– Liz Dunshee

When the SEC adopted the pay ratio rule four years ago, it repeatedly stressed that company-to-company comparisons would be meaningless. The adopting release said:

As we noted in the Proposing Release, we do not believe that precise conformity or comparability of the pay ratio across companies is necessarily achievable given the variety of factors that could cause the ratio to differ. Factors that could cause pay ratio to differ from one company to the next include differences in business type, variations in the way the workforces are organized to accomplish similar tasks, differences in the geographical distribution of employees, reliance on outsourced workers, and the variations in methodology for calculating the median worker. Consequently, we believe the primary benefit of the pay ratio disclosure is to provide shareholders with a company-specific metric that they can use to evaluate the PEO’s compensation within the context of their company.

That message stuck: most people seemed to understand that the ratio would be company-specific, and there was a pretty “ho-hum” reaction to the first year of pay ratio disclosure. But, you might say, “What about tracking changes to a particular company’s ratio over time, to monitor how CEO pay increases compare to everyone else’s? Won’t that be useful?” More than a few people predict that pay ratio will garner more attention going forward, because shareholders & others will compare a company’s current year number to prior years.

The problem with that, as this WSJ article points out, is that the same factors that make comparisons among different companies meaningless are also things that can change from one year to the next at a single company. And as I’m sure you can guess, those changes cause big swings in the ratio. So for many companies, pay ratio doesn’t even provide meaningful year-over-year info (at least, about the relationship between CEO & employee pay). Here’s a couple of examples from the article:

Median pay at Jefferies Financial jumped to $150,000 last year from $44,584 in 2017 after the holding company sold most of its stake in its National Beef meat-processing unit in June 2018, cutting its workforce to about 4,600 from 12,600. The 2017 median employee at the company, formerly called Leucadia National, was an hourly line worker at National Beef, while last year’s was a senior research associate in the company’s Jefferies LLC financial-services operation.

Coca-Cola slashed its median pay figure by two-thirds after it finished shifting North American bottling operations to franchisees and acquired a controlling interest in African operations. The 2017 median worker was an hourly full-timer in the U.S. making $47,312, while last year’s made $16,440 as an hourly full-timer in South Africa. In its proxy statement, Coca-Cola said it intends to shed the African operation again after making improvements and offered an alternative median employee excluding that unit: an hourly full-timer in the U.S. making $35,878, about 25% less than his or her 2017 counterpart.

I will say, companies are making the most of what they have to work with (thanks in large part to the flexibility the SEC incorporated into the rule). And for better or worse, the “median employee” data point might illustrate to people how company policies & strategies play out in the workforce. But a single data point can’t tell the whole story – and the pay ratio itself remains pretty useless.

– Liz Dunshee

Here’s something I blogged yesterday on TheCorporateCounsel.net: Beginning next year, CalPERS will likely vote “against” compensation committee members in the same year that the compensation plan fails its pay-for-performance quantitative model. That’s according to recommendations in a recent staff report to the pension fund’s Investment Committee. Here’s more detail on the executive compensation initiative that’s underway:

– Move from a 3-year to a 5-year quantitative model (developed in collaboration with Equilar) to assess pay-for-performance, and vote “against” bottom quartile of universe

– Vote “against” Compensation Committee members in the same year the compensation plan fails the pay-for-performance quantitative model (effective 2020 proxy season)

– Additional qualitative components will continue to be used to assess compensation plans – e.g. insufficient disclosure of goals, lack of clawback policy

– For this year, CalPERS expects its say-on-pay voting outcomes to be similar to 2018, where CalPERS voted against 43% of pay programs

The report also summarizes the status of CalPERS’ voting & engagement efforts with Climate Action 100+, and its push for board quality, board diversity and majority voting in director elections. Here’s the staff’s recommended enhancements for overboarding and refreshment policies:

– Vote “against” non-executive directors who sit on more than 4 boards. The current practice is to vote “against” non-executive directors who sit on more than 5 boards

– Vote “against” Nominating/Governance Committee members if the Board has more than 1/3 of directors with greater than 12-year tenure AND less than 1/3 of directors were appointed in the last 6 years

– Liz Dunshee

ISS research reports now include four “Economic Value Added” metrics in the pay-for-performance analysis. I’ve blogged a couple of times about whether investors are using that info – and how to incorporate the metrics into plans (if at all). This latest ISS memo – which is posted on the proxy advisor’s “EVA Resource Center” – gives more context on how these metrics are defined and why ISS thinks they’ll help shareholders better evaluate the alignment between pay & performance. Here’s an excerpt:

At its essence, EVA is a simple three-line calculation – it is sales, less all operating costs, including taxes and depreciation, less a full weighted-average cost-of-capital charge on all the capital, or net assets, used in business operations.

EVA recognizes investors’ needs by deducting a required return on capital before it counts profit. To increase EVA, managers must increase profits above the opportunity cost of funding any new capital investments. EVA naturally holds managers accountable as stewards of investor money.

NOPAT (Net Operating Profit After Tax) and Capital also incorporate the standard set of adjustments. For example, they exclude excess cash and the related investment income, and reflect writing off R&D over time instead of expensing it. EVA is thus a better indication of how well a company’s business is performing from a strategic perspective.

– Liz Dunshee

Pay-for-performance is currently the “Holy Grail” of executive compensation. But a growing number of people are questioning whether we’re making things too complicated. In his keynote address at last year’s “Proxy Disclosure/Executive Compensation Conference,” former CEO Steven Clifford recommended reductions to CEO base pay and restricted shares that vest sometime after the executive leaves the company.

Similarly, this Bloomberg article reports that the world’s largest sovereign wealth fund – which owns 1.4% of the world’s stock – favors pay caps and time-based restricted shares that can’t be sold for 5-10 years (Broc’s blogged about this fund before). And although pay caps might be a bridge too far (for the three reasons described in this blog from Dan Walter) – there are some points to consider. Here’s more detail:

Following a string of corporate scandals in the century’s first decade and the 2008 financial crisis, several large institutional investors — including BlackRock, Vanguard and State Street — began pressuring companies to link compensation more closely with firm performance. The Norwegian fund, by comparison, questioned the very idea of using incentives for “complex undertakings such as managing a listed company.”

“Designing a robust set of CEO targets is notoriously difficult on a multiyear horizon,” the fund said in its position paper, adding that “engineered incentives crowd out the intrinsic motivation of the CEO.” It also pointed to research that suggests there’s currently no definitive correlation between overall levels of executive pay and firm performance.

– Broc Romanek

We have posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.”

– Broc Romanek

Here’s a note from a member that I received in response to the panel discussion excerpted from this blog recently:

ARGH! Ms. Mulcahy could not be more wrong. Time and again, companies prove that if management’s compensation is not tied to a goal, it will not be achieved. It took say-on-pay to get companies to actually focus on performance – 20 years after 162(m) was adopted. It took the heavy hand of ISS to force companies to reduce equity spend. If we tied CEO pay to diversity, we could accelerate the time to equality to five to 10 years, instead of two generations from now.

Did you know the class of future BigLaw partners that will be the first class to experience a truly diverse board reflective of gender balance has yet to be born? That is, at the current rate of growth in females as equity partners, it will take until 2059 to reach parity. So the 35-year old lawyer who makes partner in 2058 won’t be born for another four years. Outrageous that my seven-year old daughter will still be a “diverse” lawyer should she choose to go to law school.

– Broc Romanek

Recently, a member asked this in our “Q&A Forum” (#1276):

My recollection is that it is not permissible to revise the captions for the columns of the Summary Compensation Table (or any of the other supplemental tables) to better reflect the dollar values disclosed in that column. In our case, we don’t need to disclose any above-market or preferential earnings on non-qualified deferred compensation in the column captioned “Change in Pension Value and Non-Qualified Deferred Compensation Earnings” and disclose in a footnote that the number represents the change in pension value for the previous year. Hence my question: Are we permitted to change the caption for that column to read only “Change in Pension Value”?

John gave this answer:

I don’t think that’s permitted. I think the advice in the old telephone interps still represents Corp Fin’s position on changing the language of the tables:

“The compensation disclosure rules do not, as a general rule, permit registrants to deviate from the highly formatted tabular presentations required except to omit any column or table otherwise not applicable. A limited exception has been made for the caption of column (b) in the Option/SAR Exercise table. The caption to that column may be modified to read: “Number of securities underlying options/SARs exercised.” In all cases, the gross number of securities underlying the options/SARs exercised should be reported in this column.”

– Broc Romanek

Here’s a teaser from this blog by Rosanna Landis Weaver of “As You Sow”:

Votes against pay packages have inspired responses that address problematic practices, but this year I’m seeing some indications they might cause boards to address quantum as well. One company’s executive chairman asked for his pay to be cut in half. Also, Disney made a very last minute contract change before its annual meeting. Was that done to move specific shareholders from a no to a yes on pay?

Rosanna mentions the lag & opacity in knowing how big shareholders vote. Note that Jim McRitchie recently submitted a rulemaking petition to the SEC regarding real-time disclosure of proxy votes…