Earlier this week, we announced our first foray into the survey industry, a very big step in our corporate evolution. During our eight year history, access to data has never been an issue, whether for us, or for any of our competitors. Our solutions have been based on publicly available data, primarily compensation data from proxies and other SEC filings in addition to stock price information from market data providers. While quite a bit of analysis and quality assurance goes into the finished solution, fundamentally, source data is in the public domain.

So why take on the unenviable challenge of sourcing proprietary data? Very simply, because our clients asked us to. Since we launched our first executive compensation product in late 2001, right around the time of the surfacing of Enron and Andersen (as they say, better lucky than good!), our clients have continually asked us to provide a deeper look within an organization and go beyond the Top 5.

The good news is that a substantial amount of the data that we’ll need to fill this gap is already publicly available in Form 4 filings, a little known fact that goes surprisingly unnoticed by many boards, executives and compensation professionals. In 2003, the SEC changed Form 4 disclosure rules to require that all equity grants be disclosed for all Section 16 officers, typically the top 10 to 15 executives at most companies. Yes, it’s all out there, but for anyone who has ever had to search through Form 4s, recreationally, it’s on par with sticking hot needles in one’s own eyes.

Given that equity awards typically generate the greatest amount of attention, accurate and, more importantly, transparent long-term incentive (LTI) data for the top 10 to 15 executives is a great starting point. In addition, with the strong support from a number of companies offering to provide the missing pieces, we felt that the time was right for us to take this next step.

With the combination of our technology, expertise in working with SEC data and a committed client base, our mission is to fundamentally change how executive compensation analysis is performed and improve the analysis experience for everyone. Creating a survey to fill this void is the missing piece. For the first year, our plan is to focus on companies in the Fortune 250. What we’re finding is that the demand for our services is especially strong in certain industries and that we’ll be including a number of companies beyond the Fortune 250 based on client feedback.

If you’ve had experience with executive compensation surveys and have suggestions, we’d love to hear your thoughts on what you’d like to see from us. We’re off to a great start and I’ll have some exciting updates for you shortly. Stay tuned. To learn more, read our press release from May 6.

As one would expect, the past couple of weeks have been extremely busy for yours truly. In addition to my regular CEO duties, one area that goes into overdrive this time of the year is the presentation circuit. April included trips to the Conference Board (twice), MCA, ICG and Stanford Law School, not to mention our annual proxy season webinar in mid April (once again, our apologies!). And April was just spring training. With several May presentations around the corner, it would not come as a surprise if my kids happen to forget who’s their daddy.

That being said, the area that continues to get the greatest amount of interest in all of my presentations is performance target disclosure. As I had written earlier, this was clearly a point of contention during last year’s proxy season. And with the SEC’s rabid interest in this area as indicated by the 350+ comment letters sent to issuers in the fall, many expected the fireworks to continue this spring. In our April newsletter, we published an analysis of Fortune 100 companies and found that the disclosure of performance targets for annual incentive bonuses was (are you seated?) up over 25 basis points, from 44% in 2006 to 68% in 2007.

In the rough and tumble world of proxy disclosure, this is big news. (It doesn’t take much to get us excited at Equilar.) Frankly, this came as a shock to me and others at Equilar. Early studies indicated that most companies were going to stick to their guns and NOT disclose performance targets. From talking with several issuers, it was interesting to hear how this was a major point of contention as companies were preparing their proxies. It was interesting to see that the majority of companies ended up disclosing it. It’s good to see the good guys coming out ahead this year.

As the son of an accountant, I was conditioned from a very early age to expect March and April to be busy times of the year. My dad, who is a partner in a boutique accounting firm in New York City, worked late nights and weekends each tax season. While I didn’t follow in my dad’s footsteps and become a CPA, my kids know that this is my busy time of year, too.

Retailers have Black Friday, accountants have April 15th, and at Equilar, we have proxy season. Since we started tracking executive compensation data in 2001, the months of March and April have always been an adventure. While we find ways to improve and streamline our operations each year, the sheer volume of work increases annually. The good news is that all of our hard work continues to find a receptive audience, as witnessed by recent stories in The New York Times, The Wall Street Journal, CNBC and other media outlets.

As part of our proxy season activities, we recently released our annual S&P 500 CEO pay analysis last week. While quite a bit of work went into preparing the analysis, the results didn’t quite rock anyone’s world. At the end of the day, an increase in CEO pay of 1.3 percent in 2007 was pretty tame, especially in light of the financial performance of S&P 500 companies over the same time period. Last year was the second consecutive year in which the pay of S&P 500 chiefs grew at a slower rate than the financial performance of the companies they lead.

While it’s debatable how much value investors are getting out of the new SEC disclosure rules, the analysis indicates that board members are taking pay decisions very seriously and that most companies are doing the right thing. Yes, there will always be companies that are in a state of denial and issues surrounding executive compensation will not be solved overnight. But overall, the trend is certainly to move in a more shareholder-friendly direction.

Now that we have the benefit of two years of data under the new SEC rules, it will be interesting to see year-over-year changes in key practice areas (such as perks, severance and change in control arrangements, and clawbacks, etc.) in future newsletters as we dig deeper. Stay tuned.

One area of executive compensation that has received a tremendous amount of attention over the past year is the disclosure of performance targets. While many companies disclose metrics, it’s less common to see companies include their actual targets/goals in their CD&As. Last year, we found that 44.4% of Fortune 100 companies disclosed annual incentive plan performance targets for their executives with varying levels of specificity.

As we enter proxy season, I’ve had the pleasure of reading the CD&As (lucky me!) of early filers and came across one that I found especially interesting. In American Electric Power’s CD&A, they included their Wall Street earnings estimates and how the calculation of an executive’s bonus is tied to EPS performance:

Annual Performance Objectives: In February 2007 the HR Committee established AEP’s 2007 ongoing earnings guidance of $2.85- $3.05 per share as the funding measure for AEP’s annual incentive compensation program. This performance measure required earnings per share equal to:

As someone who spent six years on Wall Street before starting Equilar, I’ve been asking myself these questions ever since the new SEC disclosure rules were announced nearly two years ago. What is the linkage between an executive’s performance targets and the guidance that companies are providing to the investment community? Wouldn’t one expect them to be somewhat aligned? And, if not, why aren’t they?

Another interesting thing to point out about the AEP CD&A is that not only did they compare 2007 performance against 2007 EPS guidance, but they also disclosed what the targets are for 2008, something that I don’t think that I’ve seen before.

In January 2008 the HR Committee also established AEP’s 2008 ongoing earnings guidance of $3.10- $3.30 per share as the funding measure for AEP’s annual incentive compensation program. This performance measure requires earnings per share equal to:

If AEP’s ongoing earnings for 2008 is less than $3.10 per share then no annual incentive compensation will be paid out to executive officers or to other employees. The 2008 earnings per share target is $0.25 (or approximately 8.5%) higher than the 2007 earnings per share target.

It will be interesting to see if more companies take this lead as the pace of proxy filings increases in the upcoming weeks.

For further reading on the topic of performance metric disclosure, The Wall Street Journal published a very interesting article on this subject last Friday.

Take Two Interactive (TTWO) recently adopted a broad-based severance plan for all of its employees. While on the surface the arrangement sounds similar to Yahoo!’s, there are several key differences which I asked Derek and Alex to summarize below for everyone. If you choose to read the 8-Ks, you’ll find TTWO’s disclosure provides greater detail on the severance arrangements.

With another hostile offer launched earlier this week by Electronic Arts (our next door neighbor) who is attempting to acquire Take Two Interactive, I wanted to highlight how companies in play have made changes to their executive compensation plans. Most recently, the New York Times wrote about how Yahoo! approved severance programs for not only the executive team, but for all employees. As the Times pointed out, while you often see severance arrangements for executives, it’s rare to see such protections for the masses.

Another example where a severance plan was put in place for all employees was at Siebel in May 2005. Technically, the plan was put in place before an offer was made, but Siebel was rumored to be on Oracle’s shopping list for quite some time. The official merger announcement came a few months later in September. By the way, for those keeping score at home, Oracle is also right around the corner from us… I hope it’s not something in our water.

With the combination of depressed equity valuations and a slowing global economy, it should not come as a surprise that companies like Microsoft, Oracle and EA, with their bullet-proof balance sheets and cash flow engines, are not taking ‘no’ for an answer in their quest for growth. It will be interesting to see if more companies adopt similar changes to their compensation plans to retain key talent in this period of consolidation.

Setting director pay is probably one of the more awkward decisions for board members. No matter how you slice it, there will always be a conflict of interest. As one would expect, with increased responsibilities, scrutiny and exposure, director pay
continues to increase. However, as part of a recent client project, we identified several companies that are bucking this trend.ⁱ We found it very interesting to read the explanations on why several boards chose to reduce their own pay. Given the current economic environment, it will be interesting to see what changes boards make to align their pay more closely with corporate performance. Thanks to Aaron and David for their help in identifying and pulling the examples together.

Aligning Director Pay with Performance

Ford (F) and General Motors (GM) represent some of the more high profile examples. Both of the carmakers cut director pay by 50% in 2006. According to Ford’s proxy, “the Board of Directors voluntarily reduced Board fees payable to non-employee directors by half.” GM went into more detail in their proxy, connecting the pay reduction to a company-wide turnaround plan:

Under the Compensation Plan, directors are entitled to receive an annual retainer of $200,000. In support of the GM North America Turnaround Plan, the Board has chosen to reduce this retainer. In March 2007, the Board agreed to forgo 25 percent of the retainer, resulting in a retainer of $150,000 for 2007. (The retainer was voluntarily reduced by 50 percent in March 2006.)

Intelligent Systems Corp (INS) provides another interesting example of decreased pay. In their proxy, INS disclosed that “each director declined the annual grant of 4,000 shares in consideration of the company’s failure to meet the continued listings standards of the American Stock Exchange.”

Reductions after Benchmarking

Pulte Homes (PHM) reduced the annual option grant for directors from 16,000 to 7,000. This change is disclosed in an 8-K filing:

On May 11, 2006, the Board of Directors of Pulte Homes, Inc. approved a revision of the compensation to be paid to Pulte’s non-employee directors, effective as of June 1, 2006. The revised compensation was recommended to the Board by its Compensation Committee after the Committee undertook a careful review of market practices and received advice from the Committee’s outside compensation consultant.

NVidia (NVDA) also changed their equity grant practices as disclosed in their proxy:

Although the 1998 Non-Employee Directors’ Stock Option Plan provided for the automatic grant of options to purchase 150,000 shares for the Initial Board Grant and 50,000 shares for the Annual Board Grant, in fiscal 2007 the Compensation Committee reduced the size of the Board grants to 90,000 shares for the Initial Board Grant and 30,000 shares for the Annual Board Grant based on data provided by our Human Resources Department and the compensation consultant. After completing its review of Board compensation in March 2007, the Compensation Committee reduced the Annual Board Grant to 24,000 shares and the Annual Committee Grant to 8,000 shares.

ⁱ A more comprehensive analysis is available in CustomInsight, our online project library, under the title Director Pay Cuts for S&P 500 Companies.

As we enter February, we’re only weeks away from the upcoming proxy season. With a year of the new SEC rules under our belt (can you believe it’s only been a year?), 2008 will be the time where we’ll be able to perform year-over-year comparisons on executive pay under the new system. I just got back from talking on a panel at the ISS/RiskMetrics annual conference and a question that often comes up is measuring the impact increased SEC disclosure will have on executive pay. Will increased sunlight on pay practices sanitize executive pay practices or lead to the “galloping greedy gimmies” in boardrooms across America?ⁱ

At this point, it’s a bit premature to point to any definitive trends. But based on our analysis of proxies from the 2007 proxy season and reactions we’re hearing from issuers on the SEC’s round of comment letters sent in the fall, I’m optimistic and expecting that the positive trend of “investor friendly” modifications in pay practices that we’ve seen in the last several years will carry on into 2008. While there will continue to be outliers who make for entertaining stories, they’re becoming increasingly hard to find.

In addition, we’re curious to see the direction of pay for 2007. Last year, the markets and economy went through a Jekyll and Hyde like experience and were in dire need of Prozac by Christmas. In a matter of months, we went from talk of $100 billion private equity buyouts to red carpet treatment for sovereign wealth funds in the Middle East and Asia. It’s comforting to know that each time I fill my tank with $3.50 per gallon gasoline, I’m doing my part to save our financial institutions. Given the deterioration in the credit markets and the overall slowdown in the economy, it will be very interesting to see the impact this has on pay decisions and the design of pay packages as we move forward.

BTW, in case you missed it in Sunday’s NY Times, Claudia Deutsch wrote about an interesting severance example that one of our analysts discovered as part of our research. Thank you to Texas Roadhouse for embracing the SEC’s plain English approach and sharing with us the most creative and shareholder friendly severance package that we’ve seen so far.

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i For those without kids under the age of 5 (or even comp committee chairs), I highly recommend The Berenstain Bears when you’re feeling down. A synopsis - Brother and Sister Bear want everything in sight, and they throw tantrums when they don’t get what they want. Wisely Mama and Papa deal with this childhood malady by teaching the cubs about the family budget and the importance of appreciating all that they have already.

We’re expecting the 2008 proxy season to be especially interesting for two reasons. First, 2008 will be the first year where we have consecutive years of compensation data under the new SEC rules. Based on typical investor expectations surrounding the Management’s Discussion and Analysis (MD&A) section, will companies discuss year-over-year compensation changes in the Compensation Discussion and Analysis (CD&A) and the reasons behind it in a similar fashion? In addition, the macro-economic environment, especially for credit sensitive industries, was vastly different in 2007 when compared to the relative frothiness of 2006. As they say in retail, “same store comps” are going to be challenging, and blaming it on the weather may be awkward unless you’ve recently won a Nobel Prize and also invented the Internet. That being said, it will be interesting to see how companies discuss annual changes in compensation and the correlation with corporate performance over the last two years.

Second, with the SEC’s round of comment letters to large issuers earlier this year, companies are clearly on notice regarding the high level of transparency and detail in disclosure that they are expected to provide. This is especially true for sensitive areas like performance targets. In our research of proxies this year, we found that slightly over 40% of companies disclosed actual performance targets in their proxies and the format and level of disclosure varied quite substantially from company to company. One of my personal favorite examples comes from Acco Brands where they included target values and actual performance results side by side in tables. We’re expecting the percentage of companies providing performance targets to increase in 2008.

To help companies with the challenges of drafting their proxies, we recently released PracticesInsight (PI). With the new SEC disclosure rules earlier this year, many companies were somewhat at a loss on what the SEC was expecting. In 2006, we launched the Proxy Disclosure Service (PI’s predecessor) that included examples of companies that had voluntarily adopted portions of the proposed SEC rules. Given the success we had last year, we saw an opportunity to build an enhanced version and rename it PracticesInsight. Based on our research of literally 1,000s of proxies, we’ve compiled a “greatest hits” list of compensation disclosure to help our clients in the drafting process. Concurrent with the launch of PI, we released the CD&A Overview report to provide a small sample of the examples in PI. As one might expect, interest (and sales) in both PI and the report have been very strong.

Thanks to everyone for what was another record-breaking year for Equilar. Happy holidays and we look forward to talking with you soon!

Since my last posting on perks, we came across two more interesting ones that I wanted to share. FYI, for those who are or hope to become a board member some day. Enjoy!

Rare Hospitality International - “Non-employee directors also receive an allowance of $400 per fiscal month for dining at the Company’s restaurants, and an allowance of $1,000 per fiscal year for dining at restaurants of the Company’s competitors. Non-employee directors also receive a $1,000 allowance for charitable donations (which fall under the IRS-defined ‘Donations/Contributions’ category), and a $2,000 allowance for public relations (which do not fall under the IRS-defined ‘Donations/Contributions’ category), both per fiscal year.”

EGL Inc - In the footnotes to the Director Compensation Table, this company gives its directors an opportunity to replace their retainer for service with airplane usage: “The Annual Retainer is due upon election at the Annual Meeting of the Shareholders and qualification to serve. Each independent director may elect to take the annual retainer in cash, restricted stock award, or a combination thereof. Any amount elected in the form of restricted stock will be at a 15% premium of the corresponding cash amount. For example, if a director elected to take the annual retainer entirely in the form of restricted stock, such director would receive $28,750 in restricted stock rather than $25,000 in cash. Alternatively, each independent director may have, in lieu of their annual retainer, up to 25 hours per year of personal usage of the EGL-owned airplane 25 hours per year of personal usage of the EGL-owned airplane subject to the plane’s availability.”