News Column

Executive Pay a Governance Issue for 2013

Dec. 26, 2012

Becky Yerak

Executives

Wall Street isn't far from its record highs in 2007, but shareholder activists continue to keep management and boards of directors on their toes.

In 2013, trends to watch for in executive compensation and corporate governance include the first round of shareholder votes on the pay of top management at smaller businesses.

Also, more companies are publicly documenting their efforts to keep investors in the loop, right down to assuring them that new directors have passed thorough background checks.

And many corporate watchdogs wonder when the Securities and Exchange Commission will propose rules -- mandated by a 2010 law -- that require companies to give hard numbers on the ratio between the pay of the chief executive and their average midlevel worker, data that could create new tension between those critical of executive pay and those who set it. Until then, passions over pay levels might remain cooler than they have in years.

Executive compensation isn't the "hot button issue it was two or three years ago," said William Atwood, executive director of the Illinois State Board of Investment.

Say-on-pay votes and enhanced corporate transparency about compensation since the 2010 Dodd-Frank Wall Street Reform & Consumer Protection Act have "increasingly ameliorated shareholder angst" on the topic, he explained.

But big investors' attention is increasingly turning to political contributions made by companies, which will be under more pressure to disclose what they're doling out and their policies for doing so, Atwood said.

In its Dec. 17, proxy, for example, Accenture PLC disclosed a Massachusetts shareholder's proposal to ask the Irish consulting firm for more information about its lobbying.

Accenture recommends a no vote, saying it "discloses its lobbying activity and expenditures as required by law."

Here are some other executive pay and corporate governance changes afoot:

Say on pay: Companies with less than $75 million in public float -- that's the value of shares not owned by directors or large investors -- had been exempt from a 2010 law requiring executive compensation to be put up for a stockholder vote at annual meetings.

On Jan. 21, smaller firms' breather from "say on pay" votes ends.

Companies with small public floats that haven't yet held any such votes include Palatine-based Addus HomeCare Corp.

"We will have a say-on-pay vote in the next proxy" as the exemption sunsets for smaller companies, Dennis Meulemans, chief financial officer for the in-home services provider, said.

Glass ceiling cracks: The number of female directors will continue to rise in 2013, predicts executive compensation data firm Equilar Inc.

The percentage of Standard & Poor's 1500 boards lacking a woman fell from 29 percent to 24 percent between 2009 and 2011, Equilar said.

In November, Bethesda, Md.-based Host Hotels & Resorts Inc., which has seven Chicago-area properties, added a second woman to its board -- Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corp.

Companies with no female directors include Lindsay Corp., an Omaha, Neb.-based irrigation systems business whose board members include Howard Buffett; Pulse Electronics Corp., a San Diego-based parts provider; and T3 Motion Inc., a Costa Mesa, Calif.-based maker of electric stand-up vehicles.

Class warfare fodder? Dodd-Frank also requires the disclosure of a new ratio: comparing a company's median annual compensation for employees to that of its chief executive.

The Securities and Exchange Commission has yet to propose the rules.

"It's low on the SEC's priority list," said Aaron Boyd, Equilar research director. Uncertainties include whether or how to include contract or foreign workers in the math.

And "most companies do not like it," Boyd said. They cite such factors as the cost to calculate it, the meaninglessness of the ratio, and the fear that it's being required to make management look bad.

At least one company is taking baby steps. Grand Rapids, Mich.-based Spartan Stores Inc. has disclosed the ratio of its CEO pay to its other top executives -- 3.4 to 1..

Too much information? Proxy statements typically include a "compensation discussion and analysis" section.

Since 2009, the length of the average CD&A for S&P 1500 companies is up 14 percent to 7,340 words, Equilar said.

Chicago-based Telephone & Data Systems Inc. is among the most verbose, using 20,000 words to explain its pay; Berkshire Hathaway Inc. has one of the shortest, about 500 words.

One year at a time: Corporate boards continue to move toward annual elections.

Nearly 60 percent of S&P 1500 companies had "declassified" boards in 2011, growing consistently over the years and up from 49 percent in 2007, Equilar said.

Shareholder Rights Project, part of Harvard's law school, and eight institutional investors, including the Florida State Board of Administration, the Illinois State Board of Investment and the Los Angeles County Employees Retirement Association, in November said they're encouraging 74 companies to move to annual elections in 2013.

The companies include Costco Wholesale Corp., which in its Dec. 13, proxy asks investors to vote against the shareholder proposal.

"The board, with its current structure, has overseen a sustained period of strong performance," Costco said in one of its arguments.

Upon further review: Companies commonly pay annual cash retainers to directors.

But just showing up for meetings is no longer a way to make a little extra.

The percentage of S&P 1500 companies that provide regular board meeting attendance fees fell from 60 percent to 44 percent between 2007 and 2011, Equilar said.

Instead, directors must take a more active role to get paid more.

In a proxy filed with the SEC on Dec. 14, Destination Maternity Corp. said its compensation consultant, Hay Group, said meeting fees were "no longer a typical practice."

So the Philadelphia-based retailer has eliminated meeting fees for directors' 2013 compensation. Outside directors had been paid $1,500 a meeting.

Meanwhile, their retainer has been raised from $6,250 a quarter to $12,500 a quarter.

Also, chairmen of Destination's audit and compensation committees will be paid an additional $3,750 a quarter. They previously were paid an additional $2,500 and $1,250, respectively.

Such changes "are expected to somewhat increase the annual total compensation that each of our non-employee directors receive," but "this revised policy is more in keeping with current market practices as it relates to eliminating the payment of meeting fees."

Let's stay together: More companies are kissing and telling about efforts to keep investors happy.

Oshkosh Corp., in its Dec. 14, proxy, laid out its "shareholder engagement."

"Each quarter, management contacted the 20 largest shareholders, offering them an opportunity to discuss our most recent quarterly results," the maker of heavy-duty specialty trucks wrote.

The Oshkosh, Wis.-based company also noted how, at its Sept. 14 analyst day, it gave updates, goals and spending plans for each business. It said it also has asked shareholders for advice on ways to improve the board, including asking what skills they consider important.

"We considered the responses, including the need for impartiality and to be an advocate for the interests of all shareholders, and our board's director nominees for the annual meeting include one new nominee with those skill sets," said Oshkosh, which has been under pressure from investor Carl Icahn.

Oshkosh said search firm SpencerStuart recommended Stephen Newlin, saying he transformed his Avon Lake, Ohio-based plastics business, PolyOne Corp., through divestitures, acquisitions, cost-cutting, investments and expansion.

Oshkosh assured shareholders that "SpencerStuart completed thorough reference checks" and employee-screening firm Kroll has done "thorough background checks" on the nominee.

Oshkosh also encouraged shareholders to write to its board and included the address to do so.

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