SEC Unveils Executive Pay Ratio Guidelines

The Securities and Exchange Commission issued its first guidelines for calculating pay ratios that compare executive compensation to that of the company’s median employee.

Companies are required to report this information in their proxy, registration and information statements, as well as annual reports for the first fiscal year beginning January 1, 2017. The rule is mandated by the Dodd-Frank law and was adopted in August 2015.

The SEC, in an update on compliance and disclosure interpretations on Oct. 18, said companies must pick a date within the last three months of their fiscal year on which to assess their employee population. The worker count should include employees whose compensation the company or its subsidiaries determine, but exclude contract workers from unaffiliated third parties. Read More

Major Investor Sues Theranos

One of Theranos Inc.’s biggest financial backers has sued the embattled startup and its founder for allegedly lying to attract its nearly $100 million investment, according to a fund document and people familiar with the matter.

Partner Fund Management LP, a San Francisco-based hedge fund, filed the suit in Delaware Court of Chancery Monday afternoon, a letter to the hedge-fund’s investors says.

“Through a series of lies, material misstatements, and omissions, the defendants engaged in securities fraud and other violations by fraudulently inducing PFM to invest and maintain its investment in the company,” says the letter, which was reviewed by The Wall Street Journal. Read More

Letter warned Wells Fargo of 'widespread' fraud in 2007

Former Wells Fargo CEO John Stumpf told Congress under oath last month that he wasn't notified of a serious fake account problem at the bank until 2013.

However, CNNMoney has obtained a 2007 letter addressed to Stumpf that warned of widespread "unethical (and illegal) activity" inside Wells Fargo and the "routine deception and fraudulent exploitation of our clients."

The letter was written by a Wells Fargo (WFC) employee, who had been transferred from the branch after raising sales concerns, and who later won a federal whistleblower retaliation case against the company. Read More

Executive pay gets boost from common owners

But that isn't always how it works in practice. Executive pay packages that don't include a comparison of company performance and that of its competitors are regularly approved by boards of directors, and many have wondered why.

New research by University of Michigan professor Martin Schmalz and co-authors Miguel Anton and Mireia Gine of the IESE Business School and Florian Ederer of the Yale School of Management helps explain why—and why benchmarking happens more in some industries than in others.

They found that when companies in an industry are owned by the same shareholders, the executives tend to be rewarded relatively more for industry performance and less for their own company's performance. Read More

Why Twitter's stock plunge is especially bad for its employees

Twitter shares plunged 27 percent in the past two weeks as potential acquirers withdrew their interest. On Friday, Salesforce.com became the latest to drop out.

While investors are hurting, the slide is a bigger problem for employees.

That's because Twitter has been highly reliant on stock as a form of employee pay. Twitter's stock-based compensation expense in 2015 of $682.1 million represented 18 percent of revenue, more than any other U.S. technology company with a market value of at least $1 billion, according to FactSet. Read More

Are Sales Goals Dead?

Sales goals were the scapegoat after John Stumpf’s brutal congregational testimony in late September.  Would his plan to eliminate sales goals have solved the problem?  We think there are many more important problems that need to be addressed.

Compensation

Sales goals are established by senior management to meet shareholders’ profit expectations and they are embedded in compensation plans to reward client-facing professionals if they meet these goals. At the end of the day crafting a sales-oriented solution is a Catch 22. 

Establishing compensation plans is an art that is led by HR professionals with the input of senior executives. In complicated financial services companies, both roles have become increasingly important. I always wondered why my bosses at Bank of America were joined at the hip to their HR executive. Now I get it, and the new regulatory initiatives are only going to strengthen this bond. Read More

Here's How Much The Wells Fargo CEO Is Getting to Leave

Even though he left on a low, John Stumpf, former CEO of Wells Fargo, will take about $133.1 million into retirement.

The beleaguered executive retired Wednesday afternoon as investors, lawmakers, and consumers grew increasingly frustrated with how Stumpf handled the fallout of the bank’s phony account scandal. He first denied that the bank’s culture had led to the 2 million credit card and deposit accounts opened without permission. Instead, he blamed some 5,300 bad employees who had been fired. Before Congress in late September, he denied that the scandal was as grave as they saw it—fanning their ire, leading the bank to clawback a portion of his pay. The bank said that Stumpf would not get a severance package.

But despite that, and giving up $41 million, Stumpf is still walking away with a pay package that goes into the nine figures, according to executive compensation research firm, Equilar, showing how large CEO pay packages are, even after executives are punished for significant mistakes. Read More

How to fix the executive compensation problem

For a long time, I’ve felt that one of the big problems with U.S. companies is the near blind focus on quarterly results. Particularly annoying is the practice of rewarding CEOs who have gutted their companies or otherwise done their firms massive damage. The departing Wells Fargo CEO who got $134M + over $500K annual sustaining income after creating the fake account scandal is the most blaring and recent example. If we keep this up I’m afraid we’ll all be unemployed because we are rewarding these folks for the wrong thing.

As a result, I was particularly pleased to see that Harvard Business Review ranked their top 10 CEOs, not by quarterly performance, but by career performance. However, I was saddened to see that only one U.S. CEO made it, NVIDIA’s [Disclosure: NVIDIA is a client of the author] Jen-Hsun Haung made the top 10. I’ve known and watched Jen-Hsun for years and he has been on my short list of CEOs who could perform in line with Steve Jobs who was ranked as last decade’s CEO of the Decade. This recognition is well deserved, but I think we need to look at this ranking as much as the person.

This method of ranking focuses on the performance of a CEO across their entire tenure not just the latest quarter or year.   Let’s talk about why this metric is a better metric than one that measures quarterly performance. Read More

What the heck is reasonable compensation anyway?

You might not be familiar with term “reasonable compensation” just yet. But come April 10 -- if not sooner -- you will be.

Why so? That’s when the Labor Department’s conflict-of-interest rule goes into effect. It’s the day when financial professionals who provide advice about the investments and insurance inside your IRA and 401(k) have to start acting in your best interest, as a fiduciary.

What’s more, it’s also the day when advisers can only charge reasonable fees or earn reasonable commissions when managing your retirement account. Read More

Tie executive compensation to this earnings metric

Analysts love to talk about “earnings.” If earnings beat expectations, they say it’s a reason for the stock to go up. If earnings are lower than expected, the stock should go down. The price-to-earnings ratio is the most common valuation metric in the financial media.

You might think, given their prominence and the fact that the Financial Accounting Standards Board governs their calculation, that “earnings” reflect a company’s profits.

Instead, GAAP earnings are subject to a number of accounting loopholes and distortions that cause them to diverge from true cash profits. CFOs themselves admit they frequently exploit these loopholes to prop up earnings and ensure management gets their bonuses. Read More

Nobel Winner Says CEO Pay Contracts Are Too Complex

A 2016 Nobel Prize winner said executive pay plans have grown too complex and cited the overuse of consultants, remarks that pay specialists on Tuesday said echoed the complaints of many investors about ever-more detailed compensation statements.

Finland’s Bengt Holmstrom, a co-winner of the Nobel Economics Prize for his work on contract theory, said that too many pay plans include contingencies or long-term performance goals that make them unwieldy.

“They have got to get to something simpler,” the Massachusetts Institute of Technology professor said of corporate boards. He was speaking at a press conference the school held on Monday after the latest Nobel Prize winners were announced. Read More

Opinion: Big investors have a different take on CEO pay than Nobel-winning academic theories

On Monday, the Nobel Prize for Economics was awarded to Oliver Hart and Bengt Holmström, two U.S-based professors. A significant section of their work focuses on how companies pay CEOs and senior executives, and their findings, along with many other academics, have contributed greatly to a significant shift in the design (and size) of CEO pay over the past few decades.

Yet while there have been many important advancements in understanding how compensation is linked to behavior, there are some significant disconnects among the academic theory (developed in part by the two Nobel laureates), its practical application and the opinion of investors.

What is often missing from conversations surrounding CEO pay is the opinion of the large, sophisticated investors that who own significant holdings of most companies in the country. And they tell a different story from the academics. Read More

New York Regulator Warns Banks on Wells Fargo-Style Compensation

New York’s financial regulator urged state-chartered banks not to align their incentive compensation with performance metrics such as the number of newly opened accounts unless they have effective risk management controls in place.

The guidance, issued Tuesday by New York’s Department of Financial Services, comes after several regulators, including the U.S. Consumer Finance Protection Bureau, fined Wells Fargo & Co. for rewarding employees who opened fraudulent checking accounts on behalf of customers who never asked for them. Wells Fargo has said the employees were encouraged by bonuses based on the cross-selling of products to existing customers. Read More

What a Nobel Prize-winning economist has to say about CEO bonuses

Are CEO bonuses too high? Just ask an economist.

On Monday, Oliver Hart, a professor at Harvard, and Bengt Holmstrom, a professor at the Massachusetts Institute of Technology, were awarded the Nobel Prize in economics for their research on contracts, in which they have examined everything from insurance contracts to employee-employer contracts.

One of the most talked-about contracts topics: chief executive compensation contracts. When asked by reporters about the bonuses that some executives get, Holmstrom had this to say: “They seem extraordinarily high,” though he also notes that “in economics we don’t really take a stand on the size of the bonus. Read More

New Compliance Oversight of Incentive Compensation Arrangements

The board, and several of its key committees, may wish to re-evaluate the extent to which organizational culture is being properly reflected in the incentive targets provided under certain executive and (especially) physician/physician group employment agreements.

Recent developments in the broader commercial sector provide a cautionary note on the compliance risks that can arise when performance incentives are misconstrued by employees to justify behavior that is inconsistent with the company’s commitment to legal compliance. When properly constructed, performance incentives can be an important component of legally appropriate employment agreements. They can help motivate executive and physician employees to achieve meritorious corporate and mission goals. Yet the recent commercial developments raise the possibility that, in certain situations, some employees may misinterpret the incentives as promoting conduct that is, in fact, completely contrary to the organization’s ethics and risk culture. These developments suggest that such misinterpretation may occur in spite of significant and explicit compliance education about the proper goals of the incentives. Read More

Preparing Employees for CEO Pay Ratio Disclosures

Public companies in the U.S. will be required to disclose the ratio of CEO pay to median employee pay in their 2018 proxy statements—reporting on fiscal year 2017—and many are already working through the calculations involved.

Prudent companies are also considering the potential impact of these disclosures on the workforce, not just shareholders. In doing so, these companies face some important decisions, both regarding the variables in the calculation itself and in how they plan to present this information. Read More

Former Linebacker Leads Compensation Charge Against NCAA

Student athletes continue to push to be included in an expansive definition of "employee"—and thus be entitled to compensation. So far, though, they haven't been successful.

A former linebacker for the University of Southern California (USC) filed a class-action lawsuit against the National Collegiate Athletic Association (NCAA) for alleged minimum-wage and overtime violations. Besides Fair Labor Standards Act (FLSA) violations, Lamar Dawson also claimed violations of California's Labor Code. The lawsuit named as a co-defendant the Pac-12 Conference, to which USC belongs.

According to the lawsuit, the NCAA and the Pac-12 failed to pay student athletes minimum wage and overtime as required by the FLSA and California law. The organizations, which the lawsuit claims are joint employers, also exercised a high degree of control in the players' on- and off-campus activities and restricted the players' ability to earn compensation. Read More

Does your personality type affect your compensation?

Making wise career decisions and choosing what major to pursue in school can all play a role toward your income as well as acquiring the knowledge and skills to meet the demands of the marketplace. What might not be as tangible as a degree are the aspects of your personality that often influence your communication style that can impact how well you interact with others.

I often talk about the significance of building rapport with people and how your communication skills can open the door to more career opportunities than just leaning on your technical skills alone. Your ability to manage people and build professional relationships is a huge factor in growing your career.

For example, take networking at conferences, no doubt there are some personalities that are more comfortable than others in meeting and greeting people. You probably know people who are shy when it comes to making new contacts versus those who can’t wait to meet a room full of new people. Read More

CHRO Pay Trails Other Top Executives

A new study of executive compensation reveals chief HR officers (CHROs) at U.S. private companies are expected to earn a median salary of $117,000 in 2016—a 6.4 percent increase over 2015. The median expected CHRO bonus is expected to be $15,000—a 20 percent increase over 2015, if achieved.

The findings are reported in the 2016-2017 CEO and Senior Executive Compensation Report for Private Companies, published by the Chief Executive Group, a Stamford, Conn.-based research firm, and are based on compensation practices from over 1,300 private companies throughout the U.S. The firms were surveyed in April through June 2016 about their 2015 fiscal year compensation levels and practices, as well as their current and expected cash compensation levels for CEOs and senior executives in 2016.

Comparisons with Other Top Officers

Looking at 2015, the median salary for a CHRO at a private company comprised total cash compensation that was less than other senior-level positions, the report shows. Read More

Settlements of Director Compensation Litigation Raise Issues

Recent lawsuits have challenged director compensation under Delaware law at several public companies. The issue at the core of these lawsuits is that outside directors are viewed as interested parties with respect to their own compensation (cash or equity). Therefore, any compensation program that applies to outside directors runs the risk of losing protection of the business judgment rule under Delaware law because of arguable self-interest. Without the protection of the business judgment rule, the outside director compensation plan would be subject to scrutiny under the “entire fairness” doctrine of Delaware law. Although any particular compensation plan may survive review under the “entire fairness” standard, most companies do not want to subject their compensation arrangements to such a review or run the risk of defending a claim on the merits at trial. As a result, when such an arrangement is challenged, the company involved may choose to settle the matter.

Recent settlements indicate the direction in which these settlements are headed. Although the set of cases actually settled to date is not large enough to form the basis of confident generalization, the following items may be part of the mix. Read More