Say on Pay: Avoiding the Crosshairs
Corporate Board Member
by Charles Keenan
Corporate Board Member talked to Carol A.N. Zacharias, deputy general counsel, North America, ACE Group, about litigation and the potential for director liability related to say-on-pay lawsuits this proxy season. Here’s what she had to say.
Say on pay is arguably the 2012 proxy season’s most contentious issue. Since say-on-pay votes are nonbinding, is there a common thread among say-on-pay litigation?
By late September, at least 2,741 companies had conducted the vote on compensation. The vast majority of compensation packages were approved—only 41 failed, and 11 of those have resulted in shareholder derivative litigation. The litigation arises out of the perceived disconnect between company results and paying for performance.
Plaintiffs allege that the defendants breached their fiduciary duties in three ways:
- They breached the duty of loyalty by putting their own interests ahead of shareholders’;
- They breached their duty of candor because the proxies did not disclose that the company failed to “pay for performance” in spite of company policy to that effect; and
- They committed corporate waste by granting excessive compensation awards.
What steps should boards be considering as they move forward into the next proxy season?
Here are seven suggestions to consider prior to the annual meeting:
- Ensure the CD&A is clear. Use the CD&A (compensation discussion and analysis) section to clarify the basis for compensation, showing shareholders clear and reasonable factors supporting the compensation decisions and how they fit within the company’s compensation structure.
- Be prepared to handle criticism. Promptly respond to criticism regarding compensation, whether it be from shareholders or critical institutional investors.
- Consider the entire picture. Temper pay for performance text with other factors so that performance is not the only factor that can justify compensation.
- Tap outside advisers. Obtain independent advice from compensation consultants and review peer company data. The data will help a company see where the compensation recommendations deviate from peer company practices. The consultants can provide guidance to better align pay with business strategy, set pay-for-performance policy, and review compensation best practices. They can also recommend governance and procedural improvements.
- Look around. Identify compensation practices that proxy advising firms consider grounds for recommending a negative vote to shareholders, such as repricing options, excessive perks or tax gross-ups, or incentive compensation that is more than three times base salary and the average, target, or most recent bonus.
- Communicate the rationale. Ensure that the CD&A section of the proxy statement clearly explains the business rationale for compensation recommendations and describes the deliberative process that the compensation committee used to derive the recommendations, particularly any pay increases in spite of stock price decreases.
- Get a jump on the season. Communicate with shareholders about executive compensation before the proxy season, be it via surveys, individual [discussions], or group meetings.
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