With executive compensation poised to remain a front-burner issue, 2006 could go down in history as The Year Of The Tally Sheet.
Experts say pressure from regulators, governance experts and institutional investors to make executive pay more transparent—along with fear of legal liability stemming from recent lawsuits—is driving many compensation committees to take a more rigorous approach to evaluating compensation programs.
Goodman
“Compensation committees today are looking hard at the processes they follow,” says Amy Goodman, a partner at Gibson Dunn & Crutcher and a former staff member in the Securities and Exchange Commission’s Division of Corporation Finance. “They are where audit committees were three years ago, when they had to adjust to enhanced responsibilities after SOX. They had to rethink their responsibilities and how they were doing them.”
That diligence has led to an increased interest in the use of tally sheets, which itemize the cost of many elements of benefits and compensation, according to a survey by compensation consultants Pearl Meyer & Partners.
According to PM&P, the majority of firms surveyed are currently completing or are considering tally sheets. Among 88 public companies responding, about 40 percent have already completed tally sheets, while another 12.5 percent are in the process; 20.5 percent are considering implementing them.
Joseph Rich, president of PM&P, says the survey results a view of the earliest adopters of tally sheets. “This survey isn’t representative of the community at large,” says Rich. “Tally sheets are only about 18 months old.”
While companies may initially create tally sheets simply because compensation committee members feel obliged to do so, Rich says that it doesn’t take them long to appreciate the long-term insight they provide. “Once they do it, they see how they can use the tally sheet as an analytical tool,” he says. Rather than focusing on compensation for a one-year period, he adds, a tally sheet “allows the compensation committee to get a balance sheet view of total compensation.”
Differing Definitions
Todd
Paula Todd, managing principal of Towers Perrin specializing in executive and stock-based compensation, agrees that tally sheets are in their early stages. “Compensation committees just started asking us to prepare tally sheets in the past year,” she says. In fact, there isn’t even clarity on exactly what a tally sheet entails. Todd notes that the term “tally sheet” is being used to describe two different exercises. “The main usage we see is to add up all of the pieces of compensation and come up with a dollar total,” says Todd. “The other is to figure out what the total pay out would be under different termination scenarios.”
While Todd says her firm conducts both exercises as part of its consulting work for boards so that the consultants have a firm grasp of all of the pieces of the company’s pay program, she adds that not all companies analyze those myriad components. “My experience is that not all companies are looking at all of those dimensions,” she says. “We’re working with a lot of companies that are either doing a tally sheet for the first time or that are beefing up a more bare bones version of what they had done in the past.”
Regardless of what they label it, experts say it’s information compensation committees need to have to do their job properly. “Whether they call it a tally sheet or not, the comp committee should have a good idea of the complete compensation package of the executive whose compensation they're considering,” says Goodman.
According to the Pearl Meyer & Partners report, tally sheets are most often being used to project the potential financial impact of a senior executive departing as a result of retirement, termination, change-of-control, or other circumstances.
KEY FINDINGS
The excerpt below is from "Tally Sheets: Current State And Expectations," Pearl Meyer & Associates:
The majority of firms are currently doing or considering Tally Sheets. Among
public firms participating in the survey, almost 40% had already completed Tally
Sheets. Another 12% are in the process of doing Tally Sheets, and another 20%
are considering implementing Tally Sheets. Larger organizations (over $10B in
revenue) were more likely to have already implemented Tally Sheets than midsize
($1B to 10B) or smaller firms (54% versus 40% and 14%, respectively).
Tally Sheets tend to focus on the CEO and Named Executive Officers. Less than
half of respondents expanded the Tally Sheet to focus on Section 16b officers
and only a handful focused on the entire “executive” group.
A focus on pay upon separation is evident. The pay elements most commonly
included in Tally Sheets tend to focus on current pay (current total compensation,
current pension and retirement benefits) and pay upon separation (employment /
security arrangements, change in control arrangements).
Public firms believe company performance is important. While not typically in
current Tally Sheets, public firms that have already implemented Tally Sheets
believe the impact of company performance on cash and equity incentives should
be included in future Tally Sheets.
Communication of Tally Sheets is somewhat limited. Most firms indicated they
share Tally Sheets with the Compensation Committee and to a lesser extent the
CEO. Less than half of participating organizations share Tally Sheets with the
entire Board of Directors and very few organizations are sharing Tally Sheets
with individual incumbents.
Tally Sheets are likely to become an annual activity. Most firms indicated they
plan to complete Tally Sheets on an annual basis or as requested by the
Compensation Committee.
Source: "Tally Sheets: Current State And Expectations," Pearl Meyer & Associates. Reprinted with permission.
Since Jan. 1, 2005, 46 companies have disclosed in the compensation committee report of their proxy filing the use of a tally sheet in the compensation decision making process, according to Tim Ranzetta, president and COO of compensation research firm Equilar Inc. According to Ranzetta, typical disclosure of tally sheets includes details on what elements of compensation were included in the calculations with little detail about the actual amounts. “While only 50 companies chose to disclose their use of a ‘tally sheet’ in their most recent proxy, I would assume that their use is much more widespread,” says Ranzetta.
Companies who indicated use of a tally sheet include Staples, Procter & Gamble, Microsoft, Intuit, Revlon, Fifth Third Bancorp, Huntsman and Kroger.
Ranzetta notes that one company, Helen of Troy Limited, changed its CEO’s employment agreement as a result of tally sheet analysis, and two other companies, Morgan Stanley and Cardiovascular Biotherapeutics, provided detailed analysis of their tally sheets (see box above, right).
The Rise Of The Tally Sheet
Rich
Experts say interest in tally sheets emerged, in part, in the wake of unexpected windfalls owed to senior executives at Disney and the New York Stock Exchange. “In both cases, the compensation committee and the board were surprised by the size of the separation payments to [former Disney president Michael] Ovitz and [former NYSE chairman Richard] Grasso,” says Rich. As a result, he says, “Some compensation committees felt it would be valuable to have a preview of coming attractions of what the value of separation packages for their CEOs would be under variety of scenarios.”
“The Disney case caused committee members to realize that they’re personally exposed related to their decisions and they need to have complete information,” says Todd at Towers Perrin.
Also fueling interest in tally sheets is the fact that the Securities and Exchange Commission, which has stated it will either revise existing rules or issue new rules related to executive compensation disclosure. The SEC has been pushing the concept of providing investors with one number for executive compensation. “Chairman Cox has indicated that the SEC wants to see one number and enhanced disclosure,” says Pearl Meyer’s Joe Rich. “That ‘one number’ sentiment is the sentiment behind tally sheets,” he adds.
In public comments made shortly after he assumed the top spot at the SEC, Chairman Cox put companies on notice that the Commission wants them to move toward providing investors that total compensation number. “I think you can look in the near future to the SEC for some improved rules on disclosure to make sure that, for example, shareholders can have one number, that the different kinds of executive compensation add up to a number that’s comparable executive to executive and company to company and at the same time that this information is provided in a timely way before rather than after the fact,” Cox said in an August interview on Nightly Business Report.
His comments echoed a speech made last year by SEC Corporation Finance director Alan Beller, who said the SEC staff was reviewing compensation disclosure rules.
According to Rich at Pearl Meyer, “Members of the governance community are also creating more awareness [of tally sheets].” For example, Rich and others say a recent move by Institutional Shareholder Services is expected to expand interest in tally sheets.
ISS SAYS
The excerpt below is from Institutional Shareholder Services 2006 U.S. Policy Update on Compensation:
Current Policy Position: ISS does not have a formal policy with regard to enhanced CEO pay disclosure.
New Policy Position: For the 2006 proxy season, ISS is strongly encouraging companies to provide better and more transparent disclosure related to CEO pay. For those companies that do not meet a minimum standard of tally sheet disclosure, ISS will note the deficiency and provide cautionary language in its analysis. In the absence of poor disclosure that would necessitate a higher level of scrutiny, ISS generally will not withhold from the compensation committee for providing rules-based disclosure and boilerplate language in the compensation committee report. However, in 2007, ISS will consider recommending withhold votes from the compensation committee and potentially recommending votes against proposed or amended equity plans if compensation disclosure is not improved and enhanced proxy disclosure in the form of a tally sheet is not provided.
Source
Institutional Shareholder Services 2006 U.S. Policy Update (Includes ISS "Minimum Standard" Table)
Related Coverage
ISS Releases 2006 Corporate Governance Policy (Nov. 2006; Includes Link To Complete ISS Policy Update)
As Compliance Week reported in its Nov. 29 edition, the revised ISS 2006 proxy season guidelines are “strongly encouraging” companies to provide tally sheets for CEO pay (see box at left). For companies that don’t meet a minimum standard of tally sheet disclosure, ISS said it will note the deficiency and provide cautionary language in its analysis. And, in 2007, ISS said it will consider recommending withhold votes from the compensation committee and potentially recommending votes against proposed or amended equity plans if compensation disclosure is not improved and enhanced proxy disclosure in the form of a tally sheet isn’t provided. “That will drive a lot of thinking about tally sheets,” says Rich.
No Uniform Standard
Among the companies surveyed by PM&P, tally sheets tended to focus on the CEO and named executive officers. Among the public companies surveyed, 89 percent said the CEO is included in their current or planned tally sheets, and the same number said the CEO should be in the tally sheet. About 72 percent said named executive officers are in their current or planned tally sheets, while almost 87 percent say they should be. Only 35 percent said Section 16b officers are included, while almost 48 percent say they should be.
The pay elements most commonly included in tally sheets typically focus on current pay—such as current total compensation, current pension and retirement benefits—and pay upon separation—such as employment/security arrangements, or change in control arrangements—according to the Pearl Meyer & Partners report.
Most public companies polled (91.3 percent) share their tally sheets with the compensation committee, while 63 percent said they share them with the CEO. Only 39.1 percent of the public companies surveyed said they share tally sheets with the entire board, and few (13 percent) share them with individual incumbents.
According to Rich, that’s something that will change over time. “At some point, the full board will see it, and some simpler form of the tally sheet is likely to become a public disclosure.”
Amy Goodman at Gibson Dunn & Crutcher says the findings are in line with what they’re seeing now among their public company clients. “Even if the full board is voting on compensation, they usually won't get into the details of the tally sheet,” she says. “A few companies are using tally sheets in connection with putting their proxy disclosures together—that’s not that common since the SEC has prescribed tables for presenting compensation in the proxy already.”
Paula Todd at Towers Perrin says most companies she works with prepare tally sheets to orient compensation committee members and to make sure there are no surprises. “Not many companies are putting them [tally sheets] in their public disclosures,” agrees Todd. “It’s a tool that is being used to help the compensation committee in the context of making its decisions.”
Until a uniform standard is set by the SEC for what should be included in a tally sheet, Todd doesn’t think companies should disclose them in their proxies. “Putting extra tables in the proxy statement beyond what’s required can lead to inconsistencies and tends to be confusing,” she says. “There’s value in making sure everybody’s disclosures are consistent.” She adds that the Commission has indicated that it may refine the summary compensation tables disclosed in proxies. “Until they do, my preference is that the tally sheets be a tool that is used by the decision makers.”
Either way, Joe Rich at Pearl Meyers predicts that tally sheets are here to stay. “They’re going to be an annual event,” he says. And his firm’s survey findings support that notion: Most public companies surveyed said they plan to complete tally sheets on an annual basis. Roughly 74 percent said they plan to complete tally sheet annually, irrespective of whether their compensation programs change, while 30 percent said they plan to complete them as requested by the comp committee; 17 percent said they would complete them when their major compensation programs change.
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