1. Say on Pay:
Planning & Tactics for 2013
January 15, 2013
Steven Hall
Steven Hall & Partners
650 Fifth Ave., 33rd Floor
New York, NY 10019
212-488-5400
shall@shallpartners.com

2. Updated Investor/Proxy Advisor Firm Voting
Guidelines
• ISS Policy Changes for 2013
– ISS Peer Group Methodology Updated
– Realizable Pay Incorporated into Qualitative Pay-for-Performance
Assessment
– Pledging and Hedging: Governance Failure
– Scrutiny of Existing Change-in-Control Arrangements in Say on Golden
Parachute Proposals
• Glass Lewis Policy Changes for 2013
– Board Responsiveness to Significant (25%) Shareholder Vote
– No Changes to Pay-for-Performance Assessment
– Modification to Analysis of Equity Compensation Plan Proposals
– Equilar Accepting 2013 Peer Group Updates
• Action Items
• 2012 Say on Pay Voting Results
January 15, 2013

3. ISS Policy Changes for 2013
ISS Peer Group Methodology Updated
• Incorporates information from companies' self-selected pay
benchmarking peer groups in order to identify GICS industry groups
beyond the subject company's own GICS classification
• Focuses on a company‟s 8-digit GICS designation to identify peers that
are more closely related in terms of industry
• Prioritizes peers that maintain the company near the median of the peer
group, are in the subject company's peer group, and have chosen the
subject company as a peer
• It will be very difficult to independently identify the ISS selected peer
group
– Added complexity
– Large number of potential peers
– Increased level of “manual judgment” on ISS‟s part
-2- January 15, 2013

4. ISS Policy Changes for 2013
ISS Peer Group Methodology Updated (cont’d)
• ISS will begin the process of peer group construction and rationalization
well before companies' new 2013 proxy disclosures are available
– ISS will typically use company-selected peers disclosed in the prior
year's proxy for their new methodology
¨ For meetings in 2013, ISS will typically use peers disclosed in
2012
– ISS offered companies an opportunity to proactively provide
information regarding changes to company self-selected peer
groups
¨ Submission deadline was December 21, 2012 in order to
ensure its consideration in ISS‟s peer group construction for
2013
-3- January 15, 2013

5. ISS Policy Changes for 2013
Realizable Pay Incorporated into Qualitative Pay-for-Performance
Assessment
• ISS reviews several qualitative factors when an unsatisfactory pay-for-
performance alignment is identified in its quantitative assessment
• Three-year realizable pay compared to three-year grant pay will now be
one of the qualitative factors analyzed prior to the finalization of the ISS
vote recommendation for S&P 500 companies
– Methodology will analyze total CEO pay for each year in the analysis
without regard to whether all years are the same or different CEOs
-4- January 15, 2013

6. ISS Policy Changes for 2013
Realizable Pay Incorporated into Qualitative Pay-for-Performance
Assessment (cont‟d)
• Three-year realizable pay will consist of the sum of
– Base salary for all three years
– Annual bonus for all three years
– Earned value of long-term cash awards made during the measurement period
– Target value of long-term cash awards for on-going award cycles
– Value of share-based awards made during the measurement period less the value of
any shares that were forfeited due to failure to meet performance criteria
– Target level of share-based awards if awards are on-going/not vested
 Share-based awards valued based on stock price at end of measurement
period
– Net value realized upon exercise of stock options that were granted during the
measurement period
– Black-Scholes value for unexercised stock options that were granted during the
measurement period
¨ Black-Scholes recalculated as of the end of the measurement period
– Change in pension value and nonqualified deferred compensation earnings reported for
all three years
– All other compensation reported for all three years
-5- January 15, 2013

7. ISS Policy Changes for 2013
Pledging and Hedging: Governance Failure
• “Significant” pledging and “any amount” of hedging of company stock by
directors and/or executives now considered failure of risk oversight by
ISS
– Will trigger AGAINST or WITHOLD vote recommendations against
directors
– Vote recommendations will be based on the following factors:
¨ Proxy disclosure of an antipledging policy prohibiting future
pledging activity
¨ Magnitude of aggregate pledged shares in terms of total
common shares outstanding, market value or trading volume
 No bright-line test has been disclosed
¨ Disclosure of progress or lack thereof in reducing the magnitude
of aggregate pledged shares over time
¨ Proxy disclosure that shares subject to stock ownership and
holding requirements do not include pledged company stock
-6- January 15, 2013

8. ISS Policy Changes for 2013
Scrutiny of Existing Change-in-Control Arrangements in Say on
Golden Parachute Proposals
• ISS will now consider existing change-in-control arrangements with
NEOs
– Previous policy was to focus only on new or extended arrangements
• Further scrutiny will be placed on the number of problematic legacy
features in change-in-control agreements
• Recent amendment(s) incorporating problematic features will tend to
carry more weight in the analysis, but the existence of multiple legacy
problematic features will also be closely scrutinized
• ISS has provided limited guidance on how this approach will work in
practice
– Problematic change-in-control features will be considered in the
context of
¨ The amount of actual tax gross-ups reported
¨ The total change-in-control payout
-7- January 15, 2013

9. ISS Policy Changes for 2013
Scrutiny of Existing Change-in-Control Arrangements in Say on
Golden Parachute Proposals (cont’d)
• Problematic features in change-in-control agreements include:
– Single-or modified-single-trigger cash severance;
– Single-trigger acceleration of unvested equity awards;
– Excessive cash severance
¨ >3x base salary and bonus
– Excise tax gross-ups triggered and payable
¨ As opposed to a provision to provide excise tax gross-ups
– Excessive golden parachute payments
¨ On an absolute basis or as a percentage of transaction equity value
– Recent amendments that incorporate any problematic features or
recent actions that may make packages so attractive as to influence
merger agreements that may not be in the best interests of
shareholders
– The company‟s assertion that a proposed transaction is conditioned
on shareholder approval of the golden parachute advisory vote
-8- January 15, 2013

10. Glass Lewis Policy Changes for 2013
Board Responsiveness to Significant (25%) Shareholder Vote
• Glass Lewis clarified its long-standing approach to this issue, noting that
the board should demonstrate some level of engagement and
responsiveness to address the shareholder concerns when 25% or more
of shareholders (excluding abstentions and broker non-votes) vote
– WITHOLD or AGAINST a director nominee,
– AGAINST a management-sponsored proposal, or
– FOR a shareholder proposal
• While a 25% threshold alone will not be sufficient to warrant a negative
recommendation on a future proposal, it will bolster arguments to vote
against management‟s recommendation in the event Glass Lewis
determines that the board did not respond appropriately
-9- January 15, 2013

11. Glass Lewis Policy Changes for 2013
Board Responsiveness to Significant (25%) Shareholder Vote (cont’d)
• Glass Lewis will make a case-by-case assessment following
consideration of publicly available disclosures regarding:
– Changes in directorships, committee memberships, disclosure of
related party transactions, meeting attendance or other
responsibilities;
– Any revisions made to the company‟s articles of incorporation,
bylaws or other governance documents;
– Any press or news releases indicating changes in, or adoption of,
new company policies, business practices or special reports; and
– Any modifications made to the design and structure of the
company‟s compensation program.
- 10 - January 15, 2013

12. Glass Lewis Policy Changes for 2013
No Changes to Pay-for-Performance Assessment for 2013
• Pay-for-Performance Assessment revamped in July 2012
– Compensation Analysis
¨ Compensation analyzed on a three-year weighted average
basis
 This is a change from the previous model that analyzed
only one year of compensation for NEOs
– Performance Analysis
¨ Performance metrics evaluated on a three-year weighted
average basis
¨ Two metrics removed
 Change in stock price
 Change in book value per share
¨ The five performance metrics remaining in the model are TSR,
Change in Operating Cash Flow, EPS Growth, ROE & ROA
- 11 - January 15, 2013

13. Glass Lewis Policy Changes for 2013
No Changes to Pay-for-Performance Assessment for 2013 (cont’d)
• Pay-for-Performance Assessment revamped in July 2012 (cont’d)
– Pay for Performance Grades
¨ Glass Lewis abandoned the forced curve grading system
¨ Grades now based on a company‟s relative percentile position
of compensation and performance rankings. Grades will be
assigned as follows:
 A = Performance > Compensation by 60 to 100%
 B = Performance > Compensation by 30 to 59%
 C = Performance > Compensation or Compensation >
Performance by 0 to 29%
 D = Compensation > Performance by 30 to 59%
 F = Compensation > Performance by 60 to 100%
- 12 - January 15, 2013

14. Glass Lewis Policy Changes for 2013
Modification to Analysis of Equity Compensation Plan Proposals
• Glass Lewis made an addition to the overarching principles used to
evaluate equity plans
– Plans should not count shares in ways that understate the potential
dilution, or cost, to common shareholders
¨ Specifically “inverse” full-value award multipliers
- 13 - January 15, 2013

15. Glass Lewis Policy Changes for 2013
Equilar Accepting 2013 Peer Group Updates
• Equilar‟s peer groups are used by Glass Lewis in its Say on Pay
quantitative analyses
• Equilar is now accepting submissions of updated peer group data to
include in its 2013 peer group calculations
– Equilar does not plan on updating peer groups until July 2013
absent the changes submitted on its website
– U.S. companies in the Russell 3000 Index wishing to provide
updated peer group information can fill out a form on Equilar‟s
website
– Deadline for submission is January 18, 2013
- 14 - January 15, 2013

16. Action Items
In light of the new ISS and Glass Lewis guidelines, companies should take
the following actions:
• Assess current company-selected comparator group and consider how
this may differ from the group selected by the new ISS methodology
• Committees should also begin reviewing realizable pay calculations for
NEOs, and consider incorporating this information into their CD&As
• Review hedging and pledging policies, and the current pledging practices
of named executive officers and directors
• Committees should ensure that public disclosure documents all steps
taken to address shareholder concerns following voting results for either
directors or the say on pay vote fell below the required 75% threshold for
Glass Lewis or the 70% threshold for ISS
• Review change-in-control arrangements for NEOs and evaluate whether
or not such policies remain in the best interests of shareholders
- 15 - January 15, 2013

17. 2012 Say on Pay Voting Results
• 2,608 companies held Say on Pay votes in 2012
– On average, companies have received
¨ 89% FOR vote
¨ 9% AGAINST vote
¨ 2% Abstentions
• 60 companies have failed with an average 62% „Against‟ vote
– 13 companies that received a 90%+ FOR vote last year failed this
year
– 23 companies that received a 80%+ FOR vote last year failed
this year
– Four companies have failed both this year‟s and last year‟s votes
– One company received more FOR than AGAINST votes, but the
company did not approve the proposal
¨ Less than 49% FOR votes
- 16 - January 15, 2013

18. 2012 Say on Pay Voting Results
As of December 31, 2012
Sample # of Companies Average Vote*
Size Pass Fail For Against Abstain
Total Sample 2,608 2,548 60 89.3% 9.0% 1.7%
Passed Say on Pay 2,548 90.5% 7.8% 1.7%
Failed Say on Pay 60 36.0% 62.1% 1.9%
Revenue
Less than $1B 1,527 1,499 28 89.7% 8.3% 2.0%
$1B - $2B 326 310 16 87.7% 10.7% 1.5%
$2B - $5B 337 330 7 89.8% 9.0% 1.2%
$5B - $10B 182 177 5 89.0% 10.0% 1.0%
Greater than $10B 236 232 4 88.0% 11.0% 1.0%
Market Cap (as of 12/31/11)
Less than $1B 1,393 1,358 35 88.9% 9.0% 2.1%
$1B - $2B 369 359 10 90.1% 8.7% 1.3%
$2B - $5B 402 395 7 90.4% 8.4% 1.2%
$5B - $10B 180 176 4 88.2% 10.7% 1.1%
Greater than $10B 264 260 4 89.2% 9.9% 0.9%
Industry (GICS Sector)
Consumer Discretionary 347 338 9 89.4% 8.9% 1.7%
Consumer Staples 97 96 1 91.3% 7.3% 1.4%
Energy 169 165 4 88.3% 9.7% 2.0%
Financials 625 612 13 89.6% 8.7% 1.7%
Health Care 332 317 15 87.4% 11.2% 1.5%
Industrials 359 349 10 89.1% 9.1% 1.8%
Information Technology 428 422 6 89.7% 8.9% 1.4%
Materials 140 139 1 91.4% 7.2% 1.4%
Telecommunication Services 33 33 0 89.8% 8.4% 1.8%
Utilities 78 77 1 89.2% 8.0% 2.8%
* Rounded
- 17 - January 15, 2013