The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

May 1, 2024

Say-on-Pay: Things Are Looking Up!

Average say-on-pay support for Russell 3000 companies is sitting at 91% so far this year – with only 1 failure – which is trending higher than last year’s results. That’s according to this WTW snapshot from last week. The update also notes:

– Last year’s season-long failure rate was 2%, based on a total of 53 failed votes, compared to 1% so far this year

– ISS is issuing fewer negative vote recommendations (8% this year vs. 13% last year)

– Pay-for-performance continues to be the biggest driver of ISS “against” recommendations

Depending on when the snapshot is taken, S&P 500 companies are either experiencing similar results (per the WTW snapshot) or lagging slightly behind (according to this Semler Brossy report that’s available for download).

Liz Dunshee

April 30, 2024

Say-on-Director-Pay: “Double Binding” Bylaw Proposals on the Ballot

We’ve blogged about the concept of “say-on-director-pay” from time to time around here. Most recently as part of the director compensation settlement at Tesla. That settlement led to a new development this season: a shareholder proposal at 13 companies for “Double Binding Director Say-on-Pay.”

The proposal is unique because it’s structured as a binding bylaw amendment (rather than a precatory request). This framing seems to be more popular this year – I blogged a few weeks ago on our Proxy Season Blog on TheCorporateCounsel.net about an “independent chair” proposal that was also submitted as a binding resolution. The bylaw provision would say:

Compensation. The compensation of directors the corporation pays shall be fixed at $1 in a f iscal year; provided, however, the corporation may pay, grant, or award compensation greater than $1 in a fiscal year if such compensation has been (1) disclosed to stockholders in advance of the fiscal year in which the corporation will pay, grant, or award such compensation; (2) submitted to an approval vote of stockholders at an annual or special meeting of stockholders in advance of the fiscal year in which the corporation will pay, grant, or award such disclosed compensation; and (3) approved by a majority of stockholder votes present in person or represented by proxies and entitled to vote cast in favor of the disclosed annual compensation at an annual or special meeting of stockholders in advance of the fiscal year in which the corporation will pay, grant, or award such compensation. In the fiscal year in which this Section [] takes effect, the Board shall continue to pay, grant, or award any such compensation that the Board has previously approved for such fiscal year.

If this proposal is approved, it means that director pay would be subject to an annual, binding vote. Directors could consider whether they would be excluded from participating in this vote. If you want more detail on this proposal (submitted by Michael Levin at The Activist Investor), check out the “Proxy Preview” report that I flagged last month. Michael recently shared this update about how the proposals are faring. Here are key points:

1. Going to a vote at 5 companies (NiSource on May 13th, PayPal on May 22nd, Fortiv, Alphabet, and Devon Energy)

2. Excluded with no-action relief at 6 companies, based on the argument that excluding directors from the vote would violate state law (Michael says “he won’t make that mistake again”)

3. 2 companies still in process

It will be interesting to see the voting results. Michael implies that there will be more proposals to come…

Liz Dunshee

April 29, 2024

The Pay & Proxy Podcast: T+1 Settlement & Equity Award Tax Withholding

The new T+1 settlement timeframe is only about a month away. As Dave recently reminded everyone on TheCorproateCounsel.net, it will be implemented over the Memorial Day holiday weekend. The new settlement cycle may raise some issues with your equity award withholdings. In the latest 14-minute episode of “The Pay & Proxy Podcast,” Meredith interviewed Troutman Pepper’s Sheri Adler about what we need to know & do. They discussed:

1. When tax becomes due for common types of equity awards

2. Withholding methods for employers

3. Employer responsibilities for depositing federal income tax withheld

4. Potential penalties for a failure to timely deposit

5. New timing for depositing tax following the shift to T+1 settlement

6. Actions & considerations before the May 28th effective date of T+1 settlement

If you have an executive compensation topic that would be good for a podcast, reach out to Meredith! She’s at mervine@ccrcorp.com.

Liz Dunshee

April 25, 2024

Stock Repurchase Excise Tax: Impact of Proposed Regulations on Compensatory Transactions

Earlier this month, the Treasury Department and IRS jointly announced proposed regulations with new guidance on the stock repurchase excise tax created by the Inflation Reduction Act. The IRS previously published temporary interim guidance in Notice 2023-2. This Wilson Sonsini alert notes that “the newly published proposed regulations will effectively replace the Notice and may generally be relied upon by taxpayers until the regulations are finalized.”

The alert then details the impact of the tax and guidance on various transactions, including compensatory transactions. Here’s an excerpt regarding the treatment of net share settlements, sell to cover arrangements and forfeitures of restricted stock:

Net Share Settlements: The proposed regulations generally expand the approach taken in the Notice to provide that stock withheld by a corporation to satisfy the exercise price of a stock option or to cover any withholding obligation (including state or foreign tax withholdings in addition to federal tax withholdings) is not treated as issued for purposes of the “netting rule.”

“Sell to Cover” Transactions: The proposed regulations provide that stock issued pursuant to a “sell to cover” arrangement (where stock is typically issued to a third-party broker and then sold to satisfy a corporation’s withholding obligations) is treated as an issuance for purposes of the “netting rule.”

Restricted Stock: The Notice did not expressly address the treatment of a subsequent forfeiture of restricted stock for purposes of the excise tax. In general, the proposed regulations treat a forfeiture of restricted stock as a repurchase on the date of forfeiture (in an amount equal to the fair market value of such stock on the date of forfeiture) if such forfeited stock was originally treated as issued because a Section 83(b) election was made. As a result, a corporation may have a potential mismatch (positive or negative) for purposes of the “netting rule” with respect to the fair market value of restricted stock that may be issued in one taxable year and subsequently forfeited in another taxable year.

Meredith Ervine 

April 24, 2024

Non-Competes: FTC Adopts Expansive Ban

Yesterday at an open meeting, the FTC voted 3-2 to approve an expansive ban on the use of non-competes. The WSJ reported that this was particularly historic rulemaking.

[It] marks the first time in over 50 years that FTC officials have issued a regulation to mandate an economywide change in how companies compete. The commission has historically operated like a law enforcement agency, investigating and suing individual companies over practices or deals deemed to violate the law.

Proposed in January 2023, this rulemaking received upwards of 26,000 comments. Here are the 570-page final rule and fact sheet. This excerpt from the fact sheet summarizes the basics:

– The final rule bans new noncompetes with all workers, including senior executives after the effective date.

  • Specifically, the final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into noncompetes with workers after the effective date.

– For existing noncompetes, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date of the final rule.

  • Fewer than 1% of workers are estimated to be senior executives under the final rule.
  • Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”

While not addressed in the fact sheet, the final rule contains an exception (expanded from the rule’s proposed form) for non-competes entered into in connection with a bona fide sale of a business entity. John described this exception in today’s blog on DealLawyers.com.

– Meredith Ervine 

April 23, 2024

CEO Special Awards: Typically Used Reasonably

While some CEO special grants have rightfully garnered a lot of attention, this recent report from ISS-Corporate, “Special Grants: Who Gets Them and How Much?“, concluded that CEO non-cash special equity awards are typically used sparingly and in relatively modest amounts. In 2022, only 10% of Russell 3000 companies gave special grants to CEOs. Among the S&P 500, the median value was around $4.5 million.

The most common form of special award was a sign-on grant in connection with the appointment of a new CEO. 44% of new CEOs at Russell 3000 companies received a special grant while only 4% of incumbent CEOs were so lucky. Special grants were much more common if the new CEO was an external hire. Check out the full report (available for download) for more information — including detailed data by index.

Meredith Ervine 

April 22, 2024

Tesla’s Proposal to Ratify Musk’s 2018 Award: 5 Things to Know

You probably saw last week’s NYT DealBook article or Wall Street Journal article that Tesla has filed its preliminary proxy statement and it includes a proposal requesting that shareholders ratify Musk’s 2018 pay package that the Delaware Chancery Court ordered be rescinded. There’s a lot here, and it’ll be fascinating to watch the vote and how the litigation proceeds (both the appeal in Tornetta and any other legal challenges). In the meantime, here are some interesting tidbits from the Times and the Journal, plus Tulane Law Prof Ann Lipton’s post and Bloomberg’s Matt Levine’s column on the topic:

– After the January 2024 opinion in Tornetta, Tesla created a special committee to assess redomestication of the company to Texas (proposal 3 in the proxy statement). Its authority was subsequently expanded to consider whether Musk’s 2018 award should be ratified at the same time. The committee was comprised of one member who was not on the board at the time of the 2018 grant — the second member stepped down after the committee’s authority was expanded. Note that the proxy makes clear that the special committee’s focus was on whether the award in its previously agreed form should be ratified based on current facts; it did not engage a compensation consultant, substantively evaluate the award or negotiate with Musk.

– The 10 annexed documents to the proxy statement include the Chancery Court’s opinion and the special committee’s report to the board.

– Tesla touts unsolicited support it received from institutional shareholders after Tornetta and includes excerpts of a letter of support from T. Rowe Price in the special committee’s report.

– Tesla’s market capitalization has gone down since the milestones included in the performance-based options were achieved. The largest milestone reflected a market cap of $650 billion; Tesla’s market cap was around $500 billion when the preliminary proxy was filed.

– The legal impact of this ratification is unclear — and the proxy says as much:

The Company is asking its stockholders to ratify the 2018 CEO Performance Award under Delaware common and statutory law. Delaware common law ratification permits a Delaware corporation to validate a corporate act where the actors that purported to effect it lacked requisite corporate authority to do so. Common law ratification can also extinguish claims for breach of fiduciary duty by authorizing an act that otherwise would constitute a breach. When properly implemented, common law ratification “reaches back” to validate the challenged act as of its initial enactment. The Company believes that, under the Tornetta Opinion, the 2018 CEO Performance Award is such an act that may be ratified under Delaware common law. The Company also seeks ratification under any other legal theory or appropriate statutory provision, including but not limited to Section 204 of the DGCL. […]

While the Company believes that the Ratification should be upheld by a Delaware court, the Special Committee noted that even a favorable vote by our stockholders to ratify the 2018 CEO Performance Award may not fully resolve the matter. The Special Committee and its advisors noted that they could not predict with certainty how a stockholder vote to ratify the 2018 CEO Performance Award would be treated under Delaware law in these novel circumstances.

Ann’s blog has much more on this topic — particularly on the topic of corporate waste.

Meredith Ervine 

April 18, 2024

Equity Plans: Getting Your “Replenishment” Proposal Across the Finish Line

This Alliance Advisors memo gives an interesting data point for anyone who is sweating out an equity plan replenishment proposal for the second (or third or fourth) year in a row:

If going back for shares two years in a row caused companies to lose support on their equity plan proposals, then surely a company that asked shareholders to approve a new share increase six consecutive years would face a significant increase in ‘against’ votes over time.

Alliance Advisors found twelve members of the Russell 3000 had proposed new or amended equity incentive plans each year from 2018 to 2023. Alliance Advisors analyzed each of those proposals and determined there is no evidence of a change in shareholder support as a result of repeated equity plan replenishments.

Phew! The memo also offers this practice point if your equity plan proposal involves replacing your old plan with a new one:

Commitments needed to secure ISS support when replacing an existing equity plan. When companies seek approval of a new equity plan and intend to terminate and cancel the remaining shares available in an existing equity plan, proxy disclosures need to be clear on this intention. Otherwise, ISS may include the remaining shares available under the old plan in its calculation of plan costs (termed shareholder value transfer, or SVT, by ISS). This would render the plan more costly and negatively impact scoring under the Equity Plan Scorecard (EPSC) – ISS’ tool for analyzing employee stock incentive programs.

A few years ago, ISS revised its policy to require an explicit commitment that: (a) no further shares will be granted under the existing plan unless the successor plan is not approved, or (b) the number of shares available under the successor plan will be reduced by shares granted under the existing plan prior to the successor plan’s approval.

If you have this type of proposal on the ballot and didn’t include the “magic language,” there may still be time to do so in a supplemental filing before ISS issues its report. Obviously, whether and when you need to act on this depends on your meeting date. And, as Alliance points out, there are cases where a negative ISS recommendation won’t sink your ship. The memo notes that while investors may use proxy advisor recommendations as a factor in their decision, they often have their own formulas (which may be more stringent). You always need to know your shareholder base.

Check out the full memo for more tips for getting this year’s equity plan proposals across the finish line.

Liz Dunshee

April 17, 2024

CEO Pay: Payout Trends for “Individual Performance” Metrics

In a memo published last week, Compensation Advisory Partners analyzed how the CEO pay of 50 “early filers” compared to the companies’ financial results. The companies in CAP’s sample – which had fiscal years ending between August and October 2023 – spanned several sectors and reported revenues ranging from $1.4 billion to $383 billion (median revenues of $11.9 billion), and median fiscal-year-end market capitalization of $16.4 billion.

Overall, CAP found that year-over-year financial performance was flat, but median total CEO pay was up. However, that increase was primarily due to the grant date fair value of LTI awards that were made early in fiscal 2023, at a time when the overall market was high and companies were coming off strong 2022 performance. This was offset by a decline in median bonus payouts. Here’s more detail:

Approximately 50% of companies in our sample had an annual incentive payout that was at or above target in 2023 (median payout of 129% of target). These higher performing companies saw modest growth at median for revenue, EBIT and EPS growth, and had strong TSR performance. For companies with below target performance (median payout of 61% of target), median revenue growth was down slightly (-2.6%) while EBIT and EPS performance was down double digits (-15.6% and -11.4%, respectively). Median TSR increased for both groups. TSR was up significantly (+17.8%) for at or above target performers and up slightly (+2.3%) for below target performers.

In 2023, annual incentive payouts had a normal distribution with companies nearly evenly split in receiving payout either above or below target. This is a change from the prior two years when a majority of companies paid out at or above target. The distribution of payouts coupled with the median incentive payout around target suggests the difficulty in setting goals amid unpredictable macroeconomic factors.

The report goes on to discuss how some companies are incorporating metrics relating to a CEO’s individual performance, which I found especially interesting after reading about Boeing’s recent decision to reduce an element of executive pay in the name of “individual accountability” (although in Boeing’s case, the focus was on LTIs). Here’s what CAP found:

Approximately one-third of Early Filers incorporate individual performance in the annual incentive payout for the CEO. This means that the CEO’s payout as a percentage of target may be higher or lower than that of the corporate funding factor (i.e., the percentage at which the annual incentive funds based on company performance). 70% of companies in our sample provided a payout to the CEO that was +/-5 percentage points from the corporate funding factor in 2023.

Nearly 15% of companies reduced the CEO’s payout from the corporate funding factor in 2023, which is up from 2022 (4% of companies) and 2021 (7% of companies). However, the average reduction in payout was lower in 2023 than in prior years. On average, companies that lowered the CEO payout in 2023 reduced it by 30 percentage points compared to 39 points in 2022 and 102 points in 2021. The number of companies that increased the CEO’s payout by more than 5 points above the corporate funding factor was up slightly from last year (17% in 2023 vs. 11% in 2022) but down from 2021 (when it was 33%). However, the increase in payout was more modest, with companies raising the CEO’s payout by, on average, 15 points in 2023 compared to 20 points in 2022 and 34 points in 2021.

Liz Dunshee

April 16, 2024

Tomorrow’s Webcast: “Clawbacks – Navigating the Process After a Restatement”

Every night before I go to sleep, I say a little prayer that none of my clients will discover the need for any financial statement corrections that would border anywhere close to what would be considered a “restatement.” Not only does a restatement (especially a “Big R” restatement) trigger a string of difficult decisions & disclosures, but there is now the added consequence of having to sort through the Dodd-Frank clawback policy and potentially recover compensation from Section 16 officers. I am sleeping just a little better knowing that tomorrow at 2 p.m. Eastern, there will be an expert discussion of the steps involved with this analysis – so don’t miss our webcast, “Clawbacks: Navigating the Process After a Restatement.” It always helps to have a playbook!

We’ll be hearing from WTW’s Richard Luss and Steve Seelig, Gibson Dunn’s Ron Mueller, and Latham’s Maj Vaseghi. They’ll be covering these topics:

– Coordinating with the Audit Committee

– Engaging the Right External Advisors & Internal Resources

– What is an Event Study? How Does it Work?

– Sources of Clawed Back Compensation & High-Level Tax Implications

– Managing Litigation Risk

– Communications with Impacted Executives

– Support & Documentation

Members of this site are able to attend this critical webcast at no charge. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you’re not yet a member, subscribe now on this “no-risk” basis by emailing sales@ccrcorp.com – or call us at 800.737.1271.

We will apply for CLE credit in all applicable states (with the exception of SC and NE, which require advance notice) for this 60-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.

Liz Dunshee