The Advisors' Blog

Put this in the category of “nothing is ever easy.” There’s a new development in the multiple cases challenging the FTC’s broad non-compete ban. As reported by Bloomberg, the US District Court for the Eastern District of Pennsylvania found that the FTC “has clear legal authority to issue ‘procedural and substantive rules as is necessary to prevent unfair methods of competition'” and denied a tree trimming company’s motion for a stay of the effective date and a preliminary injunction.

This decision seems to directly conflict with an early July order by a federal judge in Texas granting a tax services firm’s motion for a preliminary injunction of the ban (which was limited to the plaintiffs and plaintiff-intervenors) — creating a divide in the judiciary. The article says, “a real estate firm in The Villages, Fla., is also pursuing a lawsuit over the rule in the Middle District of Florida.”

This Troutman Pepper alert says, “employers should take steps now to prepare for the possibility of the ban becoming effective right after Labor Day.” While the Texas court plans to issue a ruling on the merits by August 30, that is only four days before the ban’s effective date.

– Meredith Ervine 

Semler Brossy is out with its latest report on 2024 say-on-pay data and things are looking up! In fact, at Russell 3000 companies, the average support in 2024 is the highest it’s been since 2017, and the failure rate is lower than any year since 2015. Here are some more key takeaways from the report:

– The gap between the S&P 500 and Russell 3000 average vote support continues from 2023 — this diverging support for larger companies has persisted over the last five years.

– The current S&P 500 average vote result of 89.6% is 90 basis points higher than the index’s 2023 year-end average.

– Support was lowest in the Communication Services sector, with 65% of companies receiving over 90% support.

– ISS “Against” recommendation rates for Russell 3000 companies (11.4%) and S&P 500 companies (8.0%) continue to diverge.

– The average vote result for Russell 3000 companies that received an ISS “Against” is 22% lower than those that received an ISS “For” this far in 2024; the spread is 28% for S&P 500 companies.

– Meredith Ervine 

Sign up this week for our “2024 Proxy Disclosure & 21st Annual Executive Compensation” Conferences to get together with other compensation and governance practitioners in San Francisco on October 14 & 15 (back in person with NASPP) and receive our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate). This deal ends this Friday, July 26! You can register now by visiting our online store or by calling us at 800-737-1271.

Our Conferences are timed & organized to give you the very latest updates & tips you need to prepare for the flurry of year-end and proxy season activity. You’ll walk away with actionable “to dos” to improve your compensation practices and disclosures going into 2025! Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once? Plus, our on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them for one year. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.

As always, our panelists will be addressing all the proxy season, annual reporting and executive compensation hot topics that are top of mind for you right now (or should be in the fall as we head into proxy season) — like perks practices, living with newly adopted clawback policies and the resurgence of governance & compensation shareholder proposals — and will be giving their real-time thoughts on evolving situations and practices. Check out our terrific lineup of experienced speakers and all the timely topics they’ll be addressing.

We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts!) so you won’t miss out on the practical takeaways our speaker lineup will share.

– Meredith Ervine 

– The State of Say-on-Pay During the 2024 Proxy Season
– Highlights and Tips from this Year’s CD&As
– Best Practices for Disclosing Incentive Compensation Adjustments and Outcomes
– Trends in Disclosure Regarding Operational and Strategic Metrics
– Pay-versus-Performance: SEC Staff Guidance Issues and Year 2 Enhancements
– Compensation Clawback Policies – Multiple Policies/Potential Disclosure Issues
– Proxy Advisory Firms – Is Their Influence Starting to Wane?
– Perquisites Disclosure and Recent Enforcement Focus
– Shareholder Proposals – Company Strategies; No-Action Trends; Activists and Universal Proxies
– Rule 10b5-1 Plan Disclosure Developments
– Pending SEC Rulemaking

Members of this site can access the transcript of this program for free. If you are not a member of CompensationStandards.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.

– Meredith Ervine 

On Monday, I shared data showing a significant increase in use of environmental metrics in incentive plans — particularly metrics related to GHG emissions. For companies or compensation committees with FOMO, this report from Pay Governance and SustainaBase has a guide to getting started. If you’re considering integrating environmental performance metrics in an incentive plan, the report suggests first understanding the company’s readiness to measure and quantify the considered objectives & aligning with the company’s existing environmental priorities — by considering the company’s most recent E&S materiality assessment, existing internal objectives and the requirements and preferences of external stakeholders. With respect to one group of stakeholders — institutional investors and proxy advisors — the alert says:

In our experience, institutional investors and proxy advisors prefer executive incentive designs that are measurable and transparent. This includes clearly detailing the performance metrics and goals used to reward executives. Therefore, when it comes to incorporating “E” performance metrics in incentive arrangements, quantitative metrics (i.e., predefined goals are set at the beginning of the performance period and achievement against the goal at the end of the performance period determines a corresponding incentive payout) are often preferable. Additionally, as companies’ environmental reporting capabilities become more robust and automated, this may further lend itself to companies considering whether quantitative “E” performance metrics should be included in their executive incentive designs.

While quantitative metrics are generally preferred, there are situations where qualitative metrics may be more relevant. Early-stage companies at the outset of their sustainability endeavors — such as those undertaking materiality assessments, instituting sustainability teams, or identifying internal benchmarks — require a degree of flexibility. [But] even well-established companies with robust environmental strategies occasionally find qualitative metrics beneficial, particularly when taking their initiatives to the next level.

The report also emphasizes the importance of aligning metrics with any specific frameworks used by the company so that one standard (like the GHG Protocol) is used to track environmental metrics across all departments — “from finance and investor relations to sustainability and operations.”

Side note: One of the authors of the report, Tara Tays, is participating on the panel “The Top Compensation Consultants Speak” at our 2024 Proxy Disclosure & Executive Compensation Conferences this fall! Our panel has a great agenda in store for attendees and plans to discuss topics like “Measures to Fit the Moment” and “Top Executive Compensation Plan Designs that Can Push Shareholders to a Failed Say-on-Pay Vote.” Register now to attend in person at our discounted “early bird” rate!

– Meredith Ervine 

After blogging twice last week about conducting thorough pay equity audits, I was pleased to stumble across this Seyfarth memo on maintaining privilege over pay equity audits and investigations. It starts with how and why the discoverability of audits and investigations is a high-stakes dispute:

Employers often learn about their employees’ equal pay complaints well before a lawsuit is filed in court. Employees frequently bring their concerns to company personnel first and only proceed to litigation if they feel those concerns were inadequately addressed. Depending on the circumstances, some employers may choose to investigate such claims or audit their pay practices as a result.

Many times, an employer’s investigation will reveal no evidence of unlawful pay disparities. If the employee rejects that conclusion and takes their claim to court, one issue that frequently arises in subsequent litigation is the discoverability of the employer’s investigation files. … Employers find themselves wanting to use aspects of their internal investigation to defend some aspect of an equal pay claim. Such documents can show, among other things, that the employer was diligent in responding to a plaintiff’s claims of discrimination, or that those claims are simply unfounded. … [But] maintaining privilege over investigation files is often as much a question of how those files will be used in litigation as it is a matter of how the investigation itself was conducted.

In one case, the court held that files were privileged because one primary purpose was to obtain legal advice, even though a non-lawyer conducted the investigation. But the EEOC claimed that the employer’s good faith defense waived privilege since the employer’s intentions were at issue, and the employer was forced to not rely on the files in its defense. In another case, the employer waived privilege by relying on its internal investigation report in its formal response to the EEOC complaint. In another, the court distinguished between denial and an affirmative defense:

An employer’s burden of proof is one of the fundamental differences between an equal pay claim brought under Title VII versus one brought under the Equal Pay Act. According to the court, the employer intended to use the report as evidence of a legitimate, nondiscriminatory reason for plaintiff’s termination under the McDonnell Douglas burden shifting framework applicable to plaintiff’s Title VII claim. Under that framework, “an employer is only required to articulate or produce a legitimate reason for its actions, but the employer does not bear a burden to prove or persuade, only to make a minimal evidentiary showing.”

This is in contrast to an employer’s obligation under the EPA, which many courts have held puts the burden of persuasion on the employer to establish its affirmative defense. Or, to put it in more practical terms, the court held that: “the fact that an attorney investigates a claim and reports to a corporate client does not waive privilege where ‘no actual defense of reliance on the attorney’s recommendations or findings is made as a basis of the defense against the claim.’”

Hmm. It almost goes without saying that you should work closely with your experienced labor counsel on any pay equity audits or investigations! I also found this recommendation from the alert to be a helpful — and understandable! — takeaway:

If [employers] have taken the trouble to ensure privilege over their audits and investigations, they should understand that their intention to use those documents in defense of their claims could cause them to lose the privilege they so rigorously protected. Employers will want to keep these issues in mind as they consider why they are conducting the internal investigation in the first place, or how they might want to use what they find in later litigation.

– Meredith Ervine 

When the final clawback listing standards were being adopted, there was a lot of speculation about what companies would do with existing policies — since those policies went beyond the stock exchange requirements in some ways and, in others, allowed greater flexibility than permitted by the listing standards. Would companies maintain the provisions that go beyond the requirements? Would their required policy be combined with their existing voluntary policy? We ran a survey of our members, and the results were split. This FW Cook blog has an update with data from the 2024 proxy season:

Now that the 2024 proxy season is underway, there is data to determine whether companies merely adopted SEC-compliant policies, or adopted (or retained) more expansive policies that may cover a broader population, definition of compensation, and/or clawback triggers. In an internal survey of practices among 45 large-cap companies (market capitalization greater than $10 billion), we found that 80% maintain an expanded clawback policy that goes beyond the SEC requirements. Unlike the SEC mandatory requirements, expanded clawback provisions typically provide for discretionary application. … Among the 20% of survey companies that only maintain a clawback policy that satisfies SEC requirements, one-third indicated an intention to review their policies soon and are considering adoption of an expanded policy.

The blog cites these as common features of the voluntary policies or provisions:

– 66% of the survey companies cover a broader population than SEC requirements, either by title (e.g., VP/SVP and above), coverage of all corporate officers, or the entire executive/leadership group

– With SEC requirements only mandating coverage of “incentive-based compensation”, 67% of the survey companies have expanded coverage to include broader types of compensation, such as all cash and equity incentives (including time-based awards)

– In addition to the SEC rules covering restatement-related clawbacks, expanded policies may include triggers absent a restatement, for example:

• Fraud or misconduct absent a financial restatement (64% prevalence)
• Reputational, financial, and other harm to the company (31% prevalence)
• Violation of company policy / code of conduct (25% prevalence)

If you joined us for our fall conferences last year, hopefully you heard our stellar panel on clawbacks. It was so chock full of helpful takeaways that we asked the panelists back this year for our “Living with Clawbacks: What Are We Learning?” panel. Join us at our 2024 Proxy Disclosure & Executive Compensation Conferences on October 14-15 in San Francisco to hear what tricky clawback issues they’re mulling over one year later. You can peruse our agenda to see what else our expert practitioners will cover! Our early bird price for in-person single attendees ends July 26, so register now to take advantage of this discounted rate!

– Meredith Ervine

Despite investors taking a more critical approach to ESG metrics recently, this Farient Advisors memo discusses the rise of climate metrics among a group of 500-plus exchange-listed companies in nine countries, based on research by the Global Governance and Executive Compensation (GECN) Group. Farient reports:

The use of environmental measures in incentives has increased to 61% globally, with significant increases across the various regions. For example, in the U.S., 52% of large-cap companies now use environmental incentive measures, up significantly from 34% in 2022 and 8% in 2021.

Of these environmental metrics, emissions metrics are the most common:

GHG emissions are the most common environmental measure, increasing by 33 percentage points over last year. This considerable jump coincides with increases in companies setting emissions reduction targets and disclosing them publicly. In fact, 63% of S&P 500 and STOXX Europe 600 companies have publicly disclosed Scope 1 and 2 emissions reduction goals for 2030.

The memo also provided these other key research findings:

– Common climate-related metrics include GHG emissions reductions, energy efficiency improvements, and the achievement of specific sustainability targets.
– Companies typically integrate these metrics into short-term incentive (STI) plans, and they are increasingly incorporating them into long-term incentive (LTI) plans.
– This trend is particularly noticeable in sectors with significant environmental impacts, such as energy, utilities, and manufacturing.

– Meredith Ervine

Today, I’m sharing more from this Zayla Partners article on conducting a thorough pay equity audit. (See yesterday’s blog for a description of the tools and methodologies for the compensation analysis.) The article lists the following key phases of most pay equity audits:

– Step 1: Set goals and get leadership involvement. Outline the reasons for conducting the audit, expected outcomes, required resources, and executive support needed. Educate leaders on the business case for pay equity.
– Step 2: Review existing policies and practices. Look closely at current compensation structures, job frameworks, salary bands, and pay setting guidelines through an equity lens. Identify process gaps that allow inequities.
– Step 3: Collect and clean employee compensation data. Gather pay data on base salaries, bonuses, equity awards, and other monetary benefits for all employees. Remove names and personal identifiers, standardize job titles and framework levels.
– Step 4: Analyze for statistically significant pay gaps. Leverage tools like multiple regression analysis to reveal pay disparities across gender, race, tenure, and other variables. Do this while controlling for legitimate causes of pay differences like performance ratings, education, experience, and job level.
– Step 5: Conduct an in-depth qualitative analysis. For high-risk employees flagged by the analysis, look deeper into performance reviews, qualifications, responsibilities, and other factors. Confirm whether legitimate business reasons explain pay differences.
– Step 6: Identify root causes and make action plans. Uncover policies, processes, or cultural dynamics that make for inequities to persist. Define concrete remediation plans made to address the root causes, including pay adjustments, process changes, training, and accountability mechanisms.
– Step 7: Put your solutions in place and follow-up. Execute remediation plans, communicate with employees, re-run audits, review progress, and refine actions as is necessary. Doing regular audits and ongoing monitoring prevents new inequities from developing.

The article then goes into more detail on steps 6 and 7 — the work that follows the compensation analysis — including developing an action plan and remediation strategies, like compensation adjustments, job level realignments, and succession planning, strengthening hiring and pay-setting practices, and increasing pay transparency — plus ongoing pay equity strategies to maintain fairness.

This and other resources — including our “Checklist: Pay Equity Data Collection and Interpretation,” which addresses legal considerations to consider upfront — are posted in our “Gender & Racial Pay Equity” Practice Area.

– Meredith Ervine 

This Zayla Partners article on conducting a thorough pay equity audit gets into the nitty gritty of the analytical techniques for pay equity audits. For folks who understand what a pay equity audit is and why it is important, but haven’t worked through one and don’t have an understanding of how the analysis works, the article gives this explanation:

Pay audits use a range of analytical techniques and tools to uncover potential compensation inequities. Regression analysis identifies predictors of pay and figures their impact (while considering legitimate factors). This helps to isolate potential discriminatory variables.

Visual data analysis through scatter plots, quartered distributions, and other visualizations makes it easy to spot outliers and anomalies that need further investigation. Dashboard reporting on HR analytics platforms shows audit findings across multiple pay dimensions and breaks everything down into problematic segments.

Survey data adds qualitative context around employee perceptions of compensation fairness, transparency, trust, and engagement. Discussions with employees and managers through interviews provide firsthand experiences and insights into potential equity barriers. Reviewing job titling conventions, descriptions, and framework levels helps find discriminatory practices.

Comparing internal pay against market salary ranges helps to locate outlier positions. The best approach combines quantitative statistical tools with qualitative techniques to understand what’s behind inequities. A multi-modal analysis provides a complete view into compensation equity.

Tomorrow, I’ll be sharing the article’s coverage of key steps in any thorough pay equity audit — including the important work that follows the compensation analysis.

– Meredith Ervine