Choate Co-Sponsors Event Covering Trends in Executive Compensation

 | October 7, 2009

Fall Conferences on Executive Compensation in Challenging Economic Times

Organization:  DolmatConnell & Partners
Location:  Waltham


Impending legislative and regulatory changes, as well as pressure from investors and the public generally, will have a profound effect on executive compensation practices and outcomes in 2010 and beyond.  Co-chair of Choate's Buisness & Technology Group William Asher and partner Arthur Meyers recently participated in the DolmatConnell & Partners Fall Conference on Executive Compensation to discuss major developments and trends in this area.  The top takeaways from the conference included the following:

1. TARP spillover.  Regulatory experimentation with TARP companies will continue to have a spillover effect on companies outside the financial services industry.  Expect to see the TARP focus on long-term incentives followed on a more widespread basis.

2. “Say on Pay” stockholder advisory votes.  To date, tepid investor response to “Say on Pay” stockholder advisory votes involving TARP companies suggests that this measure may have less impact than originally anticipated, at least initially.  Director withhold-vote recommendations by proxy advisory firms such as RiskMetrics will continue to represent the most effective pressure on boards of directors to reform compensation practices.

3. Stock ownership guidelines and retention requirements.  Both will become more prevalent as investors push for tighter long-term alignment of interests between management and stockholders.  Care should be taken in tailoring these to the particular circumstances of the company.

4. Finding favor with investors and proxy advisory firms.  Boards should start to garner favor with investors and proxy advisory firms by addressing the “easy stuff” first, such as curtailing excessive exit payments under change in control and severance agreements, eliminating single-trigger payment hurdles and doing away with tax gross-up payments. 

5. Replenishing depleted stock pools.  Companies burned through stock plan reserves in the past year as equity award share numbers ballooned due to low stock prices.  The 2010 proxy season will see many companies seeking stockholder approval to replenish depleted stock pools, which will set the stage for confrontations with investors dissatisfied with executive compensation practices.

6. The link between compensation practices and excessive corporate risk-taking.  The major new issue to be addressed by compensation committees in 2010 will be to assess the linkage between compensation practices and excessive corporate risk-taking.  This will be an enormous challenge for directors, as there is scant experience and little practical guidance on the topic.

7. Committee independence.  Compensation committee independence is a top-of-mind issue for regulators and investors.  Boards should re-evaluate qualifications of committee members and relationships with consultants and advisors to eliminate even the appearance of conflicts of interest.

8. Dynamic modeling of compensation outcomes.  The unanticipated consequences of the 2008-2009 economic meltdown on past executive compensation decisions underscores the importance of dynamic modeling of compensation outcomes over multiple time periods and under a range of positive and negative performance scenarios.

9. Board culture.  Tension between management and directors is on the rise due to increasing board conservatism on compensation matters.  Avoiding harm to board culture and effectiveness should be a high priority in all companies.

10. Stock option exchange programs.  The 2009 stock market rebound has moderated the need for companies to seek stockholder approval to implement stock option exchange programs.

11. Effective option exchange arrangements.  Companies that do desire to put option exchange arrangements in place must plan far in advance to assure effective coordination of the legal, design, accounting valuation homework and internal and external communications required to approve and implement an exchange program.

12. Cash-based incentives.  In the private company realm, the elongated runway to an IPO or M&A exit has changed the dynamics of executive compensation, as management and key employees fully vest in stock awards and dilution pressure limits flexibility to “re-up” option grants.  As a result, cash-based incentives are becoming a more significant element of compensation for more mature private growth companies.

13. Section 409A compliance.  Private companies should avoid cheap, check-the-box stock valuations for Section 409A compliance purposes.  Changing assumptions about financing requirements, exit scenarios and other variables can have a dramatic effect on stock valuations.  Particularly at the time of an IPO, deficient valuations can result in delay, increased cost and, in the worst of cases, restatement of prior period financial statements.


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