Yesterday, as reflected in this press release, ISS announced methodology changes to QualityScore – with an increase from 6 to 21 of the core factors considered. There is a data verification period between November 13th-28th for the changes – and the new changes are effective December 4th. Among others, new factors include evaluation of independence of the audit, nomination & compensation committees; unequal voting rights; and vesting periods for option & restricted stock awards.
As John blogged a while back, the IRS updated its “Golden Parachute Payments Audit Technique Guide” earlier this year for the first time since its 2005 issuance. While intended as an internal reference for IRS agents conducting golden parachute examinations, the Audit Technique Guide offers insight into how IRS agents are likely to approach golden parachutes when conducting an audit as explained in this new McDermott Will memo.
Yesterday, ISS released draft policy changes for comment in 13 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 9th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).
These are the three main areas up for consideration in the US:
For the director compensation draft policy, here’s how Wachtell Lipton describes it: “ISS states that median pay for non-employee directors has increased every year since 2012 and was approximately $211,000 in 2016. In response to alleged “extreme pay outliers,” ISS is proposing to recommend voting against or withholding votes from members of board committees responsible for setting non-employee director compensation when there is a “pattern” (over two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Among other things, ISS is seeking feedback regarding the circumstances for which large non-employee director pay magnitude would merit support on an exceptional basis, e.g., one-time onboarding grants for new directors.”
For the gender pay gap draft policy, here’s how Wachtell Lipton describes it: “ISS notes that there has been an increasing number of shareholder proposals requesting that companies report whether a gender pay gap exists, and if so, what measures will be taken to address the gap. ISS is proposing to vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy and its fair and equitable compensation practices. ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.”
1. This summary of a Pearl Meyer report includes these interesting pay ratio stats from a survey:
– Just 13% of the directors surveyed indicate their board has talked about the required disclosure of the ratio for the CD&A.
– Only 11% say they have discussed both internal and external communication.
– Companies in technology and healthcare/pharma/biotech appear to be most prepared in their communication, with 44% in each industry reporting some level of board discussion.
– 42% of companies are projecting a CEO Pay Ratio between 101:1 and 250:1, while 18% expect a ratio of 251:1 or higher.
2. This Weil Gotshal blog recaps what Corp Fin Chief Counsel David Fredrickson said at our “Pay Ratio” conference last week.
3. Ran into Maslon’s Marty Rosenbaum at our conference – and he reminded me of this humorous fictional pay ratio disclosure that he drafted several years ago:
[Disclaimer: An attempt at Item 402(u)-related humor follows. Because sometimes we just have to laugh.]
Soon a public company will be required to identify its median compensated employee and compare that employee’s compensation to that of the CEO. What if a company took this disclosure to the next level: don’t we want to learn something about the employee? Maybe you could see something like this in a future proxy statement:
“After a careful study utilizing its proprietary statistical sampling analysis, the Company has determined that its median compensated employee (“MCE”) is Ralph Snowden, age 37, pictured below. Since 2008, Mr. Snowdon has served as a senior fry cook at the Company’s West Des Moines, Iowa restaurant. Prior to that time, he held a wide variety of kitchen positions with companies in the fast food industry. As shown in the Summary Median Compensation Table (“SMCT”) below, in 2015, our MCE’s total annual compensation was $37,440. In 2015, the mathematical ratio of the total annual compensation of Ralph Snowden to that of our CEO, Ruth Swenson (the “Ralph to Ruth Ratio”) was one-to-238, or 0.0042016-to-one.”
Wouldn’t that be more fun? But now that I think about it, I’m not sure any part of Item 402(u) will work in Minnesota, where all the employees are above average.
We just wrapped up Lynn, Borges & Romanek’s “2018 Executive Compensation Disclosure Treatise” — and it’s been printed. This edition has a major update to the key chapter on the new SEC’s pay ratio rules (now 120 pages long!) & more – this includes the latest pay ratio guidance from the SEC in September. All of the chapters have been posted in our “Treatise Portal.”
How to Order a Hard-Copy: Remember that a hard copy of the 2018 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now to ensure delivery of this 1650-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.
Here’s an excerpt from this Compensia memo about the “newish” pay-for-performance methodology from ISS:
For 2017, ISS discloses the current rankings of each of the seven enumerated financial metrics, but not their weighting. For 2017, ISS ranks the performance measures for technology and life sciences companies as reflected in the table at the bottom of this page.
Several of these rankings are at odds with the financial metrics that many technology and life sciences companies use in their incentive programs. For example, numerous small, mid, and large-cap companies, use top-line metrics such as revenue, bookings, and TSR in their incentive plans consistent with their growth profiles and business strategy. These metrics are currently ranked at the bottom of the list for technology and life sciences companies. Conversely, in our experience, ISS’ favored metrics (ROIC, ROE, and ROA) are not commonly used by technology companies. In a recent Compensia review of the performance share award practices of approximately 130 public technology companies, only one of these companies used one of these return metrics, 36% disclosed the use of revenue, and 55% used relative or absolute stock price goals (either as the sole metric or in combination with other metrics).
While ISS may change these rankings in 2018, it is important to note that, in any given year, ISS’ view on the relative importance of these metrics may not match a Board of Directors’ long-term objectives for its executive team, creating obvious potential for a disconnect.
Yesterday, ISS released this 23-page summary from its 2017-2018 policy survey. This year, survey topics were split into two parts, with an initial, high-level survey covering a small number of fundamental and high-profile topics. Here’s two of the pay-related findings for the US:
– Director Pay – Survey respondents were asked which factors should be considered in determining whether a director pay program presents a governance concern with respect to high pay magnitude. Tops for investors was measuring director pay relative to a four-digit GICS peer group, followed by stock market index peers, and, third, measuring a director pay program relative to all companies. Corporate respondents, meanwhile, deemed the measurement of pay relative to a stock market index most appropriate, followed next by pay measurements relative to a four-digit GICS industry peer group. When asked which factors should be considered in determining whether a pay program presents a governance concern with respect to problematic pay structure, both groups agreed that excessive perquisites was most problematic.
– Gender Pay Gap – Over the past two years, shareholders have filed proposals asking for a report on gender pay equity at numerous U.S. companies. ISS’ survey asked whether companies should be disclosing their gender pay gap information, with 60 percent of investor respondents answering affirmatively, compared with 17 percent for corporates. Of the just over one-quarter (27 percent) of investor respondents suggesting the need for such disclosures would “depend” on certain considerations, most indicated they would deem it favorable if the practice became an industry norm and/or the company was lagging its peers.
In this note, Glass Lewis has joined the many who have written about the SEC’s new guidance on pay ratio (we’re posting memos about that in our “Pay Ratio” Practice Area). In addition to summarizing the SEC’s guidance, Glass Lewis indicates what approach it will take for pay ratio in this excerpt:
Glass Lewis intends to display the pay ratio as a data point in our Proxy Paper in 2018. At this time, however, we do not intend to incorporate the pay ratio into our assessment and analysis of Say-on-Pay proposals. We recognize that this data point might provide valuable additional information to shareholders on a company’s pay practices; however, we do not believe that this information is material for our analyses of the structures by which, and the disclosures of how, companies pay their NEOs.
By the way, for those registered for our “Pay Ratio & Proxy Disclosure Conference,” the video archives for yesterday’s panels are now posted…
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter Wednesday’s Pay Ratio Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials,” filled with 182 pages of annotated model pay ratio disclosures, 156 pay ratio nuggets, talking points, etc.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Eastern.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
