This Forbes op-ed notes that a few “pace-setting companies” now link executive bonuses to diversity objectives – and makes the case for more companies to follow suit. Here’s an excerpt:
If an objective is important, then the company should ensure (1) its employees know about it and (2) that their performance in meeting this goal will be measured along with the company’s other core values and targets. Fostering greater diversity and preventing harassment and discrimination is more than simply the right thing to do on a broader societal level. Indeed, a business case exists for these initiatives. According to research by McKinsey & Company, achieving these goals correlates with concrete financial improvement.
At Alphabet, a recent shareholder proposal to link executive pay to diversity received about 9% of the vote. The company’s statement in opposition (pg. 66) noted that the CEO receives a base salary of only $1 per year and isn’t paid based on performance – so it argued that a rule like this would have little impact. And at Nike, a similar proposal was withdrawn after the company agreed to meet quarterly to discuss diversity.
The fallout from last year’s Investors Bancorp case continues. I’ve blogged about how most companies now set director pay limits. But that’s only the first step in protecting directors and their pay decisions (and avoiding costly settlements). This blog from Jim Barrall tracks through recent settlements by Clovis Oncology and OvaScience – and examines a proactive approach by JP Morgan Chase. Here’s an excerpt:
JP Morgan Chase’s director compensation program, which is now locked into its shareholder-approved omnibus plan, was adopted one year in advance of the expiration of the 2015 plan and appears to have been informed by Investors Bancorp, provides companies with a good roadmap of the plan design issues and possible solutions that should be considered by companies that would like to reduce their exposure to Investors Bancorp and its progeny.
(i) it specifies the dollar amounts of the directors’ basic and special service retainers, thereby protecting these amounts under the business judgment rule because they have been ratified by shareholders;
(ii) even if the board exercises its discretion to increase any of the retainers after 2019 within the prescribed bands and even if such an exercise of this discretion would be subject to the entire fairness standard of review, the dollar amounts subject to this limited discretion are so small as not to make them attractive targets for plaintiffs’ lawyers, whose fees are largely based on the amounts that directors were paid using their discretion;
(iii) if the board ever determines to pay special fees to any directors under the plan’s safety-valve provision, it is highly likely that this compensation could be protected by the business judgment rule by having it approved by the board or a committee with a majority of members who are disinterested with respect to the compensation; and
(iv) these provisions apply to total stock and cash compensation and give the board discretion to determine the mix.
Finally, the terms of the director compensation program are included in an omnibus equity plan that also covers employees and could be resubmitted periodically to shareholders for approval when a company requests more authorized shares. Including these provisions in an omnibus plan and submitting them for approval with other plan changes every several years likely would not expose the directors program to as much risk of shareholders venting their possible unrelated grievances with the company or its board on director compensation as could be the case if the program were submitted in a free-standing director plan, as taught by the Clovis Oncology case.
This blog by Performensation’s Dan Walter cracked me up – because he speaks the truth, such as this excerpt:
Ha! I tricked you. Just a couple of paragraphs ago I talked about better linkage of performance goals to LTI. Then I talked about how communications would improve. But, if the market falls away and stock prices drop precipitously, we won’t get either of those. We will see companies leap back into stock options. All of the “in things” like Performance Units and alignment will disappear as fast as the strong stock prices. When prices go low, stock option numbers will go high. Count on it.
The first two of these changes will happen gradually. I expect two or three years, at best. The change will be so slow that you may not even notice it (don’t worry I’ll remind you.) The third change, if it happens, will happen so quickly that all of us will forget about the other two for a very long time. If you had to add a fourth “big change” what would it be?
After three negotiating sessions, Brad and I reached an agreement and signed a memorandum of understanding that we sent to our lawyers. The lawyers then did what they always do. “What happens if it rains frogs?” they asked. After three drafts, they reached an agreement on this point, and then turned to the question of whether a rain of tadpoles is the same as a rain of frogs. Once they had billed enough hours to satisfy their professional standards for minimum care, we had an agreement.
Our new CEO pay plan worked very well. Long-term value creation became the economic goal of both Brad and the shareholders. He is happier and more focused, and has remarked that the new system influenced his behavior and decision-making.* The board is happy. The shareholders are happy. Happiest of all is the comp committee. They don’t have to revisit the issues of CEO compensation or retain compensation consultants or deal with lawyers for seven years.
Gary Lutin maintains this “Graphing Tool for Shareholder Support Rankings™” that allows you to track say-on-pay voting results for the past five years for any specific company. The graph includes a pie chart reporting “turnout” – which is to the right of each year’s bar of voting support. The percentage reported in the blue section of the circle is calculated from the total number of shares voted by shareholders for/against/abstaining/withheld, divided by the number of shares outstanding…
You’ll be hearing a lot about the SEC’s Enforcement action against Dow Chemical over poor perk disclosures. As you can learn from the SEC’s order (and memos posted in our “Perks” Practice Area) – the company was not only fined $1.75 million – but it was ordered to retain a consultant for a period of one year to review its perks policies, controls & training (note that no individuals were charged, just the company). Wow! There were $3 million of perk omissions over four years.
So what can you do? For starters, we have an 82-page chapter on perk disclosure as part of the Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise” posted on this site.
Then, we’ve had a panel about perk disclosures for 16 straight years as part of our annual “Proxy Disclosure” conference – which is coming up soon: September 25th & 26th in San Diego and also available by video webcast. This upcoming big disclosure conference has nearly 20 panels. Register by August 10th for a reduced rate.
Tune in tomorrow for the webcast – “The Evolving Compensation Committee” – to hear FW Cook’s Bindu Culas, Semler Brossy’s Blair Jones and Davis Polk’s Kyoko Takahashi Lin discuss how to untangle the complex issues that compensation committees face in exercising their fiduciary duties against a backdrop of increased shareholder activism, potent proxy advisor policies, an active plaintiff’s bar and heightened media scrutiny.
Ed Hauder of Exequity has posted his “2018 ISS “Equity Usage” Calculator.” It allows you to calculate your 3-year average run rate & burn rate – and compare it to the 2018 ISS industry burn rate figures.
In our “Q&A Forum,” a member recently asked (#1229):
Has anyone dealt with issues relating to a company making a grant under one stock incentive plan but inadvertently documenting the grant using an award agreement related to a different (former) stock incentive plan? If so, how was it handled?
This was my take:
In this situation, both the company and the participant benefit from having the award properly documented. For the company, if there are big differences between the forms it’s risky to issue an award with different terms than what was approved by shareholders and registered with the SEC. And in any event, it’ll be an administrative pain if you have an award floating around with slightly different terms. For the participant, it’s inaccurate and confusing for the award agreement to refer to the prior plan – even though the award is no doubt accounted for in minutes and the company’s equity plan software, they’ll show up in a few years to get their stock and people might scratch their heads and have to comb through records to make sure they’re really entitled to it. And if you have any sort of corporate transaction in that time, it could be even more of an issue.
So even though it’s somewhat embarrassing in the short-term, I’d have the parties execute an amended and restated agreement. You can add a recital acknowledging that the parties previously entered into an agreement for the award but made a clerical error and wish to conform the agreement to what’s permitted by the applicable plan. If there’s reluctance to do that, then at the very least I’d try to get an amendment that corrects the name of the plan under which the award was granted and an analysis of whether the terms of the old form would be permitted by the current plan (including any necessary corrections in the amendment, and reporting any material differences on an 8-K if the person is a PEO, PFO or NEO).
This year’s “ClearBridge 100″ report notes that – possibly due to increasing scrutiny from shareholders & proxy advisors – almost all large companies have adopted clawback policies, stock ownership & post-vesting holding requirements and anti-hedging/pledging policies. In addition, only 7% of companies said they positioned target compensation above the 50th percentile – down from 24% in 2015. Here’s more detail:
– Most companies apply clawbacks to all aspects of incentive compensation
– For stock ownership guidelines, 75% of companies require a multiple of at least 6x salary for the CEO – up from 62% in 2015
– 59% of companies have post-vesting holding requirements – of those, 85% require executives to hold equity grants until stock ownership guidelines are met
– 97% of companies have an anti-hedging policy & 79% of companies have an anti-pledging policy – up from 71% in 2015