Here’s a memo from ISS about how – and why – its research reports now include four “Economic Value Added” metrics: Margin, Spread, Sales Momentum, and Capital Momentum (companies can view their EVA calculations in a free “EVA Profile” – here’s a mock-up of what that looks like). Last month, I blogged about using EVA measures in plans. I said:
We don’t know yet whether investors will develop a preference for EVA-based plans. It stands to reason that having the ISS data point will move everyone in that direction – but customization might be necessary.
Well, Pearl Meyer went out and asked companies whether their investors were requesting a strong emphasis on EVA measures – and they’re back with the results: over two-thirds said they’d received no feedback from investors indicating that they prefer EVA concepts to be included in incentive plan design.
Jim Heim adds this color – and suggests things comp committees should be talking about right now instead of EVA (e.g. modeling the impact of a downturn on pay programs):
We believe that EVA is a shortcut that doesn’t consider nuance. A better methodology would tailor the performance lens based on sector-specific, cycle-specific, stage-specific, and even company-specific factors. If EVA actually reflected these dimensions, we would see EVA more widely embraced across sectors.
For example, it would be inappropriate to compare EVA between two comparable organizations where one is engaged in an acquisition strategy or has embarked upon a large capital project. Furthermore, cost of capital is a function of balance sheet management. Therefore, a company that has an acquisition will appear worse from an EVA standpoint in the short term (e.g., three years) as compared to a company that buys back stock.
We’ve posted the transcript for our recent webcast: “How to Use Cryptocurrency as Compensation.” The agenda included:
1. Defining “Cryptocurrency”
2. Securities Implications
3. Tax Implications
4. Accounting Implications
5. Other Applicable Regulations
6. Why Digital Assets Are Attractive To Entrepreneurs
7. Types of Crypto Compensation Structures
8. Drafting Issues For Plans & Awards
9. Token Plan Administration
10. When Using Crypto Doesn’t Make Sense
Tune in tomorrow for the webcast — “The Top Compensation Consultants Speak” — to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance discuss these topics:
– Second year of pay ratio
– Evolution of clawbacks
– Adjustments to incentive plan actual performance or goals & goal-setting plans
– Incorporating E&S metrics into plans
– How to handle pay equity & gender/ethnicity pay gaps
– The changing role of the compensation committee
One of the most frequent questions we get about this year’s pay ratio disclosure is, “How much detail is necessary if you’re not rerunning the ‘median employee’ calculation?” In other words, you’re either using the same median employee – or one of the alternates – that you identified last year. A timely blog from Stinson Leonard Street’s Steve Quinlivan provides examples from four recent filers.
You’ll see that the companies didn’t get too elaborate. All of them basically parrot Instruction 2 to Item 402(u) – i.e. they say they used the same median employee (or an alternate) since there was no change in the employee population or employee compensation arrangements that they believed would significantly change the pay ratio disclosure. And since Steve notes in this blog that he’s found zero Corp Fin comments so far on pay ratio disclosures, that’s probably just fine.
Even though ISS has delayed till next year its voting policy on excessive director pay, this blog from Pearl Meyer’s Terry Newth is a reminder that, since the policy looks at two years’ of pay, this year’s compensation will still factor in when the policy is implemented. Terry predicts the range of director pay will narrow in the long-term, and we may see more voluntary “say-on-director-pay” votes. He also summarizes the final ISS policy:
– ISS will analyze director compensation in order to identify companies that “consistently” (defined as two or more years in a row) compensate directors at the top 2-3% of all comparable directors. (Note: this is a slightly more limited range than the top 5% previously outlined)
– The nature of the director’s role, specifically non-executive chairs and lead directors, will be taken into consideration in the comparisons
– The frame of reference for comparing directors will be the same two-digit GICS code within the same industry grouping
– The possible index groupings are S&P 500, combined S&P 400 and S&P 600, remainder of the Russell 3000 Index, and the Russell 3000-Extended
– Companies that are identified in this screening process and do not provide a compelling rationale for their pay positioning are subject to potential withhold vote recommendations. The negative vote recommendations will be aimed at the directors that approve the compensation arrangements
The headline from this CNBC article caught my eye: “‘Jesus Christ himself isn’t worth 500 times his median worker pay in companies’ — Disney heiress slams CEO pay.” It made me chuckle as I’ve blogged many times about how 99% of our population think CEOs are overpaid. Just jump into a taxi and strike up a conversation about CEO pay. And I love this reaction to the article that I received from a member: “Heiress Discovers Society Favors Rich. Film at 11.”
Meanwhile, Disney itself is a target over its own CEO pay practices – per this Bloomberg article, CalPERS intends to vote against Disney’s sau-on-pay (and two comp committee members) despite the CEO’s pay being reduced…
Here’s a reminder for smaller companies from Skadden Arps:
Most smaller reporting companies held initial shareholder say-on-frequency votes in 2013, when the requirements went into effect. Given that say-on-frequency votes must be submitted at least once every six years, the 2019 proxy season will mark the second time such votes are required for those companies. The proxy cards from those companies must provide shareholders the option to vote for one-, two- or three-year periods between say-on-pay votes or to abstain from voting.
Failure to include a say-on-pay frequency vote once every six calendar years may expose a company to potential SEC enforcement action and other risks, such as a derivative shareholder lawsuit. If a company were to fail to include a required say-on-frequency vote, such a mistake could be corrected by filing a proxy statement amendment or a revised proxy statement on EDGAR and posting the material on the same website where the original proxy materials were posted, which also should be disseminated to shareholders, either by circulating a new Notice of Internet Availability of Proxy Materials or by mailing the supplemental or revised material. The amendment or revised proxy statement can be in the form of a cover page that explains the error and provides the correct information, or it can be a restatement of the entire proxy statement containing the corrected information and an explanatory note regarding the error and corrections made.
This ‘Willis Towers Watson’ note shows how companies in the United Kingdom are handling the new “UK Corporate Governance Code & Reporting Regulations.” Here’s an excerpt:
The CEO pay ratio regulations are more flexible than the Gender Pay Gap statistics, giving companies a choice of which method of calculation is most appropriate for them. Our results indicated very little appetite to publish CEO pay ratio statistics early, as at the time the survey fielded, many companies had not yet determined which methodology they would use. Our survey showed that, so far, only 20% of companies have settled on which calculation methodology they will use, but over two-thirds have calculated or are in the process of calculating ratios to test the various methodologies.
80% of companies are considering voluntarily disclosing additional ratios. Amongst the additional ratios being considered are those which will show base salaries only; exclude LTI vesting; use an average single figure and/or illustrate target pay information.
A member recently sent in a note wondering why some companies were reporting dividends in the “Summary Compensation Table.” She noted that if a company reports the fair market value of an award in the SCT, any subsequent dividends that are paid on the shares (whether prior to – or at – the vesting date) are not reported as compensation expense in the financials (provided the underlying shares vest). And therefore, dividends do not need to be reported in the SCT.
If dividends are paid on a current basis and the shares are subsequently forfeited, those dividends are charged to earnings and would be required to be reported in the SCT. Because paying dividends on unvested shares is considered a bad compensation practice, most companies accrue the dividends and only pay them when the shares vest, thus the reporting of dividends should be rare (if ever). The fact the dividends are treated as taxable income has no bearing on the accounting or proxy disclosure. For support, the member sent this relevant accounting standard:
Paragraph B93 in the Basis of Conclusions of the Financial Accounting Standards Board’s (“FASB”) Statement 123 (revised) – Share-Based Payment states the following:
The fair value of a share of stock in concept equals the present value of the expected future cash flows to the stockholder, which includes dividends. Therefore, additional compensation does not arise from dividends on nonvested shares that eventually vest. Because the measure of compensation cost for those shares is their fair value at the grant date, recognizing dividends on nonvested shares as additional compensation would effectively double count those dividends. For the same reason, if employees do not receive dividends declared on the class of shares granted to them until the shares vest, the grant-date fair value of the award is measured by reducing the share price at that date by the present value of the dividends expected to be paid on the shares during the requisite service period, discounted at the appropriate risk-free interest rate.
The dilemma for directors, however, is determining what aspects of sustainability, or ESG performance, should have priority — and should be linked to pay incentives. The UN, for example, has outlined 17 broad Sustainable Development Goals for 2030. Progress is measured with 169 targets. The goals include eliminating poverty, offering affordable and clean energy, achieving gender equality, protecting ecosystems, increasing responsible consumption and production, and much more. Meanwhile, a number of business organizations have created their own sustainability measures, including the Sustainability Accounting Standards Board, Sustainalytics, Bloomberg, and MSCI. And at many companies, sustainability efforts are measured with well over 10 internal metrics.
Compensation committees often start by tying bonuses and long-term incentives to goals related to compliance and risk management. That approach pleases some stakeholders, but it may put the focus on issues far removed from the company’s core mission. For example, measures of regulatory fines gauge only a company’s environmental “hygiene,” which may reduce risk but doesn’t incentivize executives to increase the company’s broader environmental impact.
What’s a better approach? Have bonuses depend largely, or solely, on executives’ success in tapping big strategic opportunities related to sustainability. By pushing the top team to go on the offense strategically, this change brings the work of advancing sustainability from the periphery of the business to its heart.
Though not all businesses today are in a position to implement big strategic initiatives based on sustainable thinking, the opportunities to pursue them are growing fast. According to a survey by the UN and Accenture, 63% of executives believe that sustainability will cause major changes in their businesses in the next five years. And if that shift ends up determining which companies thrive in the future, then it’s likely that incentive goals must apply to bold business opportunities.