Last week the Governance Center held a webcast on Executive Compensation and the 2012 Proxy Season. Our panelists had a number of tips for companies as they approach the second year of say on pay and prepare their proxy statements:
- Don’t be overconfident. Even if your company received significant majority support for its say on pay proposal in 2011, don’t take anything for granted in 2012. As we begin the current election year, continued high unemployment in the United States and concerns over economic disparity make executive compensation a potentially incendiary issue. Therefore, take nothing for granted in examining and disclosing company pay practices and programs.
- Know your audiences. Understand how shareholders view your company’s executive compensation and areas of concern. Also consider the influence and concerns of other audiences, including proxy advisory firms, employees and others. While not all pay practices will or should comply with the preferred pay practices of all of these audiences, be prepared to explain the rationale for your company’s pay program. Disclose the reasons behind specific pay practices that you know may be are controversial.
- Be prepared. Know how new proxy advisory firm guidelines will affect recommendations on your company’s say on pay proposal. Being armed with this knowledge provides a significant advantage in developing your company’s disclosures. This is particularly important as companies face new ISS guidelines for determining peer groups and analyzing pay for performance.
- Don’t lose sight of the fact that proxy statements are communication vehicles. While proxy statements must satisfy legal requirements, don’t lose sight of their fundamental purpose to communicate with shareholders.
- Use headings, charts, white space, plain language and other tools to make the proxy statement easy to understand and facilitate finding information.
- Ask people not involved in drafting the proxy statement to review the disclosures and provide input on how well it serves its communications function (e.g., investor relations personnel).
- Know who votes company shares. Know who is responsible for voting decisions of company shareholders and who to contact if an issue arises. Understand how shareholders use proxy advisory firm recommendations in their voting decisions.
- Explain your peer group. In addition to providing basic information about how your company’s peer group is selected, consider whether companies have been added to or omitted from the peer group that will raise questions from a shareholder or proxy advisor perspective. Consider explaining proactively in the proxy statement why the company was added or omitted from the peer group. Apart from the compensation process, directors and compensation committee members should be aware of industry peers and competitors to be in the best position to evaluate the appropriate peer group.
- Use supplemental solicitation materials wisely. While supplemental solicitation materials may be required in some circumstances, such as a new development after the original proxy statement is filed, these materials can get lost in shuffle of a busy proxy season. If important new information is provided, be sure to communicate with proxy advisory firms and key investors to make sure they are aware of the supplement. Supplemental solicitation materials can be a good way to remind shareholders of a company’s key messages right before shareholders vote.
- Givebacks may be worth considering. Say on pay votes largely reflect a vote on the past. In some circumstances, executives may prefer to give back awards if unforeseen circumstances occur that make the award no longer appropriate. Such a decision needs to be carefully examined to assure that the company and the executive are aware of all the consequences of such a decision (accounting, disclosure, tax, etc.)
- Explain non-GAAP metrics or adjustments to measures. Often companies will decide that non-GAAP measures are appropriate additions to or replacements of GAAP measures, or that adjustments should be made to GAAP measures. Be sure to explain the business reasons for making these adjustments and comply with SEC rules regarding non-GAAP financial measures.
- Impeccable process and paperwork. Assure that your board follows an appropriate process and develop and maintain a complete record that supports the process and analysis.And one advance tip for 2013:
- Engage with shareholders and proxy advisors in the “off season.” In the midst of the proxy season, investors and proxy advisory firms are slammed with analyzing and voting on hundreds of company proxies. As is the case with companies, shareholders and proxy advisors have more time to interact with company representatives and give feedback about issues, concerns and questions during the off-season.
For more tips on preparing your 2012 proxy statement, watch the recording of last week’s Governance Watch on Executive Compensation and the 2012 Proxy. (Flash required)