Archive for Titan Group

ESOPs: IRS Tries to Reduce Backlog

July 5, 2011 at 3:28 pm · Filed under Titan Group ·Tagged

Many employers have been waiting a long time to hear from the IRS that their ESOP has been approved.  Faced with a large backlog of ESOPs that have been submitted for a determination letter (that the plan is qualified), IRS has introduced some changes.  A significant one is to allow lawyers (or other professionals) who have submitted more than one plan to respond to questions but have the answers apply to several similar plans.

In addition, IRS has published the checklist that it uses to review the plan.  See http://www.irs.gov/pub/irs-tege/esop_worksheet.pdf.  This suggests that plans that are submitted in the future might be well-served by enclosing a completed checklist in the package to expedite (we can hope!) the review.

Bob Musick, Titan Group LLCRobert L. Musick, Jr.

(804) 249-6027

bmusick@titanhr.com

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Executive Compensation: Year One “Say on Pay” in Review

June 29, 2011 at 1:00 pm · Filed under Titan Group ·Tagged , , ,

Background.  This was supposed to be the year when shareholders of public companies finally had their say about executive pay. As a result of the passage of the Dodd-Frank Act last July, shareholders for the first time can cast proxy votes on top executives’ compensation.  Median pay of chief executives jumped 35 percent, to $8.4 million for Standard & Poor’s 500 CEOs in 2010. So shareholders’ say on pay votes, although only advisory, were widely expected to challenge companies where compensation didn’t reflect performance or was out of line with those at competitors.  But now that most meetings have been held and votes tallied, what was the result?

ISS Shooting Blanks?  Institutional Shareholder Services (ISS), which advises investor clients on proxy and shareholder issues and is the largest firm of its kind in the U.S., (and a thought leader that we follow closely) has recommended “nay” votes on pay for 293 companies so far this year. However, through June 14, shareholders by a majority vote objected to executive comp at just 32 of the nearly 2,000 companies that have held annual meetings this year. “Say on pay is at best a diversion and at worst a deception,” says Robert A.G. Monks, a corporate governance activist who founded ISS in 1985. “You only have the appearance of reform, and it’s a cruel hoax.”

ISS advises shareholders that may constitute a large minority in many public companies; so why weren’t its recommendations followed more often?  Some credit the work of the Center on Executive Compensation, a recently formed offshoot of the HR Policy Association (a lobbyist on human resources issues for 300 of the largest U.S. companies). The center advised companies that received negative ISS recommendations to send rebuttals to shareholders. “We provided some guidance on how to tell their pay-for-performance stories,” says Charles Tharp, the center’s CEO.  Many companies effectively countered ISS’s recommendations in letters to shareholders. Among major corporations which ISS criticized, Pfizer won 57 percent of the shareholder vote on executive pay. ExxonMobil and JPMorgan Chase received 67 percent and 73 percent shareholder support, respectively.

Separately, the center also produced a white paper in which it said ISS has published errors, holds excessive power, and has conflicts of interest because it both consults with some companies on corporate governance and issues proxy voting recommendations on them.

Game On!  While the early returns on SOP suggest that it has had little impact, a closer look reveals a more nuanced result.  Some companies that received negative ISS recommendations this year made changes and then won the firm’s blessing. These instances show how say on pay helps foster accountability by creating more “engagement” between management and shareholders.

In addition, shareholder advocates and some in the media have trumpeted a significant percentage of “nay” votes as a defeat for the company. Since the SOP vote was based on last year’s compensation, its primary impact will be on compensation decisions for the rest of this year and on next year’s disclosures.

Also, overall most companies have proposed (or received majority approval of) annual SOP votes (as recommended by ISS), although some smaller companies have preferred a vote every three years.  The more frequent the vote, the more opportunities arise to register discontent.

Finally, as we noted in our April 26 Alert, while very few companies in the early going received negative votes on SOP, every one subsequently has been sued.  Remember that plaintiffs’ lawyers will file an excessive pay lawsuit, naming the board, compensation committee members, and executives, against companies that fail to receive a majority vote “for” SOP.

Conclusion.  While, to date, the fallout from SOP has been underwhelming, expect a more focused effort in the future as shareholder advocates refine their approach.

 

Bob Musick, Titan Group LLCRobert L. Musick, Jr.

(804) 249-6027

bmusick@titanhr.com

 

Richard Deutsch, Titan Group LLCRichard Deutsch

(804) 249-6026

rdeutsch@titanhr.com

 

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ESOP Alert: “Floor Price” Protection?

June 27, 2011 at 10:38 am · Filed under Titan Group ·Tagged , , ,

Background. Many times when a major stock purpose from an insider (an “interested person”) is planned, especially the initial purchase after an ESOP is created, a plan sponsor considers whether to build in “floor price” protection for the benefit of plan participants who may terminate employment and become entitled to a payout over the next few years. Why? Because after a “leveraged” transaction (as most are), the company’s valuation drops significantly from the value immediately before the transaction, as a result of the new stock acquisition debt.

New Guidance from IRS. The argument for establishing a “floor price” (in effect, a guaranteed minimum price) is that it protects those who become entitled to a payout (especially as a result of retirement) soon after a leveraged transaction, before the loan repayment has gotten well underway (and the value of the stock has rebounded). It would appear that the company is trying to do the right thing for former participants who otherwise would be disadvantaged.

The NCEO’s 2010 survey on repurchase obligation practices found that fewer than 10% of ESOP companies offer floor-price protection, and another 21% are considering doing so.

However, citing possible fiduciary and tax concerns with floor-price protection, William K. Bortz, associate benefits tax counsel at the Treasury Department’s Office of Tax Policy, said recently that the practice raised unanswered questions. Speaking at the ESOP Association’s annual conference on May 13, Bortz noted that since floor-price protection is temporary, any benefit it provides one participant is offset by reduced benefits to other participants. He called this situation “a zero-sum game” and suggested that it “presents fiduciary problems.” Bortz also said the question of how floor-price protection should be viewed was unanswered, suggesting that it could be considered a participant benefit, an agreement with the ESOP, or a side agreement with the employer. He noted that which of these three views of floor-price protection prevailed would affect several aspects of ESOP taxation.

Conclusion. This guidance is not especially helpful. Without specifically identifying the troublesome issues and possible solutions, it should serve to quash what already is a fairly rare practice. It certainly will be hard to recommend a “floor” now!

Questions or comments?  Reach me at bmusick@titanhr.com

Bob Musick, Titan Group LLCBob Musick

Principal

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Are you a Mental Athlete?

May 4, 2011 at 9:14 am · Filed under Employee Engagement, How to Keep Employees Happy, life long learning, Titan Group, Work Life Balance ·Tagged , , , , , , , ,

Athlete

My friends Bettina Altizer and Robyn Goodpasture introduced this concept to me recently and I thought others might like to learn about it.  I will work through the concept over the next couple of blogs.

Mental Athletes are trying to grow themselves to be the best performers they are capable of being.  The three focus areas are:

  1. Physical—cardio, stretching, core and strength training
  2. Attitude development—Mind training—improving your attitude and mental outlook
  3. Care of Body—Nutrition, hydration, recuperation and rest

I find that most of clients spend a ton of time growing their technical knowledge but spend very little time taking care of their mind and body.  This tends to lead to burn-out, walking around like a zombie and feeling like there must be more to life.  If this sounds like you, stay tuned for suggestions in future blogs.

What are you doing to develop yourself?  What will be different between you today and the next two years will based largely on two things—

  1. Who you meet and work with
  2. What books/podcasts you read/listen to

Thus, what are you doing to help grow your mind?  I recommend subscribing to Smart People Podcast and start learning while you are out for a walk.

#2 Mental Athlete-Let’s Get Physical

We spend a lot of time thinking about how to make ourselves better.  What are you doing to physical make sure you are in peak performance shape.  This does not mean you have to be a world class athlete.  The real question is:   what are you doing to help your mental sharpness by having a good infrastructure to support your brain?

What are 3 changes that would make me perform better at work?  Now think about your physical needs—what are you good at doing?  I am a marathon runner so I have the cardio done really well.  However, I rarely find time for strength training and I find that by the end of the name I carry all my stress in my neck.  Thus, I am going to commit to strength training for 20 minutes, three times a week to help my body to stay in tune with my mind.

What can you do to improve your strength, cardio, stretching or core training?  Improving your body will help you stay more mentally sharp longer and give you an advantage over your peers.  What ideas have worked for you?

#3 Mental Athlete—“Changes in Latitude, Changes in Attitude”

I love the Jimmy Buffett song in the title…it is a quick reminder that we are really in control of our attitude.  I find the best mental athletes do not let things affect them as much as normal people.  They keep a great perspective and treat setbacks as challenges that will make them stronger.  Marshall Goldsmith says we should try to fail forward.  We should try something and then see what we learn from the experience while keeping an optimistic perspective.

One suggestion I have adopted in my daily practice is choosing my attitude every morning before getting out of bed…I choose words like enthusiastic, curious, awesome, fun-loving, thoughtful, etc.  I find this helps me keep the focus on how I want to experience the day and not the day dictate how I should feel.

What are 3 changes you could do to improve your attitude/mental outlook?  Suggestions include—reading books/passages on positive thinking, meditation, prayer, seminars, affirmations, journaling, quiet time, relaxing with a friend.  A couple of good suggestions are:  Jeffrey Gitomer’s—Little Gold Book of Yes! Attitude and Norman Vincent Peale’s “Power of Positive Thinking.”

Napoleon Hill also recommended surrounding yourself with positive people.  Jon Gordon suggested in the Energy Bus to cleanse you of “Energy Vampires.”  Who can help you become a better mental athlete?  Who is holding you back from your peak performance?

#4 Mental Athlete—“Do you treat your body like a temple or a tent?”

This is another great line by the great philosopher Jimmy Buffett J  We all are busy working hard, doing amazing work for our customers, clients, bosses, families, etc. that it can be hard to take care of our bodies.  If we are going to be a top performing mental athlete we need to have good physical habits, strong mental practices but we also have to put the right fuel in our bodies to get optimal performance.

Okay Jeff, are you saying I have to eat salad and tofu all the time?  No way!!!  However, I am saying that you should be thinking about how you are treating your body…is a temple that leads to higher levels of performance or a tent that can easily broken down when there is bad weather (stress?)  My question to you is:  What are 3 things you can do to take better care of your body?

Here are a few suggestions—meet with a nutrionist and/or coach that help offer ideas for improving your habits.  Most studies seem to suggest we do our optimal thinking if we get between 7-9 hours of sleep per night—can you try to go to bed a few minutes earlier to maximize your brain.  Are you eating the right foods at the right times to help you brain stay focused through the day?

I hope you have enjoyed the blog series on mental athletes.  I hope you are working on improving your mental and physical habits so you can be the best mental athlete you can be.  You can be a superstar!  Aristotle said it best:

“We are what we repeatedly do.  Excellence then is not an event but a habit.” 

Keep up the great habits!

Jeff Smith, Principal  Jeff Smith, Principal
Jeff@TitanHR.com

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The Curses of Using a Broad Band Pay Structure

March 8, 2011 at 12:32 pm · Filed under Communication, Compensation, Employee Salaries, Executive Compensation, Titan Group ·Tagged , , , , , , , , , , , , , , , ,

Broad Band pay structures became the “in” approach to compensation management in the late 1980’s. Consultants and academics praised the Compensationbroad band approach as a way to reduce salary administration and support organizations that promoted a culture of employee development. Several research papers conducted a few years ago found that the results of broad-banding were mixed at best. Many of our compensation clients adopted broad-banding years ago. When we begin our work with them they often complain about the problems this approach has created.

Many of our clients cannot remember the purpose or the advantages of broad bands. In an era of cost reduction at companies we have found broad bands may have actually resulted in an increased cost of payroll. For broad bands to be effective, managers must be trained and employee communications be clear and succinct. But like many great ideas, the burden of success falls on the shoulders of proper implementation and continued execution.

In a study conducted in 2000 of federal government use of broad banding, researchers found that broad band structures were associated with more rapid increases in pay costs than traditional structures. Our experience with clients finds that the lack of understanding of broad bands leads to confusion, mistrust and a lack of pay consistency. Most broad bands are very wide and include several levels of jobs in one band. The expectation of many employees in a broad band is to reach the maximum of the band. With bands as wide as $40,000 to $100,000, employees with a market target of $50,000 expect to be paid $100,000 at some point. As a result, management and human resources spend an inordinate amount of time explaining how the system should work. The promised reduced administrative costs have actually increased.

In the post-recession era of reduced spending and emphasis on performance-based pay, broad bands are declining. The peak of broad band usage was in the early ‘90s yet many companies have not yet abandoned them. Market-based pay structures have overtaken the old point factor methods of the past. Companies must be sure that they have good sources of pay data and a pay structure approach that stays current with the market. Companies can ill afford to overpay average performers (and underpay high performers) and still remain competitive.

Lee Weisiger, Partner, Titan Group LLC Lee Weisiger, Partner
lee@titanhr.com

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