I blogged last week about the pros & cons of disclosing your “equal pay audit.” There aren’t many US companies doing this…yet. But Citigroup is one of the trailblazers. Last year, similar to the stats in Intuit’s proxy (hat tip Lois Yurow), Citi announced on its website the results of a “pay inequality” analysis – the difference in pay of women & men and US minorities & non-minorities, as adjusted for job function, level and geography. And it’s made some pay adjustments based on the findings.
More recently, Citi announced on its website its unadjusted “pay gap” for women and US minorities – i.e. the difference in median total compensation. Citi agreed to publish the stats in response to a “gender pay equity” proposal from Arjuna Capital – who then withdrew the proposal. Here’s an excerpt from Arjuna’s announcement about what comes next:
Citi’s analysis shows that the median pay for women globally at Citibank is 71 percent of the median for men, and the median pay for US minorities is 93 percent of the median for non-minorities. Citi’s goal is to increase representation at the Assistant Vice President through Managing Director levels to at least 40 percent for women globally and 8 percent for black employees in the US by the end of 2021.
Alongside the median pay disclosure, Citi updated last year’s “equal pay for equal work” analysis to extend across its global operations, reporting that when adusting for job function, level, and geography women globally are paid on average 99% of what men are paid, and no statistically significant difference between what US minorities and non-minorities are paid at Citi. Citi also made pay adjustments following this year’s compensation review.
Last fall, Broc wrote in regards to the Nissan/Carlos Ghosn saga that, yes, you can get caught for not disclosing perks – and deferred comp – in other countries. And after that, Japanese regulators formally indicted Nissan’s former chair – and the company itself – for under-reporting executive pay (this NYT article has details). Now, since Nissan ADRs trade on the Pink Sheets, the SEC is joining the party.
According to this Bloomberg article, the Commission is investigating whether Nissan accurately disclosed its executive pay in the US and whether it had adequate controls to prevent improper payments. This excerpt explains why the SEC might have jurisdiction:
Nissan shares trade in the U.S. via American Depositary Receipts, which generally gives the SEC enforcement authority. U.S. courts have disagreed about whether the regulator has jurisdiction in certain cases where wrongdoing occurred abroad. The activities under scrutiny at Nissan to date took place mostly in Japan and Europe. But the SEC believes it has authority in this instance, according to one of the people familiar with the matter.
This Bloomberg article explains how the carmaker’s reporting of deferred compensation may have violated Japanese reporting laws – and this Nissan announcement about the results of their internal investigation says they’ll consider clawing back all payments to Carlos Ghosn that were the result of misconduct.
During our recent webcast, “The Latest: Your Upcoming Proxy Disclosures,” Dave Lynn noted that Item 402(u) of Regulation S-K allows you to use the same median employee for up to three years – unless there’s been a “significant” change in the employee’s pay arrangements or circumstances or the employee population. Dave explained that “significant” means tectonic shifts that would impact pay ratio – not something like a standard raise, but something so significant that it could actually swing the ratio one way or the other.
This Compensia memo provides even more color – it suggests types of actions or events that would constitute a “significant” change under the rule. And for companies that have decided to use the same median employee this year, it gives an example of disclosure that would comply with Instruction 2 to Item 402:
For example, the company could disclose that there has been no change in its employee population or employee compensation arrangements that it believes would significantly impact the pay ratio disclosure. Of course, where the company has re-identified its median employee, it should say that it has done so, which will be accompanied by a brief description of the methodology that was used to identify the new median employee.
Recently, Willis Towers Watson announced the results from its annual analysis of outside director compensation among the Fortune 500. More companies have now implemented annual compensation limits – since shareholder ratification of those limits might be helpful if there’s a lawsuit (but keep in mind, as I’ve blogged, that a “high-water” limit will likely just be a factor in a court’s entire fairness evaluation, rather than entitling the board to a business judgment review). Here’s where things stand:
– 61% of companies have now adopted director pay limits, compared to 55% in 2016
– 78% of limits are set based on a fixed value rather than a fixed number of shares
– The median fixed-value limit is $600,000
– 32% of limits now cover both stock & cash compensation, which would provide the most protection in litigation
The survey also shows trends in overall pay levels & practices. It has a lot of great charts – including ones that show total pay & pay components at various percentiles. In light of recent director pay litigation and upcoming (but delayed!) changes to ISS voting policies, it’s not too surprising that median pay to outside directors increased by only 3% last year. What did surprise me was that – despite the risk of a shareholder suit or an eventual ISS “no” vote – less than half of companies are reviewing director pay annually. Here’s some other highlights:
– Median total pay increased to $267,500.
– The median value of annual cash compensation increased 4% – to $107,500 – bolstered by a 5% increase in the annual cash retainer to $100,000. The level of variable cash pay for board and committee meetings remained virtually unchanged, but fewer companies provided that form of compensation.
– The median value of annual stock compensation rose 3% to just over $150,000.
– The average mix of pay remained constant at 57% in equity, 43% in cash.
– Lead directors received an average of $30,000 additional compensation
– 94% of companies now have stock ownership guidelines and/or retention requirements for directors (typically based on a multiple of the annual retainer)
– 29% of companies review director pay only “periodically” or “from time to time” (I blogged a few months ago about one reason why this is risky)
…[W]e commit to conducting an annual company-wide gender pay analysis across occupations; reviewing hiring and promotion processes and procedures to reduce unconscious bias and structural barriers; and embedding equal pay efforts into broader enterprise-wide equity initiatives.
And at about the same time, there was also a rule in the works that would’ve required companies with 100 or more employees to report detailed salary information to the Equal Employment Opportunity Commission (see this Forbes article). So some people expected that companies would also disclose their gender pay analysis, similarly to what’s required now in the UK, Australia, Germany and Iceland.
Now that government-initiated efforts have stalled out, shareholders are stepping in with private ordering. But so far, these proposals typically receiving less than 20% support if they go to a vote – so should you embrace voluntary disclosure & other efforts? This Pearl Meyer survey found that a majority of companies were planning to study gender pay issues – and this Skadden memo outlines the pros & cons of disclosing the findings:
Blair Jones of Semler Brossy notes that “gender pay gap” statistics are receiving increased attention from shareholders. She recommends that boards and compensation committees discuss the issue of gender pay proactively, ideally before a company is targeted by a shareholder activist. Ms. Jones also noted that companies may want to consider disclosing policies and programs to support diversity and inclusion and gender pay equity, in addition to pay data. For example, companies could include information on recruiting and development programs and specific efforts such as unconscious bias training, in addition to pay data.
Skadden’s Marc Gerber cautions that an incorrect or materially misleading disclosure can increase the risk of litigation, so companies should strive to make gender pay disclosures as accurate as possible. Mr. Gerber noted that, to date, we have not seen securities lawsuits based on incorrect gender pay disclosure.
The Skadden memo also makes terminology distinction that’s important to keep in mind as you consider your strategy & prepare for shareholder engagement:
“Pay inequality” generally refers to the difference in wages men and women receive for performing equal or substantially similar work, while “gender pay gap” means the difference in pay between an average male employee and an average female employee and largely reflects the clustering of men in high-paying roles and women in low-paying roles. Pay inequality involves sex-based discrimination in the wage-setting process, but a gender pay gap does not necessarily indicate discrimination.
It’s not uncommon for a company’s stock price to drop when a successful CEO departs, even if you’ve previously disclosed the succession plan. This NACD blog says you should anticipate the market reaction to these events – and there’s an easy way to avoid penalizing the new CEO. Here’s an excerpt:
There’s an important executive compensation point to interject here: as you set up pay plans for a new CEO, structure equity incentives so they are based on the stock price after the market has absorbed the bulk of the hit to the share price. There have been numerous circumstances where options are granted immediately upon a promotion, yet within a few days, the value of those options are 10-15 percent underwater. This is demoralizing to the successor and does not achieve the supposed aim of your incentive plan.
This Pay Governance memo has some nice charts that compare current incentive practices to potential alternatives, which could better motivate executives when the company is going through a strategic change. Don’t be afraid to depart from “market practice” when a different approach will drive shareholder value.
Recently, ISS Analytics published this summary of equity plan trends. The biggest news is that there were 40% fewer equity plan proposals from Russell 3000 companies, due to the repeal of Section 162(m) – with some companies also removing individual grant limits and other “performance-based” provisions from their plans. Here are a few other takeaways:
– Shareholder-friendly plan features are gaining traction year over year – 44% now require one-year minimum vesting, fewer companies permit liberal share recycling, 61% prohibit paying dividends on unvested equity
– Specific aspects of equity plan proposals lead to higher levels of shareholder opposition – High dilution, high burn rate, repricing provisions, and evergreen provisions are associated with higher levels of shareholder opposition to equity compensation plan proposals
– Pharma & tech companies grant the most equity – Available data indicate that the median three-year average burn rate in these industries is more than double most other industries