This Willis Towers Watson memo gives suggestions for handling annual, long-term and deal-related incentives at an acquiring company. Here’s an excerpt:
One of the biggest challenges with acquirers’ incentive compensation is performance scoring when financials of the acquired company gets consolidated. Let’s start with annual incentive. In our experience, the prevailing approach on adjusting incentive compensation in an acquisition year tends to vary based on the timing of the deal’s close.
– When a deal closes at the beginning of the year, acquired company financials are almost always reflected in the acquirer’s financial goals for the entire year, with any necessary adjustments to back out one-time acquisition-related costs.
– This treatment is typically reversed for deals that close in the fourth quarter, with acquired company financials excluded from both the goals and the results, as the acquirer’s executives would not have sufficient time to impact the results.
– For deals that close in the second or third quarter, the treatment of an acquirer’s annual incentive plan tends to vary by deal circumstances and integration strategy. If an acquirer wants to integrate the acquired business into its own operations, it’s more likely to consider the acquired company’s financial performance from the close date to the end of the fiscal year in bonus scoring.
In previous years, many public companies resisted changing bonus plan financial goals midyear, because it reduced or eliminated the tax deductibility of bonus payments to the CEO and other named executive officers. However, the 2017 Tax Cuts and Jobs Act eliminated the performance-based compensation exception under Internal Revenue Code Section 162(m), so there is no longer a need for acquirers to consider any potential impact on tax deductibility when deciding what to do with outstanding bonuses.
During our upcoming “Proxy Disclosure Conference,” we have a panel devoted to the #MeToo era and how it might impact how your clawbacks (should) work. This PwC study shows how more CEOs were dismissed in the last calendar year for ethical lapses than for financial performance or conflicts with the board. So updating your clawback policies might be appropriate…
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering?)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
Reduced Rates – Act by August 2nd: Proxy disclosures are in the cross-hairs like never before. With Congress, the SEC Staff, investors and the media scrutinizing disclosures, it is critical to have the best possible guidance. This pair of full-day Conferences will provide the latest essential—and practical—implementation guidance that you need. So register by August 2nd to take advantage of the discount.
These Principles have also been updated to address SRD II with ‘avoidance’ added to ‘management’ of conflicts-of-interest with regard to the policy which should be disclosed. It also responds to feedback from the 2019 BPP Stakeholder Advisory Panel, acknowledging that conflicts of interest will always exist; therefore it is incumbent upon the BPP Signatories to have proper policies in place to try to avoid such conflicts wherever possible and when they do arise, to be transparent and manage them properly. The 2019 BPP Review Stakeholder Advisory Panel also reiterated the importance of the more stringent updated “Apply and Explain” approach for BPP Signatories to follow in light of SRD II Article 3j in relation to the Principles.
Another further area the updated Principles focused on was delineating the scope of proxy advisors’ responsibilities versus those of investors, in light of continued market misperceptions regarding the alleged overinfluence of proxy advisors and/or alleged “robo-voting” on the part of investors.
This alignment of CEO to shareholder value, with handsome rewards for top executives, is how the theory is supposed to work. In reality, executive compensation is often laughably disconnected from financial and stock performance. At its worst, the pay model has encouraged heedless risk-taking, accounting fraud and volatility.
This happens especially because of weak corporate governance, despite efforts to improve it. Even with nominally independent directors, the board and CEO are part of the same “club,” in world view, life path, outlook and extreme wealth.
This article from Semler Brossy’s Seymour Burchman is interesting, illustrating how EVA has made a comeback – mainly due to ISS embracing economic value added (EVA) – and providing a historical lookback about how economic value has been used in pay packages over time…
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering?)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
Reduced Rates – Act by August 2nd: Proxy disclosures are in the cross-hairs like never before. With Congress, the SEC Staff, investors and the media scrutinizing disclosures, it is critical to have the best possible guidance. This pair of full-day Conferences will provide the latest essential—and practical—implementation guidance that you need. So register by August 2nd to take advantage of the discount.
This article from CBS News notes the discrepancy between the overall CEO rate of pay inflation and the pay rate of ‘typical’ worker. I imagine this type of media attention will become more prevalent as word gets out – so at some point, companies may need to address this widening gap in their proxy disclosures. Here’s the bullets that introduce the article:
– The total median pay package for chief executives at S&P 500 companies rose to $12 million last year.
– The number — which includes salary, stock, bonuses and other compensation — is 7% higher than in it was in 2017, for an average pay hike of $800,000 for large-company CEOs.
– The median pay increase for the typical worker at an S&P 500 company grew just 3% last year, or less than half the rate that the top boss enjoyed.
– It would take 158 years for the typical worker at most big companies to make what their CEO did in 2018.
According to this recent Equilar report (available for purchase), CEO pay continues to grow – with median total compensation increasing by 8% since 2017. It also identifies this notable trend:
Since 2014, the percentage of Equilar 500 CEOs receiving performance-based awards has been steadily rising, exceeding both time-based stock and options grants as the most prevalent long-term incentive vehicle. In 2018, 87.8% of Equilar 500 CEOs received performance-based awards.
This ClearBridge memo on annual & long-term incentive plan trends says the proportion of companies using performance awards might be even higher than that Equilar figure. Some people think the pendulum is due to swing back towards salary & time-based awards…stay tuned.
The weighted average cost of capital (WACC) is an important financial precept that is widely used in financial circles to test whether a return on investment can exceed or meet an asset, project, or company’s cost of invested capital (equity + debt). The thesis of this opinion article is that companies can develop more meaningful return performance targets by better understanding the details of its WACC before setting a return performance target.
Simply stated, a company’s return on capital performance target will be more relevant if in fact the return shows that the level of performance to be achieved must equal or exceed the company’s estimated cost of capital. Directors serving on the Board’s compensation committee can use the WACC model to test the validity and reasonableness of an incentive plan’s return performance target by learning whether the return target meets or exceeds the company’s WACC over the performance period.