The Dodd-Frank Wall Street Reform and Consumer Protection Act attempted to create more accountability for shareholders by allowing them to vote on executive compensation packages. Dodd-Frank mandates both periodic “say on pay” votes and, in some cases, “say on golden parachute” votes when a company is involved in a change of control transaction, such as a merger.
There are varying opinions as to whether these relatively new legal standards are a positive influence on corporate America. But what’s for sure is that boards are paying attention. The executive pay conversation has grown louder, whether it’s about CEOs or their somewhat less well-compensated general counsel counterparts, and while much of the talk is about the annual pay package, boards are also taking note of how they pay executives during times of transition in company ownership.
Jeffrey London, a partner at Kaye Scholer who specializes in compensation design, told CorpCounsel.com that he sees the trend toward greater executive pay scrutiny as one that started well before Dodd-Frank became law of the land. “The concept of pay for performance—it was evolving anyway,” said London, who recently coauthored a newsletter piece about compensation votes and golden parachutes. He explained that between public discussion and a push from such major proxy advisory firms as Institutional Shareholder Services and Glass, Lewis & Co., some shift in the way executive compensation works was on its way.
Often, this means having companies talk to institutional investors directly about what they are looking for in a more performance-aligned compensation deal. “Companies are really getting fairly active in what I characterize as shareholder engagement,” London said.
There’s been a lot of discussion about how say-on-pay votes are impacting compensation, but a bit less about the changes spurred on by say-on-golden-parachute votes. One telling development that London identified was the decrease in accelerated vesting for executives when their companies change hands. It’s been a common practice for companies experiencing a change to allow executive shares to vest sooner, so the exec can collect before the change happens. However, this is less frequently the case now.
Another major change, London explained, is in severance packages of executives in change-of-control situations, if these leaders are losing their current job in the new company structure. “You see more and more of a push for severance to go away once you hit a defined retirement age,” London said. The idea of capping an executive’s severance when reaching a certain age—say, 65 years old—is based on the fact that by this point he or she is probably retired anyway. Some shareholders see this as a way to rein in spending, but not everyone agrees that it is fair to the employee.
A third major trend for golden parachutes is the decrease in use of excise tax gross-ups for executives who get these packages during a change in control. In some cases, executives have been compensated using gross-ups for the money they lose after the tax the government levies on golden parachutes that are above a certain size relative to the executive’s normal compensation is paid out. London noted that the use of these gross-ups has been on the decline for a while, but shareholder votes have probably spurred the downward trend along. One solution some of his clients use is a “best net” approach, in which the company cuts the value of the golden parachute if doing so will allow higher post-tax compensation for the executive.
Given all of these trends and changes in the way executives get paid, what is a board of directors to do? London suggests finding a peer group of companies and using their compensation data as a helpful comparison. If the board deviates too far from the norm among members of the peer group, then it better have an explanation for curious shareholders when the next vote on say on pay or say on golden parachute comes around. “If your shareholders buy into it, then you’ve done your job,” London said.