a 2012 step program for detoxifying your executive pay plans
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Presented at WorldatWork 2012 by Hay Group's Dan MoynihanTRANSCRIPT
May 22, 2012
A 2012 Step Program for Detoxifying your
Executive Pay Plans
2© 2012 Hay Group. All rights reserved
Discussion areas
Introductions
Current Environment
2012 Step Program
Key Learnings at CEDC
Q&A
1
2
3
4
5
01Introductions
4© 2012 Hay Group. All rights reserved
Introductions
Presenter
Dan Moynihan, Principal, Executive Compensation, Hay Group
[email protected] | 201.557.8423
5© 2012 Hay Group. All rights reserved
About Hay Group
Global organizational and human resources consulting firm
Compensation and benefits consulting
Employee, organizational and customer research
Executive coaching/leadership development
Organizational effectiveness and management development
Work design/strategy alignment
Information business
Founded in 1943
Offices in 49 countries
Ten US offices
6© 2012 Hay Group. All rights reserved
About Central European Distribution Corporation
CEDC is one of the world’s largest vodka producers - $2B annual revenues
It maintains leading positions in all of its key markets:
Poland, Russia and Hungary
Our brand portfolio includes valuable and recognized brands like BOLS, Żubrówka,
Absolwent and Soplica in Poland; Green Mark and Parliament in Russia; and
Royal Vodka in Hungary.
02Current Environment
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Overview
What are the key issues?
Dodd-Frank provided a “perfect storm” of shareholder empowerment around
executive pay
The Act arms shareholders with more information, power, access and
ultimately responsibility than before, while making it harder for management
to accumulate votes
In response to increased pressure from shareholders and proxy advisory firms,
as well as recent Say on Pay legislation, companies continue to monitor their
executive compensation programs
Only 41 companies failed in 2011, and thus far we have had 4 fail in 2012…is
the hubbub worth it? (as of 4/20/2012)
Given today’s intense scrutiny of executive compensation, we are seeing
companies and compensation committees re-evaluate their programs annually
and to make changes to comply with stakeholder concerns
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What's next?
The 2011 voting results have some compensation committees more relaxed
than they were before the results were known.
Too soon to tell for 2012
We believe that the single biggest factor influencing the say on pay voting
trends this proxy season has been strong company performance
The fact that pay programs have been “cleaner” has certainly had impact
But at the end of the day, shareholders will make 2012 all about company
performance
Don’t be fooled by the modest shareholder reaction of 2011 – if performance
declines while pay does not, you can be sure that shareholders will make
themselves heard in 2012!
Citibank is the most notable case to date
A false sense of security?
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The situation at CEDC
In 2009, ISS withheld their votes on several directors for PFP issues and
excise tax gross-ups
The pay packages were not in line with the market
The Compensation Committee chair resigned from the Board
A new Committee was formed and a new Chair named
Clean-up began on
Employment Agreements
Ownership Guidelines and better shareholder alignment
Removal of gross-ups
Realignment of equity plans
More performance based pay
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The situation at CEDC
In 2010, changes to the LTIP, and a clean bill of health from ISS – Low
concern
In 2011, redesign of AIP to better meet the needs of business
In 2012, stock performance and pay may be misaligned
The Company is working closely with Hay Group and ISS to rectify prior to
the proxy release
032012 Step Program
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2012 Step Program
1. Admit we are powerless over scrutiny
2. There is a power greater than our
compensation plan
3. Turn our plans over to the path of
righteousness
4. Do an inventory of our plans and issues
5. Admit we have made mistakes with our
pay plans
6. Admit we are ready to fix our plans
7. Ask to fix the shortcomings
8. Make a list of the problems, and
share with your team
9. Fix the issue, and make amends with
stakeholders
10. Continually take an inventory of
where we are, and fix any on going
issues
11. Focus on carrying out the plan
12. Spread the message to others who
need help fixing their plans
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1. Admit we are powerless over scrutiny
Evaluate the stakeholder base
Employees
Unions
Shareholders
Institutional shareholders
Media
Watchdogs
ISS, Glass Lewis, etc.
Begin pro active communication with affected groups
Stay true to yourself
Best practice vs. Best fit
Critical to understand where the
issues are with these groups, and
be proactive in approach to
working with them
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2. There is a power greater than our compensation plan
ISS and their ilk
Once we accept that we must deal with these activists, we are better prepared
A force to be reckoned with
Their power is perceived, and not always real
Success with outreach
In order to get to a successful Say on Pay vote, shareholder outreach is advisable
Build the story of why, not just what you did
There is power to the story
ISS/Glass Lewis can be reasonable
Work with them towards a satisfactory outcome
Begin the conversation off cycle
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2. There is a power greater than our compensation plan (cont.)
ISS – Losing Influence?
Shareholders seem to be less influenced by ISS on say on pay – at least this proxy season
Only small number of companies that ISS recommended AGAINST lost their votes in
2011
However, a number of companies changed programs after receiving the ISS
recommendation and before the shareholder meeting
Direct shareholder outreach may be able to overpower ISS recommendations
More pressure on shareholders to not “rubber stamp” their vote
Investment manager proxy voting will be a matter of public record
More institutions developing their own “books”
All that said, every compensation committee in America continues to be aware of the ISS
standards around executive pay
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3. Turn our plans over to the path of righteousness
Live by the rule of business judgment
Develop a Compensation Philosophy that is fair and just, and works for the business
If you have 75th percentile performance, then you can justify 75th percentile pay
Strategy
Make sure that the HR and pay philosophies match with current business strategy
Too often we change the course of the business, but forget to adapt our pay
strategy to match
Develop a story line that connects the dots between business strategy and reward
strategy
Charter
Review the Compensation Committee Charter
Ensure that they are overseeing the right things
Best Practice
Does not always equal best fit
Just because others are doing it, does not make it right for your business!
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4. Do an inventory of our plans and issues
Compensation program audit
Need to really understand all of your plans and practices
Great time for tally sheets for the Committee
Problematic Pay Practices
Gross-Ups
Higher than 75th percentile pay
Inexplicable peer group
Be honest with yourself
PFP Analysis
Be proactive with this, and understand when you will have an issue
If company performance and/or stock performance over time is declining, need to be
aware that issues with PFP will arise
Again, BE PROACTIVE
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5. Admit you have made mistakes
Did your audit uncover any of these hot buttons?
“Hot Button” Description
1. Employment contracts Egregious employment contracts with multi-year pay guarantees, non-
performance based bonuses and/or equity compensation
2. New CEO with overly
generous package Excessive “make-whole” provisions without sufficient rationale
3. Large bonus payouts
without justifiable
performance linkage or
proper disclosure
Performance metrics that are changed, canceled or replaced during
the performance period without explanation of the action and link to
performance
4. Egregious
pension/SERP payouts
Inclusion of additional years of service not worked or inclusion of
performance-based equity awards in the calculation
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5. Admit you have made mistakes
Do you need to fess up to these?
“Hot Button” Description
5. Excessive perquisites
Perquisites for former executives, such as lifetime benefits, car
allowances, or personal use of corporate aircraft
Extraordinary relocation benefits (including home buyouts)
Other perquisites including personal use of corporate aircraft, home
security systems and car allowances
6. Excessive severance
and/or change in
control provisions
Change in control payments exceeding 3 times base salary and bonus
or without loss of job or substantial diminution of job duties
New or materially amended employment or severance agreements that
provide for modified single triggers, under which an executive may
voluntarily leave for any reason within 1 month period following the 12
month period and still receive the change-in-control severance package
or that provide for an excise tax gross-up
Payments upon an executive's termination in connection with
performance failure
Liberal change in control definition in individual contracts or equity
plans which could result in payments to executives without an actual
change in control occurring
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5. Admit you have made mistakes
Need to make amends for these?
“Hot Button” Description
7. Tax Reimbursements
Reimbursement of income taxes on certain executive perquisites or other
payments (e.g., personal use of corporate aircraft, etc; see also excise
tax gross-ups on previous page)
8. Repricing or replacing
of underwater stock
options
Without prior shareholder approval (including cash buyouts)
Voluntary surrender of underwater options by executive officers may be
viewed as an indirect option repricing/exchange program, especially if
those cancelled options are returned to the equity plan, as they can be
regranted to executive officers at a lower exercise price and/or the
executives can subsequently receive unscheduled grants in the future
9. Internal pay disparity Significant differential between CEO total pay and that of next highest-
paid named executive officer (NEO)
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6. Admit we are ready to fix our plans7. Ask to fix the shortcomings
Ok, so you have made some mistakes
Disclose it
Amended proxy filings explaining why ISS/Glass Lewis “got it wrong”
Shareholder calls and meetings
8-Ks disclosing new programs
We will fix it
Commit to making it right
Most difficult areas are gross up’s and elimination of single trigger
Want to keep executives engaged and motivated
They see the removal of these as huge take-aways
New philosophy
Outline the changes, and how your philosophy on pay has shifted
Use CD&A for this
Step away from the bar…
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8. Make a list of the problems, and share with stakeholders
Outreach is essential
Create the full list of issues
Prioritize and identify any unintended consequences of change
Create a timeline for reparations
May not be possible to make all changes in one year
Especially if making complex changes to LTI plans, which often include a
shareholder request for more shares
Communicate
Good to involve multiple parties, based on your unique situation
Board
Compensation Committee
Executive Management
Internal Compensation, Finance, and Legal Teams
External Consultants and Legal Team
ISS and/or Institutional Investors
24© 2012 Hay Group. All rights reserved
9. Fix the issue, and make amends with stakeholders10. Continually take inventory, and fix on going issues
Fix it
Say mea culpa
Monitor the plans to ensure they don’t get away from you
Review the plans as things change
Clawback policies will be a big issue for the 2013 proxy season
Final rules should be available, and ISS will expect swift action to ensure that
companies are complying with the new regulations
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11. Focus on carrying out the plan
Stay committed to the cause
Remember, that Compensation has four goals:
Helps to attract new talent
Helps with retention of talent
Acts as a motivational tool
Helps to focus the executive on what is important to the business
Solid compensation plans will fit the business, link to shareholder return, and will be a
tool for helping to run the business
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12. Spread the message to others who need help
Once you have seen the light…
Share the vision with others
Become a compensation evangelist
04Key Learnings at CEDC
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The CEDC Story
Withheld votes on 2 directors in 2009
PFP disconnect
Excise tax gross ups
Subsequently eliminated from new contracts
2010 – low concern
There is no disclosure regarding a holding period for stock option grants to
executives
Created holding period
2011 – median concern
Directors are subject to sub-standard stock ownership guidelines
Fixed in mid-2011, and disclosed in July
The company did not disclose a clawback provision for variable cash
compensation
Awaiting final Dodd Frank rules
2012 – PFP likely to be an issue again
From ISS Withhold to Positive Outcomes
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What was learned
Audit revealed issues that were forgotten or missed due to piecemeal approach to
compensation
New committee re-evaluated the entire package
Reviewed tally sheets to understand the historical issues for their executives
Fixed problematic pay practices
Better outreach to shareholders on key issues
For 2012, in the process of a share request for a new LTI plan
Got ISS involved at the beginning
30© 2012 Hay Group. All rights reserved
What to Expect in 2012 and 2013
Continued government interest and involvement, specifically through Dodd-Frank
Due to shareholder and proxy advisory firm influence, continued conservatism around the
optics of certain pay program features and design:
Double triggers on equity plans
Lower severance multiples
Elimination of excise tax gross-ups and less perquisites
Increased share ownership guidelines or holding requirements
However, due to current performance equity designs, more volatility of outcomes
More pay for performance alignment
Companies using stock options and PSUs have significant leverage in their LTI program
Increased use of TSR-based performance plans to ensure executives don’t win if
shareholders lose
More companies will defer a portion of bonuses into stock
Both a “risk in compensation” issue as well as a mechanism to enforce clawbacks
Don’t be fooled by the modest shareholder reaction of 2011 – if performance declines while
pay does not, you can be sure that shareholders will make themselves heard in 2012
Overview
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TopicWhat Makes
Business Sense?
What Do
Shareholders Want?
Where’s The
Breaking Point?
Issue for
CEDC?
Pay
Philosophy
Pay positioning that maps to
competitive positioning
Pay positioning that
maps to competitive
positioning
Targeting P75
without P75
performance
Not an issue
Pay MixMapping pay mix to key time
horizons for the business>50% in LTI for CEOs >50% in STI Not an issue
Performance
Measures
A balance that rewards
something when returns are
low but the team outperforms
plans and the market
High absolute returns
AND relative
outperformance
Big payouts when
shareholders lose
Have paid $0
bonuses in
last 2 years
STI /
Bonuses
Allowing some discretion when
warranted; Balancing financial
and strategic measures
Formula-driven
financial performance
Overriding the
formula with big
discretionary
payouts
Limited
discretion
LTI
Performance vesting when
linked to the “right” measures
and key milestones
Less dilution
Performance vesting
Lack of a
performance-vested
vehicle
LTI plans
balance time
and
performance
What to Expect in 2012/2013
Companies need to be aware of the “breaking point” for each pay element
32© 2012 Hay Group. All rights reserved
TopicWhat Makes
Business Sense?
What Do
Shareholders Want?
Where’s The
Breaking Point?
Issue for
CEDC?
PerquisitesSome of these, some of the
timeNone of them
Gross-ups,
excessive personal
use of plane
None
anymore
Change in
Control
Incentive for executives to be
aligned with the best interest
of shareholders
Double-triggers
2x payouts (from 3x)
Single triggers –
even on equity –
and gross-ups
, Double
Trigger for
other NEOs
Managing
Risk in Pay
Some balance – but not too
much
Pay profile that maps to the
risk profile
Balance, but with a
focus on shareholder
value
One measure that
drives most of the
pay
Not an issue.
Multiple
metrics to
balance risk
What to Expect in 2012/2013
Companies need to be aware of the “breaking point” for each pay element
Q&A
34© 2012 Hay Group. All rights reserved
Presenter
Dan Moynihan, Principal, Executive Compensation, Hay Group
[email protected] | 201.557.8423