CHALLENGES FOR THE COMPENSATION COMMITTEE IN 2014

RC: What are some of the key trends and developments you have seen regarding executive pay in recent months?

Haggerty: The pressure of say-on-pay votes and influence of proxy advisory firms continues the trend of companies adopting ‘one size fits all’ or homogenisation of executive compensation programs. It is true that say-on-pay votes have encouraged some valid governance enhancements, for example, significantly more shareholder outreach by many large companies. However, in order to minimise the potential for a negative say-on-pay vote outcome, many companies are changing their pay practices based more on potential external views than business or talent needs. This is particularly apparent in the design of performance share plans with the increasing use of relative total shareholder return (TSR) – at nearly 50 percent prevalence. In terms of developments, we see many companies taking a renewed focus on aligning pay and performance and revamping change in control (CIC) programs. Reviewing incentive performance measures has always been a key responsibility of compensation committees. Recently, we see compensation committee members asking harder questions and probing for enhanced explanations.

Kohn: Companies continue to emphasise pay-for-performance, and an increasing number have granted performance-based stock units or ‘PSUs’ in lieu of the more traditional time-based vesting restricted stock awards. There has also been a greater movement toward granting cash and stock awards with longer performance or time-based cliff vesting periods, typically three or more years. Some companies have eliminated or reduced pre-wired change in control protections that were customary. For example, some companies have moved from single to double-trigger vesting of equity awards in their plans, or provide accelerated vesting only if awards are not assumed by an acquirer. In practice, many companies continue to accelerate the vesting and payment of equity awards in a live CIC scenario as negotiated in merger agreements. Companies continue to eliminate tax gross-ups in their employment and change in control agreements, and have moved to reduce the CEO’s CIC severance multiplier from three to two years.

Oct-Dec 2014 Issue

Cleary Gottlieb Steen & Hamilton LLP

Gibson, Dunn & Crutcher LLP

Pay Governance LLC

Ropes & Gray LLP