We’ve posted the transcript for the recent webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.” Mark Borges, Dave Lynn & Ron Mueller shared their latest takes on these topics:
1. Say-on-Pay Results
2. Performance-Based Compensation Disclosure
3. Shareholder Responsiveness Disclosure
4. Perquisites Disclosure
5. Director Compensation Disclosure
6. CEO Pay Ratio Trends
7. Hedging Disclosure Rule
8. Status of Other Dodd-Frank Rulemaking
9. Shareholder Proposals
10. Proxy Advisors
11. Proxy Strike Suits
Emerging growth companies aren’t required to provide a CD&A or conduct a say-on-pay vote – but that doesn’t mean they can ignore executive compensation issues. This Semler Brossy memo points out that the EGC period is a time to lay the groundwork that will allow their governance practices & pay programs to evolve gradually after the IPO. And according to the memo, there are a few things that should be “high-priority” right out of the gate:
1. Avoid egregious pay practices (such as repricing options, overly generous or non-standard employment agreements and/or tax gross-ups)
2. Establish a peer group to understand comparative practices
3. Set reasonable and defensible pay levels (for example, informed by peer group); avoid outsized pay packages without sufficiently disclosing the rationale
I’ve blogged a couple of times about what might be a growing push to eliminate the “Reg G” exception for CD&As. This Audit Analytics blog says that more than two-thirds of the S&P 500 now use non-GAAP measures to establish compensation targets – and that number could go even higher if companies integrate ESG performance criteria and EVA metrics into their programs. Should we care? Well…
A recent study from B-School profs at Cornell & MIT that says companies that use non-GAAP earnings end up over paying their C-suite executives and that non-GAAP measures aren’t a truer picture of business. But what probably matters more (to the SEC, to shareholders, to courts) is whether investors can understand how those payouts are calculated (and the main complaint in CII’s April rulemaking petition was that right now, that’s really difficult).
The blog goes on to consider Corp Fin comment letter trends on non-GAAP metrics and says the Staff is no longer just looking at how non-GAAP figures are disclosed, but diving deeper to consider whether the adjustments are misleading. So far, though, the Staff isn’t commenting on non-GAAP measures used exclusively for executive compensation purposes.
Broc & I have blogged several times about the director pay analysis that ISS will start applying next year. So far, it hasn’t been super clear how ISS will treat “outliers” – directors whose pay was in the top 3% of their peer category. But this Pearl Meyer blog takes a look at what recent proxy filings – and corresponding ISS comments – can tell us. Here’s an excerpt:
It’s becoming clear that outliers will be categorized into two buckets, those that may be able to provide a compelling rationale for outlier compensation and those that may not. ISS’ position on what may qualify as compelling rationale is based on feedback from investors. We reviewed detail from Main Data Group on 2018 proxy filings for Industrials companies in the Russell 3000 to see how many board members, board chairs, and lead directors received outlier compensation, and what types of director fees or other compensation positioned these directors in the top 3%.
– The companies with outlier compensation were larger from a revenue size perspective. Because the ISS evaluation is based on indices, which include companies across a wide range in revenue size, a larger company within a given index is more likely to have directors be identified as outliers (given that director pay tends to be correlated with company size).
– It matters which index the company is a member of, and will be evaluated against, particularly for companies in the S&P 500. The 97th percentile director compensation for the S&P 500 is significantly higher than the other indices.
– More than half of the 14 companies with outlier director compensation (one or more board members) could likely provide a compelling rationale for the positioning above the 97th percentile. Reasons for the outlier positioning included (from most to least prevalent): receiving a chair retainer for a portion of the year, newly-elected directors receiving an initial equity grant; special fees for work on a transaction; consulting fees; and payment of dividend equivalents.
A few weeks ago, I blogged about whether the DGCL allows boards to delegate authority to an officer to grant options. An astute member responded with these additional thoughts:
I think per 157(b) the board has to set the terms so a delegated officer wouldn’t have discretion. If the delegation was made to a CEO designated as a committee of one (which was commonly done before the statute was changed to expressly allow delegation to officers for restricted stock grants) then the action would be a board action and the terms could be set by the CEO who would be acting as the board.
Here’s something that Liz blogged yesterday on TheCorporateCounsel.net: Although many of you know our work simply by the names of our “Essential Resources” – e.g. TheCorporateCounsel.net, CompensationStandards.com, Section16.net, DealLawyers.com and our related print newsletters – we’re actually part of a company called “EP Executive Press” that was founded by Jesse Brill over 40 years ago (here’s the last installment of Jesse’s “reminiscences” when the company celebrated its 35th anniversary).
Now, we’re entering another new chapter – with a parent-company rebranding to “CCRcorp.” Our new name stands for “Corporate Counsel Resources” – but I for one will forgive anyone who mixes us up with a certain ’60s rock band, especially since we’ll be “chooglin’ on down to New Orleans” for our “Proxy Disclosure Conference” this September.
You may notice some logo changes following our formal announcement later this week. But rest assured, we’ll be providing the same practical info…and when Broc & John are at the keyboard, it’ll even be entertaining.
Last month, I blogged that directors are split on whether to incorporate E&S metrics – like diversity – into incentive plans. This Farient Advisors blog says that more companies are saying that they pay for E&S accomplishments – but the metrics aren’t well defined and are tied to only a small portion of pay. In other words, they seem to be rooted in “virtue-signaling” rather than well-considered strategic plans – so executives perform accordingly, and shareholders remain dissatisfied. Here’s an excerpt:
The Farient team examined compensation plans from companies in the Russell 3000 and found that E&S compensation metrics are almost exclusively used in determining annual bonuses. As would be expected, we found a concentration of companies – 57 specifically – in the energy, materials (think mining) and utilities sectors that were using environmental compensation metrics in these plans. Twenty five of these companies were in the S&P 500. But other metrics in the E&S category were few with only 18 companies using metrics around “diversity” and nine using “sustainability.”
In examining these plans more closely, we found many of the companies combine E&S compensation metrics with other metrics into an overall category that is generally not weighted more that 10 percent of the overall short term incentive award. And, in addition to not being tied to a significant amount of compensation, the goals around these metrics aren’t generally well defined or aren’t disclosed at all.
Glass Lewis & CGLytics have been partnering on compensation & data analytics in Europe for a while now. Last week, they announced that they’re expanding that collaboration to North America. Glass Lewis will use CGLytics data as part of its peer group comparisons & pay-for-performance analysis – which underpin the proxy advisor’s voting recommendations on Say-on-Pay and other executive pay topics – as well as its “Proxy Paper” research reports. They’ll also integrate the data into the proxy voting policies of institutional investors via “Viewpoint” (their vote management service that implements those custom policies). Here’s more detail (also see the product page):
Glass Lewis’ Say on Pay analysis will now also be available via CGLytics’ proprietary platform, giving investors, issuers, advisors and board members the exact same data, tools and insights Glass Lewis uses to review and model CEO and executive compensation plans, and prepare for engagements with all stakeholders. Combining Glass Lewis’ proprietary policies and methodologies and CGLytics’ extensive data and analytical tools, the two companies will give all market participants unprecedented transparency and access into Glass Lewis’ compensation analysis that was not widely available and is needed for successful governance and stewardship in the modern digital age.
This blog from Willis Towers Watson looks at practices & plan design features that originated because of the “performance-based” exemption under Section 162(m). In addition to investors’ continued desire for companies to link pay to performance and regularly submit equity plans to shareholders (every 3-5 years), companies also might want to keep some of these other practices in place – even though there’s no longer an express tax reason to do so. That includes:
– Establishing maximum amounts/shares payable to covered employees (per the plan document)
– Agreeing upon extraordinary items and rules around financial metrics exclusions at the beginning of period (not decided after the fact at year-end)
– Pre-establishing performance goals (i.e., within the first 90 days after the beginning of the performance period)
– Ensuring performance goal outcomes are substantially uncertain when adopted
– Limiting the use of “upward” discretion outside of individual performance goals (which should generally be measurable and objective)
The question is whether to hard-wire those requirements into the plan, versus adding some leeway to the plan documents or even stripping out the requirements and providing a “softer” disclosure commitment. Remember that this is still an area that plaintiffs are watching, and there’s a litigation risk if aspirational disclosure commitments don’t align with practices. Here’s what Willis Towers Watson says about another disclosure point:
Companies must also decide whether they’ll continue to use “negative discretion,” and how the plan is disclosed in the proxy with the overarching consideration being whether this would alter the Summary Compensation Table (SCT) disclosure.
SEC staff guidance in Compensation and Disclosure Interpretations 119.02 permits 162(m) compliant plan payouts using negative discretion to be disclosed in the Non-Equity Plan Compensation (NEPC) column. If positive discretion is applied instead, this would cause more compensation to be shown in the SCT’s Bonus column due to discretionary adjustments. It’s unclear whether suddenly moving disclosed values to the Bonus column will increase scrutiny from proxy advisors and shareholders, but if this approach is taken we strongly suggest that a clear description of the reasoning appears prominently in the proxy. And such action might require more detailed disclosure of actual performance thresholds, targets and maximums in the Grants of Plan Based Awards (GOPBA) table as we discussed in “162(m) changes will affect your proxy disclosure, but not in the manner some suggest”, Executive Pay Matters, December 21, 2017.