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Incentive Design Study Sheds Light on Compensation Practices

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

February 16, 2012

As we approach the second proxy season featuring Say-on-Pay votes, public companies are under increasing pressure to describe how executive pay is tied to company performance. The compensation consulting firm James F. Reda & Associates recently issued its “Study of 2010 Short- and Long-Term Incentive Design Criterion Among Top 200 S&P 500 Companies” (PDF). This study provides a good snapshot of the types of practices large companies used in 2010 (reported in 2011 proxy statements) to provide the proper incentives to executives. Among the findings:

  • Although stock options remain popular, for the first time, the prevalence of grants of performance-based awards (performance shares, performance units, etc.) exceeded the prevalence of stock options (including stock appreciation rights).
  • For short-term incentive plans (generally annual bonus plans), earnings per share and income were the most common performance measures, followed by revenue, capital efficiency ratios and cash flow. For these plans, 72% of companies used two or more financial measures. Over the past several years, the percentage of companies using only one measure declined.
  • For long-term incentive plans, earnings per share and income were the most popular measures, followed by total shareholder return (TSR) and capital efficiency ratios (return on invested capital, etc.). For these plans, 40% of companies used only one measure, with this number declining. Almost the same percentage used two measures, with a smaller number using three or more measures.

The study also provides a lot of detail on target levels, maximum payouts, disclosure practices, etc. As companies are finalizing their 2012 compensation programs and preparing their proxy disclosures, the study should provide a useful reference.

Facebook’s Governance Structure: Not Everyone “Likes” It

As reported in this recent post, Facebook, Inc., which is preparing for its IPO, has a dual-class voting structure that gives founder Mark Zuckerberg a lock on controlling the company, now and for the foreseeable future. Now, certain shareholder groups are expressing their disapproval.

Earlier this week, the shareholder advisory service ISS published a research note that criticizes Facebook’s governance structure, as described in this DealBook post. One of ISS’s statements: “This is a governance profile with a defense against everything [but] hubris.”

Further, as reported by Bloomberg, the California State Teachers’ Retirement System (CalSTRS), which is an existing investor in Facebook, is planning to send a letter to the company questioning the governance provisions.

Of course, one of the features of Zuckerberg’s super-voting stock is that he is not required to listen to any outside parties who might criticize these practices. And if investors don’t like these governance provisions, they don’t have to invest. But it will be interesting to see whether there is so much criticism that the underwriters have to press for some changes in order to attract investors. The way it looks right now, this will be a hot stock no matter what. But stay tuned . . . .


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