– Liz Dunshee

Recently, a member posted this query in our “Q&A Forum” (#1245):

Is anyone aware of any guidance out there on whether, in delegating the authority to an officer to grant options pursuant to DGCL Section 157(c), a board could give the officer the ability to decide the vesting terms of the option (e.g., officer can choose whether to grant a 1 year, 3 year, or 5 year option)? Or is that something that must be set by the board pursuant to DGCL Section 157(b)?

An anonymous member responded:

You’ll probably want to run this one by a Delaware lawyer – but I’ve had some tell me they read Section 157(c) narrowly and do not allow a delegated officer the discretion to fix vesting terms. They were comfortable that the Board or Comp Committee could choose a variety of forms of agreements – such as one with 1-year vesting, one with 3-year vesting and one with 5-year vesting, and then the delegated officer can pick which form is used for individual awards – but they were not comfortable in allowing the officer complete discretion to set vesting terms.

I tend to disagree with the view because I think that the vesting term is inherent in setting the size of an award.

– Liz Dunshee

The ISS FAQs for its compensation policies say (Question 27) that research reports show realizable pay as compared to granted pay – and that realizable pay may be discussed in the qualitative view and as a component of the pay-for-performance analysis. This recent memo gives more background about how ISS defines “realizable pay” and whether it will become a more prominent part of the proxy advisor’s analysis in the future. Here’s an excerpt:

Comparing realizable pay to granted pay may serve as a helpful measure to assess a pay program’s alignment with performance as well as the pay program’s “leverage,” i.e., the degree to which actual payouts are disproportionately larger compared to performance achievements. Leverage in pay plan design can serve as a strong motivational factor. However, excessive leverage may lead to excessive payouts and potential a misalignment of incentives. Among the S&P 1500, the ratio of realizable pay to granted pay is distributed in a relatively normal distribution, with median realizable pay figures ranging between 100 percent and 110 percent of granted pay. Approximately 3.7 percent of companies under review have realizable pay figures that are more than double the granted pay levels.

Looking ahead, several questions continue to surround realizable pay. The market does not appear to have agreed on standard definitions, and company disclosures are inconsistent and hard to use. At the same time, there are signs that the measure may be gaining traction with some large investors, as CalPERS recently announced the incorporation of realizable pay in its pay-for-performance evaluation analysis. If usage of realizable pay becomes more widespread, a common definition for the measure may become inevitable. As we argue above, companies and investors can gain significant insights when reviewing pay-for-performance alignment by using realizable pay. However, realizable pay can only serve as another resource in investors’ toolbox for analyzing compensation, and it cannot replace a full and comprehensive evaluation of compensation. ISS Research reports for S&P 1500 companies include realizable pay figures along with comparisons to granted pay.

– Liz Dunshee

If your company has to restate three years of financials due to some bad accounting decisions, who pays for the fallout? In a still-rare move, Hertz recently filed this complaint to attempt to recover $70 million in incentive compensation paid to its former CEO, CFO and GC. Hertz also wants $200 million in consequential damages resulting from an SEC investigation into the company’s accounting & disclosure (which resulted in a $16 million settlement), and defense of class action & derivative suits ($25 million in legal fees!).

Hertz is claiming that the former execs are required to return their golden parachutes because they breached their separation agreements by representing they hadn’t engaged in any conduct that met the standard of “willful gross neglect” or “willful gross misconduct” that resulted in material economic harm to the company, etc. In addition, Hertz says a clawback is warranted because the executives agreed to be bound by the company’s then-effective clawback policies in their equity award & separation agreements, which provided for repayment or forfeiture if all of these conditions were met:

– The payment, grant or vesting of such [incentive-based compensation] was based on the achievement of financial results that were the subject of a restatement . . . as filed with the Securities and Exchange Commission

– The need for the restatement was identified within 3 years after the date of the … filing of the financial results that were subsequently restated

– The Compensation Committee determines in its sole discretion, exercised in good faith, that the executive officer’s gross negligence, fraud or misconduct caused or contributed to the need for the restatement

– The Compensation Committee determines in its sole discretion that it is in the best interests of the Company and its stockholders for the executive officer to repay or forfeit all or any portion of the [incentive-based compensation]

The clawback policy also provides that all determinations & decisions made by the compensation committee are final, conclusive and binding on all persons.

The standard of conduct is important here. This Clearly blog explains that the company is alleging that a wrongful “tone at the top” was a form of misconduct & gross negligence – and that raises quite a few novel legal questions. For more info about how this case and another recent case might affect board decisions and indemnification & advancement, check out this other Cleary blog…

– Liz Dunshee

Last week, State Street Global Advisors posted “key takeaways” to remind everyone about the circumstances that could trigger it to abstain from a say-on-pay proposal. They appear basically unchanged from last year’s guidance. Here’s an excerpt:

We cannot predict all instances when we will use an ‘Abstain’ vote but based on past practice typical cases would include:
– Large one-time payments that cannot be justified or explained
– Lack of adequate disclosure or some concerns with performance metrics but recognition of strong longterm performance etc.
– Where companies have responded to some but not all of our concerns.

There will be no change to State Street Global Advisors’ Asset Stewardship Team’s evaluation of compensation votes.

– Liz Dunshee

Tune in tomorrow for the webcast – “Termination: Working Through the Consequences” – to hear Orrick’s JT Ho, Pillsbury’s Jon Ockern, Equity Methods’ Josh Schaeffer and PJT Camberview’s Rob Zivnuska discuss how the timing of when an executive officer becomes entitled to severance benefits can impact accounting, SEC disclosures, taxes, say-on-pay and shareholder relations. Please print out these “Course Materials” in advance.

– Liz Dunshee

Earlier this year, I blogged about the relationship between “gender pay” shareholder proposals and a handicapped rule that would have required companies with more than 100 employees to report gender pay data to the Equal Employment Opportunity Commission, saying:

Some people expected that when the rule became effective, 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.

According to this MarketWatch article, a judge has now ordered the EEOC to collect the info by September 30th – and so far, the ruling hasn’t been appealed. I’ve blogged that most public companies are already doing equal pay audits. And Broc & I have blogged several times about shareholder efforts to encourage public disclosure of this type of info.

We don’t know yet whether EEOC reporting would bolster – or diminish – those initiatives. Last week, Arjuna Capital announced that support for two of its gender pay gap proposals had increased from 15% when they were first on the ballot in 2017, to approval of about a quarter of shareholders.

Check out our “Gender Pay Equity” Practice Area for more info on the EEOC requirement, the emergence of “equal pay laws,” and the board’s oversight role.

– Liz Dunshee

According to this 11-page Pearl Meyer memo, these are the “Top 5” emerging agenda items for compensation committees this year:

1. Expanding Role: CEO pay ratio, gender and other diversity-based pay inequities, talent development and culture-related concerns are pushing the boundaries of traditional compensation committee responsibilities

2. Non-Financial Metrics: They may not be right for all companies but given the increasing interest in non-financial metrics and the possibility that they could further your business strategy, a robust discussion on the subject should be included in your 2019 compensation committee’s agenda

3. Relative Total Shareholder Return: TSR is probably here to stay but satisfying external stakeholders while maintaining any incentive value of an rTSR-based awards is challenging – some companies are feeling pressure to modify these plans

4. Director Pay: Given the increased discussions regarding board diversity, education, and refreshment and additional board and committee responsibilities, committees may want to—or need to—rethink their director pay programs

5. Expect & Prepare for Unexpected Plan Issues: Remember good plan design—and good executive compensation governance—includes planning for the unexpected. Inevitably there will be things that you haven’t fully anticipated, but thoughtful preparation for the “known unknowns” and brainstorming “black swan” events can help the board mitigate future risk