The Advisors' Blog

– Broc Romanek

Last month, I blogged about changes that companies have made after getting a low say-on-pay vote. But if you want to avoid being in the 12-14% of companies that get a negative ISS recommendation each year, there are also things you can do in advance.

This Davis Polk blog lays out the 7 main drivers that lead to say-on-pay issues, in addition to the magnitude of pay & shareholder return (also see this Willis Towers Watson memo). Here’s a teaser:

1. Compensation committee responsiveness. Failure of the compensation committee to demonstrate responsiveness after a low, although passing, say-on-pay vote.

2. Discretionary awards outside of plans. Retention grants, replacement grants and make-whole awards are all discretionary awards that can be particularly problematic if they are essentially re-grants of previously forfeited awards or used to replace foregone performance-based awards. Discretion, or any adjustments, can be appropriately applied, even upward discretion, if specifically linked to tangible business events that benefited shareholders. A separate ISS Analytics report indicated that discretionary cash bonuses have continued to decline, making up just 10% of the S&P 500 in 2016, while 86% of those companies paid non-equity incentives.

3. Incentive plan construction. Questions may arise around a program that relies exclusively on subjective components or has an ineffective mix of time-and performance-based awards.

4. Selection and disclosure of performance metrics. Disclose your metrics in a way that ties them to your strategy. There continues to be a love-hate relationship with relative TSR – but companies with high TSR tend to have higher say-on-pay approvals regardless of pay structure. There’s also a lack of consensus on whether three years is too short of a performance period – consider selecting other metrics for that time span as part of long-term incentive programs.

5. Rigor of performance goals. The situations that generate the most concern include setting goals below last year’s actual or target performance without explanation, goals that always achieve maximum payouts or a company’s failure to disclose goals at all even after the award cycle is completed.

6. Peer group and benchmarking practices. Some companies continue to select aspirational peer sets where the median company is significantly larger, or benchmark above the median without explanation.

7. Employment agreements. While there has been tremendous change in practices over the last seven years, some perennial issues that arise and always garner attention include large severance multipliers, guaranteed multi-year awards, inducement grants, replacement awards, retirement grants and separation benefits.