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August 25, 2010EXEQUITY
Independent Board and Management Advisors High Performance Equity Compensation
Dodd-Frank Wall Street Reform
and Consumer Protection Act
Action Steps for Executive Compensation
and Corporate Governance Provisions
(sections 951-957 and 971-972)
The following presentation walks through the highlights of the executive compensation provisions contained in the Dodd-Frank
Wall Street Reform and Consumer Protection Act. This presentation is based on the final version of the bill dated July 16, 2010 and
posted on the Government Printing Office’s Web page: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf
(under Title IX—Investor Protections and Improvements to the Regulation of Securities Sections 951–957 and 971–972).
President Obama signed the Dodd-Frank Act into law on July 21, 2010
To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the prior consent of Exequity LLP and
Performensation Consulting LLC. ©2010
Today’s Presenters
Ed HauderSenior AdviserExequity LLPEmail: [email protected] Phone: (847) 996-3990Web: www.exqty.com
EXEQUITYIndependent Board andManagement Advisors
Dan WalterPresident and CEOPerformensationEmail: [email protected]: (415) 625-3406Web: www.performensation.com
High Performance Equity
Compensation
About the Speakers: Ed Hauder
Senior Executive Compensation Advisor
Senior advisor and practical thought leader: Ed is known industry-wide as a leading advisor on executive compensation matters. He maintains long-term relationships with numerous companies, serves on the CompensationStandards.com Executive Compensation Task Force, maintains his acclaimed Equity Compensation Blog, edwardhauder.com, and is a practical thought leader on compensation matters.
Experience across a range of industries: Ed has consulted with hundreds of companies in multiple industries on all aspects of executive and director compensation. Ed focuses on helping companies design compensation programs that help them achieve their strategic goals and objectives, while at the same time keeping them out of the penalty box with shareholders and the media. Ed also helps companies understand and find practical solutions for technical matters impacting compensation, e.g., financial accounting, securities, tax, and corporate governance issues. His expertise includes RiskMetrics Group (a.k.a. ISS) compensation modeling and policies, which enabled him to create the Flexible Share Authorization to maximize equity plan flexibility.
Articles and quotes on compensation issues: Ed has recently written articles that have appeared in The Corporate Board, workspan Weekly, BNA’s Executive Compensation Library, and Tax Management Compensation Planning Journal. He has been quoted in such publications as BNA’s Pension & Benefits Daily, Business Finance, Forbes, HR Magazine, and The NASPP Advisor.
Background and education: Before joining Exequity, Ed was employed as a Principal at Buck Consultants where he managed the Technical Solutions and Innovation Team. Prior to that, Ed was a member of Hewitt Associates’ Executive Compensation Center of Technical Excellence. Ed received a B.A. in International Relations from Juniata College, a J.D., cum laude, from Seattle University School of Law, and an LL.M. (Tax), with honors, from IIT-Chicago-Kent College of Law.
Contact information: [email protected] or (847) 996-3990Ed’s Equity Compensation Plan Blog: www.edwardhauder.com Twitter: www.twitter.com/ExeCompAdvisor
About the Speakers: Dan Walter
President and CEO of Performensation
Broad experience: Dan has more than 15 years of experience assisting companies with both executive and broad-based compensation programs. He provides end-to-end solutions for private and public companies in both the United States and abroad. His clients have ranged from entrepreneurial start-ups to established Fortune 100 companies providing him with a unique perspective on compensation issues.
Incentive compensation futurist: Dan is frequently recognized for being an industry leader in compensation design, philosophy, and execution. He provides solutions that start with your corporate culture and end with your corporate success. Performensation’s solutions also include GEMS, the only tool designed to automate the tracking of complex goals against equity plans.
Deep expertise: Dan’s expertise includes equity compensation, executive programs, performance-based pay, and talent management issues. His experience with these programs includes diagnosis, design, communication, administration, and reporting. Dan has experience with all forms of equity, including stock options, restricted shares and units, and stock purchase and performance-based programs. Dan’s past clients include: Yahoo, Google, IBM, Microsoft, JDSU, ION Geophysical, Redback Networks, BGI (now BlackRock), and others.
Industry educator: Dan is currently writing a book on performance-based equity and contributing to another. He is a frequently requested speaker at compensation, stock administration, human resources, and accounting events, covering a wide range of topics. Dan is the founder of Equity Compensation Experts, the largest networking group for professionals who touch equity compensation, a regular contributor to the Compensation Café blog (rated one the top 10 talent management blogs on the web), and a co-producer of the ShareComp 2010 virtual conference
Phone: ofc: +1-415-625-3406 | mobile: +1-917-734-4649Twitter: @performensation | Skype: performensation | LinkedIn: www.linkedin.com/in/danwalterPerformensation’s Website: www.performensation.comEquity Compensation Experts groupsite: www.equitycompensationexperts.groupsite.comCompensation Cafe Blog: www.compensationcafe.com
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: SAY ON PAY PROVISIONS
What you need to do:
Create say on pay stakeholder team
Determine your say on pay philosophy and approach:
Aggressive:
Actively move to more performance-based pay
Move to annual shareholder votes
Passive:
Wait for others in your peer group to announce their position
Push for vote triennially
Understand what your shareholders want
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: SAY ON PAY PROVISIONS
How an experienced compensation consultant can help:
Evaluate content and presentation of executive compensation disclosures
Review alignment of pay to performance
Reach out to your shareholders to find out what they think and identify any “hot button” issues that could impact their vote on say on pay
Review past recommendations from ISS, Glass Lewis, and others regarding companies in your peer group
Review how your your compensation plan, design, and program compare to the policies of your institutional shareholders
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: GOLDEN PARACHUTE VOTES
What you need to do:
Review change-in-control (CIC) provisions in all compensation programs and ensure that they represent your current philosophy
Determine go-forward philosophy in regard to golden parachutes
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
Determine current golden parachute liability assuming a CIC event in the next 12 months; use different deal price assumptions to get a feel for the sensitivity of your golden parachutes to the deal price
Determine Top 5 NEO golden parachute liability as a percentage of deal price and premium over current and 200-day average stock price
Perform same calculations for your peers
Review compensation arrangements that may be subject to a separate shareholder vote if a transaction were to occur; ensure the terms are consistent with intent, and disclosure is covered by a management say on pay vote
ACTION ITEM: GOLDEN PARACHUTE VOTES
How an experienced compensation consultant can help:
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: COMPENSATION COMMITTEE INDEPENDENCE
What you need to do:
Review independence standard for audit committee members
Review how the audit committee independence standards might apply to your current compensation committee members
Review independence of compensation committee members and adjust as needed
Move to switch out non-independent directors before next applicable proxy period
Committee charter may need to be updated, but wait for SEC to issue rules
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: COMPENSATION COMMITTEE INDEPENDENCE
(You’re on your own)
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM:CONSULTANTS AND ADVISERS INDEPENDENCE
What you need to do:
Determine what independence standard the compensation committee will apply to its advisers
Create a list of qualified compensation consultants who do not provide any other services to the company
Review current compensation consultants and other committee advisers for independence as related to the new rules
Review with your compensation committee possible advisers that may suit their needs
Determine whether the compensation committee wants to change any of its advisers as a result of reviewing their independence
Review the independence factors to be issued by the SEC
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
Exequity and Performensation are both completely independent consulting firms
We can provide assistance with your compensation programs
We can provide assistance in evaluating the independence of your current consultants and advisers
ACTION ITEM:CONSULTANTS AND ADVISERS INDEPENDENCE
How an experienced compensation consultant can help:
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: EXECUTIVE COMPENSATION DISCLOSURES
What you need to do:
As part of say on pay review and philosophy, document relationship between pay and performance
Determine the tools, time, and budget required to calculate employee annual compensation in the same manner as required for the Summary Compensation Table (SCT)
Provide input to the SEC now [http://www.sec.gov/spotlight/regreformcomments.shtml]
Contact your Congressman and Senators
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
Evaluate whether a historical look at pay versus performance of your company and its peers would assist the development of disclosure and/or message to shareholders
Utilizing Exequity’s ROX methodology
Determine current ratio of CEO pay to employee pay
Determine if any other pay ratios should be considered for disclosure purposes, i.e., CEO to other NEOs, CEO as a % of total compensation expense, etc.
Review peer group ratios, using compensation survey data as a guideline
Evaluate if your ratio is “media worthy”—will news outlets report on your ratio as a positive or negative?
ACTION ITEM: EXECUTIVE COMPENSATION DISCLOSURES
How an experienced compensation consultant can help:
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: CLAWBACK PROVISION: RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY
What you need to do:
Evaluate your current philosophy on clawback provisions
Can your current position be communicated as supporting the new regulations?
If not, what changes must be made to comply?
Determine if those changes can be made (some may require significant legal work or plan redesign)
Identify potential legal issues (wage laws, etc.)
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
Review your clawbacks to determine any necessary changes
Set out a plan to get necessary changes implemented so your clawbacks comply with the new requirements
Create clawback “best practices” guidelines that can be applied to current and prospective programs
ACTION ITEM: CLAWBACK PROVISION: RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY
How an experienced compensation consultant can help:
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: DISCLOSURE REGARDING EMPLOYEE AND DIRECTOR HEDGING
What you need to do:
Review current hedging positions with all executives, directors, and employees
Evaluate the disclosure requirements for each individual’s current transactions
Determine the modifications, if any, that each individual must make
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
Define a clear anti-hedging policy as part of your insider trading policy
Create a communication program explaining the variants of hedging and how your anti-hedging policy works
ACTION ITEM: DISCLOSURE REGARDING EMPLOYEE AND DIRECTOR HEDGING
How an experienced compensation consultant can help:
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: ENHANCED COMPENSATION STRUCTURE REPORTING FOR FINANCIAL COMPANIES
What you can do:
If you are not a financial company, disregard for now, but keep an eye on this so you know what some shareholders might ask you to adopt if the changes are viewed as beneficial by shareholders
If you are a covered financial company with more than $1 billion in assets:
Start evaluating your compensation programs now
Determine how you will communicate the structure of these arrangements to determine:
Possibility of providing excessive compensation fees or benefits
Risk profile and association with possible material loss to the company
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
Prepare initial approach to modifications such as:
Mandatory holding periods and stock ownership guidelines
A significant portion of compensation to be deferred
Introducing an absolute metric governing payouts of any performance-based compensation subject to relative performance measures, e.g., relative total shareholder returns
ACTION ITEM: ENHANCED COMPENSATION STRUCTURE REPORTING FOR FINANCIAL COMPANIES
How an experienced compensation consultant can help:
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: VOTING BY BROKERS
What you can do:
Evaluate voting standards and determine impact
Determine whether more aggressive outreach to shareholders is warranted to gain support of retail shares
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
Evaluate employee equity compensation accounts to determine if the individuals can and do vote their shares
If you have a strong employee ownership culture, assist with the creation of a communication program that explains the importance of employee voting
Determine the potential need for a proxy solicitation campaign, based on the likelihood of un-voteable, broker-held shares
ACTION ITEM: VOTING BY BROKERS
How an experienced compensation consultant can help:
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
ACTION ITEM: CORPORATE GOVERNANCE
What you can do:
Keep your eyes open for final decisions regarding Proxy Access
Draft out the rationale for your company having the Chairman/CEO structure it has
Why was this structure selected?
What does it enable the company to do?
How does this structure impact your company’s corporate governance?
Does this structure increase or decrease your company’s risk profile?
Did you consider alternatives?
If so, why were they not selected?
How often does the company review its Chairman/CEO structure?
www.exqty.com (847) 996-3990
www.performensation.com415-625-3406
Update you when final proxy access rules are available
Provide insight into rationale for peer group Chairman/CEO structure
ACTION ITEM: CORPORATE GOVERNANCE
How an experienced compensation consultant can help: