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July 2011: ISS, FDIC Clawbacks, & The Legislative Disconnect Between Pay and Performance

Possible Changes to Some ISS Methodologies?

Here’s some potentially happy news for issuers: a report from BNA indicates that ISS plans to review certain of its methodologies in light of company complaints that ISS negative recommendations on say-on-pay proposals during the most recent proxy season were unwarranted.

First, during a recent webcast, ISS Executive Director Patrick McGurn said that ISS will review the way it values options. More specifically, in SEC filings, companies report the grant date fair value of options in accordance with GAAP, while ISS uses valuations provided by Equilar Inc. However, Equilar valuations tend to be higher because of the volatility measures that it uses. (See, for example, the additional soliciting materials from GE, which contended that, by using the wrong volatility measures, ISS had overvalued the grant date fair value of the CEO’s options by over $7 million.) According to the article, ISS plans to request comment on the issue related to option values from its institutional clients and expects to settle the issue by next year.

Legislative Disconnect Between Pay & Performance
by Josh Henke, Managing Director at Longnecker & Associates

There are many lessons to be learned from the 2011 proxy season, most of which relate to pay-for-performance. With the on-set of the Dodd Frank regulations, companies spent most the latter part of 2010 and early part of 2011 navigating the muddled legislation, preparing for proxy doomsday. The oppressive triune of proxy seasons (ISS, the SEC, and disgruntled shareholders) had a lot to prove this year under one overarching theme: there should be a relative correlation to executive pay and performance.  

FDIC Backs Pay Clawback in Bank Liquidations

 U.S. regulators will be able to snatch back up to two years of Wall Street executives’ pay if they are found responsible for the collapse of a major financial firm, under a rule approved on Wednesday.The provision is part of a broader Federal Deposit Insurance Corp rule laying out the order in which creditors will be paid during a government liquidation of a large, failing financial firm. The 2010 Dodd-Frank financial oversight law gives financial agencies this power to recoup executives’ pay, but bankers are complaining regulators are taking it too far.

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