking.

2011.Oct.1  IRS Worker Classification Correction Program
It is easy to underestimate or to ignore the tax, labor, and ERISA risks that arise from classification of workers as independent contractors. This often latent liability is worth attention now because IRS Announcement 2011-64 provides tax amnesty relief for employers. Interested employers need to apply, enter into a closing agreement with the IRS, and pay a fee that is a mere fraction (10%) of the payroll taxes that would othewise have been payable over the prior year for the re-classified group. Employers should consider their corrective alternatives carefully because the IRS corrective program may not be the best alternative and carries the risk of serious unintended consequences (such as claims from the very employees who are re-classified). Contact Mark for more info.