CEO-to-Worker Pay Ratio Rule

 Robert B. Jones, JD, CPA, CEBS, CSCP  CEO, Innovative Compensation and Benefits Concepts, LLC  Conshohocken, PA  November 22, 2011Robert Chapter B. Jones, JD, CEBS, CSCP Philadelphia ofCPA, NACD  CEO, Innovative Compensation and Benefits Concepts, LLC 2014 Compensation  Philadelphia, PAUpdate: “Following Februrary the Right 22, Path 2011 in 2014”

Robert B. Jones, JD, CPA, CEBS, CSCP CEO, Innovative Compensation and Benefits Concepts, LLC Philadelphia, PA May 14th, 2014

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Quotable “Despite our concerns regarding the goals of the original provision, we understand that as a matter of U.S. law, …SEC… is mandated to pass a rule implementing it. In a previous comment letter…..sent Nov. 18, 2010, NACD noted an “unfavorable costbenefit ratio for the rule, with no perceivable benefits and significant costs,” and urged the SEC to implement this provision with “extreme care. We still believe this to be true…”. NACD letter of 12/1/13

“The pushback is that this calculation between top executive

pay and median employee pay is actually a really hard calculation to make. It can be extremely hard with a global corporation with hundreds of thousands of employees or even millions of employees in the case of a company like Wal-Mart to figure out what exactly the median employee's paid, especially since some work part time, some may work in other nations”. Lynn Stout, Cornell Law Professor, NPR, 10/26/13 1

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Today’s Agenda

1. Brief Review of executive pay practice trends for 2014.

2. Brief Review of best practices for Say on Pay in 2014. 3. The New Dodd-Frank SEC Pay Ratio Rule-Value or Folly?

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The Changing Compensation Environment—Companies Continue to Re-Think their Compensation Strategy

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The changing compensation environmentrethinking the compensation strategy Significant Forces Affecting Executive Compensation in 2014 Regulators • SEC

Financial

• FASB and IASB

• Manage earnings expense

Lawmakers

• Manage dilution

• Sarbanes-Oxley Act • Deferred comp reform • More from Congress?

• Cost vs. perceived value • Economic conditions

Impact on Future Designs Stakeholders • • • • •

Stock Exchanges

Shareholders Proxy advisory firms Employees/Retirees Labor unions Corporate governance

• New proposed governance rules • Listing requirements

Media • Heightened vigilance and skepticism 4

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Major Issues in 2014 In a “perfect storm” 3 main issues are surfacing at once: How can organizations be confident that their compensation programs are fully aligned with 2014 business objectives? What does the current regulatory environment mean for the future design of executive remuneration programs? How can organizations be sure that their rewards programs attract, retain, and motivate their top executives for the long term?

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1. Executive pay practice trends for 2014

Innovative Compensation and Benefits Concepts

Key Equity Compensation Trends from 2013 For the 3rd year in a row, long-term performance shares increased in prevalence. According to one major survey, they are now used by 81% of the Top 250 (up from 75% in the 2012 report), and are the most prevalent form of equity. Restricted stock usage has also increased this year, from 58% to 63%, while the use of stock options and long-term cash plans remains largely unchanged. Companies are still emphasizing a portfolio approach to their long-term incentive programs (LTIPs), with an increasing number of companies using 3 LTI grant types (39%), while those granting one or two types declined. Total Shareholder Return (TSR) has become the most prevalent performance metric (for the first time) for LTIPs, featured in 50% of all performance awards, as companies continue to look for ways to tie executive compensation to shareholder experience at the urging of proxy advisory firms and shareholder advocates. Overall, the design of LTIPs has become more complex as the number of grant types, number of performance award measures, and prevalence of the concurrent use of absolute and relative measures all increased. Source: Frederic W. Cook & Co. 2013 Top 250 report 7

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Current Equity Pay Trends

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Because of the rising stock market last year, while the total dollar value of LTIP awards increased, the number of shares required for those awards decreased. The use of full-value awards continues to increase, with companies showing a median equity mix of 67% full-value awards and 33% appreciation awards based on the number of shares granted, and 86% full-value awards and 14% appreciation awards based on the fair value of equity awarded in the year. For the near term, it seems clear that full-value awards, particularly performance-based awards, will continue to be the primary award vehicle in the LTIP portfolio of large U.S. companies. However, while decreasing in influence, stock appreciation awards are in no danger of disappearing and continue to have a place in the LTI mix. The evolution in equity award usage will continue. Source: Frederic W. Cook & Co. 2013 Top 250 report 8

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So what’s the problem ?...... Major Disconnect between the views of investors and the views of directors: Nearly 3 in 4 investors (72%) say that the executive pay model in the US has led to excessive CEO pay levels while only 1 in 5 directors (20%) say the executive pay model has led to excessive pay levels 7 in 10 directors (70%) say the executive pay model at most companies is closely linked to company strategy, compared with just 1 in 3 investors (34%). Less than one-fourth of directors (23%) say executive pay is overly influenced by management, versus two-thirds of investors (66%). Source: Towers Watson, January 16, 2014; Evolving Director and Investor Views of Executive Pay in the Say-on-Pay Era 9

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Current Equity Pay Trends

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According to one survey, stock grants are most common, followed by performance shares/units. Stock Grants/Awards:

81%

Performance Shares/Units: 72% Stock Options/SARs:

54%

Source: Deloitte/ NASPP Annual 2013 Survey—”Top Trends in Equity Plan Design”

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Say on Pay for 2014

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Executive Summary Key Takeaways from the Past Year: Compensation committees have become more disciplined and effective in analyzing and designing executive compensation programs.

The adoption of Say-on-Pay for publicly-traded companies and additional shareholder scrutiny of executive compensation arrangements have definitely played a role in the increase of granting performance-based awards. Most companies, even those with good Say-on-Pay shareholder voting results, have been proactively reaching out to shareholders over the past few years to interactively discuss, review and analyze what their key shareholders think about executive compensation. 12

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Say on Pay Results 3,363 companies held Say on Pay votes in 2013 73 companies have failed with an average 60% “Against” vote (Two additional companies received less than 50% ‘For’ but considered the vote a win because ‘For’ votes outnumbered ‘Against’ votes due to abstentions).

15 companies failed previous votes 70.6% of companies have received a greater than 90% ‘For’ vote 8.4% Average ‘Against’ vote 1.8% Abstentions [One company, Looksmart, received 100% ‘Against’ on their Say on Pay vote] 13

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Say on Pay Results

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Total fail rate= 2.2% Average vote for those who passed: 91% Average vote for those who failed: 37% >90% “For” vote: 70.6% 70-90% “For” vote: 20.8% 50-70% “For” vote : 6.2%