– Broc Romanek, CompensationStandards.com
The latest memo from Pay Governance is unique and bears reading. Here’s the key findings:
1. Sustainable investing now represents approximately 11% of the invested assets under management in the US.
2. Some sustainable investors or shareholder activists file shareholder resolutions to influence corporate environmental and social (E+S) policy, and certain E+S proposals have garnered shareholders support levels at or above 30%.
3. ISS recommends “for” about 70% of such proposals, but voting investors appear to diverge from ISS with generally low levels of support on most proposals.
4. Additionally, ISS appears to recommend “for” proposals requesting additional E+S reporting and “against” proposals that would place operational limitations on corporate issuers.
5. Shareholder proposals seeking to require the inclusion of E+S metrics in executive incentive plans are almost always rejected by ISS and the majority of shareholders.
6. Despite the fact that some companies do maintain limited E+S metrics in annual incentive plans, executive incentive programs continue to focus on financial metrics that are direct drivers of shareholder value creation.
– Broc Romanek, CompensationStandards.com
Here’s a blog by Davis Polk’s Ning Chiu:
ISS is evaluating equity plan ballot proposals under a new “scorecard” approach this season, which we previously discussed. Through May 12, ISS has supported 85.9% of equity plan proposals covered under its S&P 500 and Russell 3000 models, higher than in past years. In 2014, of the 808 companies in those indexes that were reviewed, a little over 80% received favorable recommendations for their plans.
About 300 companies evaluated this year met the minimum thresholds. The primary reasons the plans faced “against” recommendations include excessive plan costs, which were often reason alone to warrant a negative view.
In terms of vote results, only 11% of companies that have held meetings received less than 80% of votes in favor, a significant decrease from the prior year. No plan has yet failed.
Of note, as ISS Corporate Solutions looks across equity plan proposals, is that five years seems to be the median plan duration. Plans with duration in excess of six years receive no points under the scorecard approach. In addition, a majority of companies have adopted at least a three-year minimum period between the grant date and vesting date for awards to CEOs, which provides for partial credit under the ISS scorecard. Longer time periods are becoming more common for stock appreciation awards and time-based full value awards, but are still rare for performance-based awards.
In addition, more than 62% of companies met the ISS criteria for having a clawback policy, which must be more restrictive than the Sarbanes-Oxley clawback that covers only the CEO and CFO. Full points are awarded for a policy that allows recovery from all or most equity awards in the event of certain financial restatements.
Finally, few large companies are permitting practices such as repricing and have liberal change-in-control vesting.
Also check out this blog about a new study about when the SEC should require unbundling…
– Broc Romanek, CompensationStandards.com
With the July 6th deadline for comments to be submitted to the SEC looming, you can gather ideas for your comment letters from our webcast transcript, as well as the oodles of memos posted in our “Pay-for-Performance” Practice Area (check out this new memo from Mark Borges in particular). The first handful of comment letters have already been submitted to the SEC…
You have only until next Friday – June 5th – to register for our “Proxy Disclosure Conference” to get 20% off. Act Now!
– Broc Romanek, CompensationStandards.com
Here’s a description of this recent NPR story:
CEO pay comes up a lot in the news. The stories often include someone complaining that it’s too high. Then there’s someone on the other side, defending CEO pay. But that’s usually that’s where the stories stop.
On today’s show: an actual story about CEO pay, with a beginning, middle, and an end. It’s the story of two guys who tried to cut the pay of the CEO at a small pneumatic tool company on Long Island.
Meanwhile, this Bloomberg piece entitled “Executive Pay Gluttony” covers some of the history of executive pay…
– Broc Romanek, CompensationStandards.com
We have posted the transcript for the popular webcast: “P4P: What Now After the SEC’s Proposal.” We have also posted over 50 memos on the SEC’s proposal – including this one from Orrick with a sample table and disclosures…
– Broc Romanek, CompensationStandards.com
Recently, ISS posted this survey on compensation trends based on this year’s proxy statements filed so far. As summarized in this blog, the survey shows:
– The most significant trend continuing in 2015 has been the move to performance-based pay, which has mostly been in the form of long-term equity awards. Related to that ongoing shift has been the growth in the use of Total Shareholder Return, or TSR, as a performance metric, and the use of relative awards, where the achievement of the award is based on performance relative to a group of companies, usually a peer group but sometimes a broader index like the S&P 500.
– TSR remains the top performance metric used for long-term performance awards, with 58 percent of companies using TSR, up from 51 percent last year.
– The shift to performance based pay has led to increased complexity and perhaps less transparency.
– The main issue for all parties will be less visibility as to the potential value of the award. There will be more uncertainty, and greater potential for conflicting designs across multiple awards. In short, an increase in “unintended consequences,” where complexity in award design leads to a pay and performance disconnect, is a distinct possibility.
– Broc Romanek, CompensationStandards.com
In her NY Times column on Sunday, Gretchen Morgenson compared the levels of say-on-pay votes with the CEOs that earn the most. An interesting read…by the way, here’s a recent Q&A with Gretchen about herself…
– Broc Romanek, CompensationStandards.com
Here’s a note that I received from a member recently: Shareholder engagement may not be surfacing tough compensation issues as long as ISS is willing to recommend a “For” vote on say-on-pay. But, once ISS does recommend an “Against” vote, it seems any inhibitions to criticize or vote against say-on-pay come tumbling down. Here’s a case in point:
-I have a client that has received mid-90’s shareholder support for SoP every year
-ISS has recommended a “For” vote for SoP every year until this year
-Over the last 3 years, the company received a “High Concern” rating from ISS based on their pay-for-performance quantitative test score
-ISS has been willing to support the company despite the “High Concern” rating in the past, but this year changed its vote to “Against” citing the “High Concern” on the quantitative tests and some other issues
-The company has diligently engaged its top 25 shareholders every year in October-November for the last 2 years, and has generally had positive feedback on the current compensation structure (there was some feedback about disclosure and discretion, but nothing seemed serious at the time)
-Once ISS released its report this year with the “Against” recommendation, the company contacted its top shareholders, and this time they heard a very different story. Investors were siding with ISS and would no longer support SoP, or in some cases, said this would be the last year they would support SoP and expected significant changes to the pay program in the future
-The company was surprised and disappointed that so many of the shareholders had not spoken up sooner (especially during the October-November meetings), which would have allowed them to address these concerns starting in 2015, and perhaps avoided a significant drop in shareholder support in 2015
So, what happened here?
-Is it possible investors assumed everything was okay as long as the proxy advisory firms were recommending a “For” vote, and they focused their attention on other companies flagged by the proxy advisory firms?
– But, once the company was identified as having compensation issues sufficient to warrant an “Against” vote, investors paid much closer attention and decided to side with the proxy advisory firms?
– How else to explain past support, and no objections until the adverse recommendation from ISS?
– Is it also possible some large institutional investors feel the need to show they are independent of management, as recent studies have called them out for their lack of opposition to managements’ proposals?
What lessons can be learned?
1. Do not take shareholder support for granted. It has to be earned every year.
2. If you meet with your major investors, be sure to probe for any concerns or areas they think you need to do better. Ask if there are any “deal breakers” you need to know about. Try to gauge the “intensity” of their concerns.
3. The proxy advisory firms’ biggest influence may be their ability to draw investors’ attention to potential “outliers” that require additional scrutiny
4. Pay attention to the proxy advisory firms’ methodologies, and adopt policies and programs that minimize the risk of an adverse recommendation ( in other words, try not to be the 10%-12% of the companies that attract their against vote). Easier said than done!
5. Once issues are identified by shareholders, be hyper-diligent in addressing their concerns
6. Given that a number of the institutional investors admitted to not reading the CD&A until ISS recommended an “Against,” if you expect a negative recommendation, it is important to initiate in-depth conversations with investors to:
– Find out what concerns they might have with the pay program in the event an “Against” recommendation is made by ISS or Glass Lewis
– Inquire what changes could be made to gain their support
– Broc Romanek, CompensationStandards.com
Here’s a blog by Pearl Meyer & Ptrs’ Greg Swanson:
While most of the chatter surrounding the SEC’s April 29 proposed rules appears to be focused on the recalculation of equity values, the proposed change in the way pension values are reported for pay-versus-performance disclosure is equally significant for those companies that sponsor defined benefit (DB) plans. When defining “compensation actually paid,” the SEC acknowledged the inadequacy of the current definition of Change in Pension Value in the Summary Compensation Table (SCT). As a result, the SEC is proposing that the pension value currently used in the SCT be replaced with the actuarially determined “service cost” for the applicable fiscal year for purposes of the pay-for-performance disclosures.
By its proposed adjustment, it appears the SEC is now in agreement with the rest of us. To understand the relevance of the proposed adjustment, it might help to explore the flaws in the current SCT disclosure rules.
Communicating the compensation value of widely different DB retirement arrangements is challenging – a fact the SEC readily admitted when developing the current DB plan compensation disclosure rules that became effective in 2006. In an attempt to standardize the method of disclosure and minimize the burden placed on companies, the SEC decided to require the disclosure of an annual value that loosely reflects the increase in the accounting liability for most DB plans. There are two fundamental flaws in the DB plan values currently required in the SCT:
1. The SEC’s method for disclosing DB plans in the SCT includes all interest cost (growth in value due to the passage of time) as compensation to the executive. This is in direct conflict with the SEC’s own determination that reasonable interest earned on voluntary deferred compensation should not be considered current compensation for purposes of SCT disclosure.
We agree with the SEC that only “preferential” interest should be considered compensation. Applying this in a consistent manner to DB plans would mean that the interest cost associated with prior accrued benefits should not be included as compensation. As a result, the SEC’s method for the SCT could materially overstate DB plan compensation in the latter years of an executive’s career.
2. The SCT method also includes as compensation 100% of the value of any actuarial gains or losses resulting from changes in assumptions (e.g. discount rate, mortality table), as well as the full impact of any plan amendments that occur during the year. This can result in significant fluctuation in calculated value from year to year, diminishing the comparability of the information between years and/or between individuals.
Replacing the SCT DB pension methodology with an actuarial service cost approach, as the SEC has proposed, would address both of these fundamental flaws and result in a much more consistent, apples-to-apples compensation value associated with DB plans. Our firm often employs a similar approach when performing total compensation benchmarking analyses for clients if they, or their peers, maintain DB retirement arrangements for executives. This can be particularly important for companies in industries with a higher prevalence of DB plans such as banking, insurance, utilities, manufacturing, etc.
We applaud the SEC for making this adjustment to the definition of “compensation actually paid,” and believe the SEC should go a step further and overhaul the methodology within the SCT in the same manner. This would minimize the confusion of multiple methods and provide shareholders with pension-related compensation information that is more relevant, comparable and useful.
– Broc Romanek, CompensationStandards.com
As someone who has practice yoga for 30 years, this NY Times article about Aetna’s CEO resonated. Here’s an excerpt:
In recent years, following a near-death experience, Mr. Bertolini set about overhauling his own health regimen, as well reshaping the culture of Aetna with a series of eyebrow-raising moves. He has offered free yoga and meditation classes to Aetna employees; more than 13,000 workers have participated. He began selling the same classes to the businesses that contract with Aetna for their health insurance. And in January, after reading “Capital in the Twenty-First Century,” the treatise on inequality by the French economist Thomas Piketty, Mr. Bertolini gave his lowest-paid employees a 33 percent raise.
Taken together, these moves have transformed a stodgy insurance company into one of the most progressive actors in corporate America. Most health insurance companies are thriving, largely because of increased enrollment. Aetna’s stock has increased threefold since Mr. Bertolini took over as chief executive in 2010, and recently hit a record high. It’s a decidedly groovy moment for the company, and Mr. Bertolini is reveling in his role as an idealistic, unconventional corporate chieftain.
“We program C.E.O.s to be certain kinds of people. We expect C.E.O.s to be on message all the time,” he said. “The grand experiment here has been how much of that do you really need to do?”
On a February day in Aetna’s Hartford headquarters, there were experiments all around. In a conference room downstairs, a meditation class had just concluded, and employees were returning to their desks. Nearby, preparations were underway for a new yoga class, starting in a week. And in his corner office — where a golden statue of the Hindu deity Ganesha was arranged next to an antique grandfather clock — Mr. Bertolini eagerly shared the most recent data from Aetna’s meditation and yoga programs.
More than one-quarter of the company’s work force of 50,000 has participated in at least one class, and those who have report, on average, a 28 percent reduction in their stress levels, a 20 percent improvement in sleep quality and a 19 percent reduction in pain. They also become more effective on the job, gaining an average of 62 minutes per week of productivity each, which Aetna estimates is worth $3,000 per employee per year. Demand for the programs continues to rise; every class is overbooked.