The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

March 28, 2024

Setting Metrics and Managing Share Pools in Periods of Volatility

In recent years, it’s felt like outside advisors pretty much always have a few clients battling significant stock price volatility. From time to time, those companies decide they need to make off-cycle retention grants to one or more executives, but they may have fewer headaches to deal with if they can maintain the competitiveness of their pay program while avoiding special, one-time awards. This NACD insight from Semler Brossy discusses how annual and long-term incentive plans can be adapted and share pools can be managed in a volatile environment. Specifically, it suggests that companies consider for both annual and LTI plans:

– Changing metrics
– Altering performance periods
– Widening goals or payout ranges
– Adjusting the LTI vehicle mix

If the company has share pool concerns due to the volatility, it recommends considering the following strategies to reduce the number of shares utilized for equity grants:

– Reduce the number of participants
– Reduce the dollar value of the annual grant per participant (e.g., focus on the number of shares instead of the dollar value)
– Substitute performance cash for a portion of equity
– Delay the timing of awards

Meredith Ervine 

March 27, 2024

Activism: When Compensation Programs Come Under Fire

Since the early years of say-on-pay votes, low outcomes have been considered a potential sign of broader problems — low say-on-pay support may signal that shareholders have performance concerns, putting the company at heightened risk for an activist attack. This post from Meridian Compensation Partners discusses why and how activist shareholders seeking more widespread changes also raise compensation issues — noting that they can be “a ‘wedge’ to gain broader shareholder and proxy advisor support,” and activists may gain leverage by using compensation issues to “embarrass the board and hamstring the executive team.”

The post identifies the following compensation issues likely to attract the attention of activist shareholders:

• Use of aspirational peer groups or aspirational pay positioning (top quartile target pay positioning)
• High ratio of CEO pay to pay of other named executive officers
• Pay programs that are different from those of peer companies or the broader market without a disclosed rationale that activists believe
• Incentive targets set to reward executives for performance that lags industry norms
• Large incentive payouts when company has “underperformed” on financials or stock price
• Designs that don’t align pay outcomes with performance

Meridian suggests companies work with their compensation consultant to take the following steps to avoid compensation making the list of issues an activist may raise:

• Audit compensation plans and programs
• Identify disconnects between realized pay and financial and stock performance
• Identify other potential compensation issues — peer group, CEO to NEO pay ratio, etc.
• Take steps (as appropriate) to change incentive design or target setting and/or enhance public disclosure of the business rationale for pay design and outcomes

Meredith Ervine 

March 26, 2024

Focus on Change-in-Control Arrangements: The Latest Market Practice

Severance provisions continue to draw scrutiny from investors and proxy advisors, and severance has been the subject of a trending shareholder proposal two years in a row. With this focused attention, you may want to look at the latest edition of Alvarez & Marsal’s study (partnered with ESGAUGE) on change-in-control arrangements among 100 companies in the S&P Composite 1500 Index. This summary highlights these key data points:

– The most common cash CIC severance multiple is >2 and <3 times compensation (typically base plus bonus).
– Double-trigger accelerated vesting of equity remains a common CIC benefit (88%).
– Companies routinely provide other CIC benefits, including health and welfare benefits continuation (63%), outplacement services (22%) and enhancement of retirement benefits (15%).
– Excise tax protection is handled in a variety of ways, with most companies either not addressing (executives are solely responsible) (45%) or including a best-net provision (41%).

The complete report shares detailed data by market cap on the topics above for CEOs & CFOs. If you’re taking a look at your severance and CIC benefits and making changes, you may want to consider the impact of the Dodd-Frank clawback rules — for example, ensuring any severance agreements provide a contractual basis to enforce the company’s clawback policy and considering whether severance should be based on base plus target bonus (if you currently use actual).

Meredith Ervine 

March 25, 2024

M&A Retention Awards: Companies Shorten Retention Periods

WTW recently conducted a study of incentive structures and strategies companies use to retain key employees during an acquisition. The survey of approximately 160 respondents provides useful benchmarking information to shape retention programs more effectively. Here are some key takeaways from this release comparing the results to WTW’s 2020 study:

– Overall, retention pool size continues to decline, with nearly 70% of respondents that track and set aside a retention pool reporting that the retention pool was less than 2% of the purchase price for the acquired company. In a similar vein, fewer companies reported retention pools above 5% of the purchase price, compared to three years earlier.

– Companies also shortened the length of retention periods for top executives between 2020 and 2023. […] In 2020, two-thirds of companies that participated in WTW’s retention study reported retention timelines of two or more years for senior executives. Currently, fewer than 30% of participants reported structuring retention periods to last longer than two years, with the median lying between 13 months and 18 months. Shorter retention periods may reflect pressure to retain employees for only as long as necessary during the transition, which may cut costs for retention packages.

– The study also makes clear that performance pay is climbing, and the focus is shifting from cash bonuses alone to a mix of cash, stock options, RSUs and other awards that account for measurable metrics of success for the target or combined companies. This move toward performance pay almost certainly reflects the character of the purchasing companies. More than 70% of respondent buyers were publicly traded companies, with 66% of the acquired companies held privately.

Meredith Ervine 

March 21, 2024

Pay vs. Performance: Avoiding Common Mistakes

I blogged earlier this year that for 2024 pay vs. performance disclosures, the Corp Fin Staff expects that you’ve digested the feedback and guidance that it issued last year in the form of comment letters and 17 (!) CDIs. While I am very grateful for all of that helpful guidance, I also was very happy to see this Skadden memo, which provides a concise & timely list of the common mistakes that the Staff will be watching for this year:

1. Failing to describe the relationship between CAP and: (a) TSR, (b) net income and (c) the company-selected measure (CSM).

2. Failing to include the tabular list.

3. Including multiple CSMs or failing to include the CSM in the tabular list.

4. Failing to provide a GAAP reconciliation for non-GAAP CSMs.

5. Using a TSR peer group that does not match either the industry group in the company’s 10-K performance graph or the compensation peer group disclosed in the Compensation Discussion and Analysis (CD&A).

6. Failing to include or identify all NEOs who served each year.

7. Using partial-year compensation (e.g., only including compensation for the time served as an NEO during a given year).

8. Valuing awards that vest during the year based on a year-over-year change, rather than valuing them as of the date of vesting.

Unless you are a smaller reporting company, it’s also important to remember that your PVP disclosures require iXBRL tags!

Liz Dunshee

March 20, 2024

Exec Comp Shareholder Proposals Have Dwindled…But Climate Metrics & “Fair Pay” Persist

Recently, As You Sow, Si2 and Proxy Impact released the 20th Anniversary Edition of their “Proxy Preview” report – which tracks the number, topics and outcomes for “ESG” proposals in the current season and as compared to prior years. Of the 527 proposals that are captured in the report for the 2024 proxy season, only a handful directly relate to executive compensation. Within that small group, the proposals focus on tying pay to climate-based goals. Here’s an excerpt:

As companies have begun to take seriously the bottom-line impacts of climate change risk management and diversity considerations in human capital management, they have started to tie executive pay to specific corporate goals on these issues. Shareholder resolutions asking for these links have never received spectacular votes, but companies are taking action anyway. This year there are a few variations from As You Sow and state pension funds, at electric utilities and a couple of industrial companies, but all five are about climate change:

• As You Sow wants Cummins and General Electric to disclose a plan “to link executive compensation to 1.5-degree C-aligned greenhouse gas emissions reductions across the Company’s full value chain.” A similar proposal at Cummins last year earned 15.1 percent support, although the 2024 resolved clause is more general; the supporting statement has similar very specific suggestions, though, which As You Sow says are needed because the company claims CEO pay is linked to climate change but does not explain how.

In addition, compensation committees should continue to track “human capital” proposals. The report has a few takeaways on that topic:

– “Fair pay” & “working conditions” proposals continue to diminish. Only 41 resolutions are in play this year on the topics of gender/racial pay gaps, health & safety audits, workplace bias and paid sick leave – down from a high of 74 two years ago.

– “Living wages” proposals are emerging – this is the new twist on the general topic of “decent work,” with 7 new resolutions this year requesting policies designed to pay a living wage or to disclose information needed to assess the company’s compliance with international human rights standards.

Liz Dunshee

March 19, 2024

Using Compensation to Support Succession Planning

Some investors view CEO succession planning as the Board’s most important responsibility. In fact, in its voting guidelines for 2024 annual meetings, BlackRock called out that it might vote against the members of the responsible committee where there is significant concern on this topic. We’ve noted that a number of companies include succession-related metrics to compensation programs to incentivize planning. This Directors & Boards article shares a reminder that it also may be appropriate for compensation committees to pay a premium to up-and-coming internal candidates who might otherwise be recruited away. Here’s an excerpt:

Ensure compensation supports succession plans. Over the past decade, compensation committees increasingly have broader responsibilities and, in many cases, that includes oversight of executive succession. It is important for the committee to consider succession plans when weighing executive pay decisions. For example, if an executive is one of the candidates to succeed the CEO, it is likely appropriate to pay that executive at a premium to market for their current role. The committee should also review retention handcuffs for talent that is most critical for succession planning.

One retention risk approach to consider is conducting a “next job” analysis. This analysis considers what a current executive could potentially be paid if they left their current company for a higher-level position at another company. For example, knowing how much the head of a large business unit could make as a CEO of a smaller stand-alone company can give an important frame of reference for retention risk. While ISS and Glass Lewis may be critical of special retention awards, the greater risk to the company may be losing essential talent because there was not enough retention “glue” holding them in place.

Even if the proxy advisors aren’t thrilled, retention awards may draw relatively less ire if they are granted only to executives other than the CEO, and you may be able to get shareholders on board if they are framed as an element of succession planning. If you’re not sure what to say about succession planning, you’re not alone – check out Meredith’s blog on TheCorporateCounsel.net about the significant variations in discussing the elements of this process.

Liz Dunshee

March 18, 2024

The Pay & Proxy Podcast: Lessons for Compensation Setting from Tornetta v. Musk

In the latest 20-minute episode of the “Pay & Proxy Podcast,” Meredith interviewed Paul Hodgson of ESGAUGE (Paul is also a freelance writer and researcher for ICCR and Ceres). Meredith and Paul elaborated on themes from Paul’s recent article on impact of Elon Musk’s 2018 compensation package on benchmarking & the market for CEO pay. Specifically, the podcast covers:

1. Overview of the equity award and legal challenges in Tornetta v. Musk

2. How Delaware boards need to be thinking about director independence when setting compensation, especially for potential controlling shareholders and “superstar CEOs”

3. Process takeaways for compensation committees from the Tornetta v. Musk decision

4. The importance of shareholder outreach and necessary disclosures when seeking majority of the minority shareholder approval

Liz Dunshee

March 14, 2024

Annual Incentive Plan Payouts: 10 Year Trends

Last fall, Liz shared that more than 70% of S&P 1500 CEOs achieved target or above-target payouts for annual incentives in 2022, according to an analysis from ISS-Corporate. In that analysis, ICS questioned whether terminology commonly used by companies in CD&A — stating that target goals are intended to be “rigorous” — is accurate when targets are consistently achieved. The report suggested a “best practice” payout range is 50-60%.

This recent report by Compensation Advisory Partners, which analyzed annual incentive plan payouts over the past ten years of 120 large U.S. public companies with a median revenue of $43 billion, further supports this 70% statistic.

Based on our analysis of actual incentive payouts over the past ten years, the degree of difficulty, or “stretch”, embedded in annual performance goals translates to:
– A 95 percent chance of achieving at least Threshold performance
– A 70 percent chance of achieving at least Target performance
– A 5 percent chance of achieving Maximum performance

Not surprisingly, 2020 and 2021 were outliers:

In most of the years reviewed in our study, between 60 percent and 80 percent of companies paid bonuses at target or above. There were two exceptions: 2020, when only 55 percent of companies paid bonuses at target or above, and 2021, when 89 percent of companies paid bonuses at target or above.

In 2020, bonuses were generally down due to the unanticipated impact of the COVID-19 pandemic on financial results, while in 2021 bonuses increased due to a faster than expected rebound for most companies. In 2022, we saw a return to more typical payout distributions with 65 percent of companies paying bonuses at target or above.

With the macroeconomic environment still highly uncertain, the report notes that “companies can use design strategies to help reduce volatility in their plan payouts, including setting wider ranges around target to recognize the challenges of setting performance goals in an uncertain environment, using non-financial goals to tie annual incentive payouts to other markers of company progress, and adding relative measures, which will allow for relevant comparisons even if the overall market is affected by macroeconomic challenges.” On the use of non-financial goals, some had speculated that the Dodd-Frank clawback rules may also cause companies to include more strategic or operational goals in their plans. Whatever the reason, an increasing number of companies in this study are taking that approach (separate from ESG goals):

57 percent of companies in our current study use strategic or nonfinancial goals, an increase from 38 percent in 2020. These metrics incentivize behaviors that contribute to long-term success but may not be captured by short-term financial performance results. Specific strategic or nonfinancial metrics vary by industry and company – for example, pharmaceutical companies often use pipeline metrics and oil and gas companies often use safety and environmental metrics.

Meredith Ervine 

March 13, 2024

Benchmarking Human Capital Disclosures

Seyfarth just released its Human Capital Disclosure Report — now in its third year. Based on a review of HCM disclosures of 200 companies in 2023 10-Ks, the report provides the following general trends — although it also recognized that the disclosures continued to vary widely from company to company:

We saw an increase in the number of HCM disclosures we reviewed specifically referencing culture up an average of 82.5% across industries.

Despite recent Supreme Court decisions raising issues about factoring race into college admissions decisions, we continued to see most HCM disclosures include reference to DEI efforts with 93.5% of the HCM disclosures we reviewed across industries including references to DEI principles. The number of companies including more detailed statistics related to diversity and year-over-year comparisons continued to increase with the number of companies that included demographics reporting increasing to 60.5% across industries (up from 44% in 2021).

While not at the same level of DEI references, we saw consistent numbers in the references to pay equity reviews in the HCM disclosures we reviewed—with 28.5% across all categories mentioning pay equity efforts—and most industries reflecting the same or increased references to pay equity reviews.

Perhaps not surprisingly, many of the HCM disclosures we reviewed focused on recruitment and retention efforts as a critical part of their HCM strategy. As part of that effort, employee benefits continue to play a front and center role. In addition to the compensation element, which is impacted by the pay equity analyses noted above, we saw many references to the importance of the company’s employee benefits package. These references often included mention of standard employee benefit programs, such as retirement plans and medical benefits, but many also referenced additional benefits offerings, such as mental health and well-being benefits, mindfulness tools, caregiver (caring for infants as well as disabled or elderly family members), and family planning and fertility benefits.

We also saw many HCM disclosures focus on employee engagement, noting engagement surveys, and other ways to assist employees with their professional development and general education. Many disclosures referenced remote and hybrid work options reflecting a continued desire for flexibility within the workforce. Companies also seemed focused on developing their talent pipeline, as another tool for retention and health of the business. We saw references to a variety of course offerings and programs, including traditional coursework from universities (some virtual) as well as mentorship and sponsorship programs. We also noted references to more discreet topics such as mindfulness, financial literacy, and English as a Second Language courses.

[T]he number of references to board level oversight of human capital issues in the HCM disclosures we reviewed (regardless of industry) continued to increase with an average of 45.5% reporting board oversight in this area, up from 25% in 2021 and 42% in 2022.

Meredith Ervine