– Liz Dunshee

I’ve blogged that most companies will experience a say-on-pay failure at some point. This PJT Camberview memo says that might be because voting policies have become more complex. Here’s an excerpt:

Feedback from engagement meetings this spring indicated a heightened focus on one-time or supplemental awards and a desire for plan design that is tightly linked to challenging strategic and financial measures. As investors continue to become more sophisticated in their compensation analysis, they have also become more willing to support plans that have moved away from traditional metrics such as TSR and toward those specific to company circumstances and strategy. As a result, compensation plans have generally become more aligned with key performance metrics, with the caveat that unique plan design requires clear disclosure and more in-depth engagements to provide investors with context.

Underlying both voting and engagement trends is the continued search for perceived or actual gaps in pay and performance. Many investors have created proprietary quantitative pay screens to flag potential disconnects that can prompt an engagement request to understand the underlying causes.

Companies that faced investor challenges this spring on compensation can expect further discussion this fall into the rationale behind the compensation committee’s decision-making and how investor feedback has informed potential changes to plan design. 2020 should bring further complexity as investors continue to dig deeper into compensation plans and ISS potentially expands its analysis to include Economic Value Added (EVA) in addition to TSR and other financial metrics.

– Liz Dunshee

This Pay Governance memo analyzes the relationship among stock buybacks, long-term growth and executive compensation for companies in the S&P 500. Here’s the conclusion:

Following up on Pay Governance’s original research into the relationship among executive compensation, share buybacks, and shareholder value creation, we found even stronger evidence that certain executive compensation structures (granting stock options and using EPS bonus metrics) are correlated with share buybacks. We also debunked two common myths: that share buybacks damage long-term corporate investment and that there is an excessive trade-off between short-term and long-term shareholder returns.

Taken together, these findings suggest an alternate narrative about the relationships between executive pay, share buybacks, shareholder value, and company growth. The contemporary fact-driven story of share buybacks is not one of managers shirking investment and long-term stewardship of corporate capital but one of disciplined capital allocation. Companies conducting the largest share buybacks are not just rewarding shareholders with higher long-term returns; they also appear to be investing in the long-term through capital expenditures.

Executive compensation programs are an important part of the strategic structure ensuring this efficient capital allocation and long-term corporate financial sustainability. The use of short- and long-term financial metrics and share-based incentives remains a proven approach for focusing executive teams on long-term value drivers and aligning executive pay with shareholder interests.

– Broc Romanek

Some of us have been internally debating what the “latest practicable date” means for purposes of S-4 compensation disclosures. There often are public-public deals with S-4 filings that are updated and amended four or five times before going effective six months after the S-4 is first filed with the SEC. In these S-4s, they start describing all the compensation arrangements as they are back at signing – but six months later, the company is still using some date that is quite a bit earlier (or, in some cases, a future date that is expected to be the closing) to show compensation “as of the latest practicable date.”

Here are various thoughts from folks that I reached out to:

– For a long time, I’ve trying to connect the dots of “latest practicable date” and compensation disclosures and S-4. I can’t find anywhere in S-4 itself that references “latest practicable date” and I only found a few references of it in Item 402 of Regulation S-K – (1) with respect to not being able to calculate salary or bonus and so you would provide it in a Form 8-K, and (2) with respect to golden parachute compensation. I don’t think item (1) would apply for an S-4 as an issuer would theoretically already have get this squared away for its 10-K. As such, I assume we are referring to calculating golden parachute payments where we pick a triggering date as of the latest practicable date and that the payment is based on a price that is not yet determined (such as a stock price).

– My personal approach to “latest practicable date” (a similar term is used in Item 403 for stock ownership tables – “most recent practicable date”) is to update the information so that by the time the registration statement is declared effective, it provides substantively materially accurate information within a reasonable period of time. In other words, as always said by the SEC, “it depends on the facts and circumstances” and don’t make any material misstatement or omissions. My goal would be to set up a calculation so that you can plug in the variable for the answer. This means your comp information could be within 1-3 weeks of going effective (based on filing and amendment and then getting SEC sign-off). If it makes sense, you could also use a variable approach showing payments at different levels based on different assumptions (e.g., high/medium/low).

Generally, executive comp tables must include the last completed fiscal year. Consider CDI Regulation S-K, Ques. 117.05 with regards to updating comp tables in an S-1 or an S-3. Also make sure you are comfortable that there are no material misstatements or omissions. I would also consider providing updates to the extent that there have been changes made in disclosures pursuant the acquisition agreement (e.g., in the disclosure schedules).

– Our view is that (leaving aside how material the volume of comp data really is), we would go with less is more so would leave it until there’s a specific rule or comment to change it. If there’s no SEC comment, we think a lot of S-4 issuers leave well enough alone, so they don’t have to take another cut at comp beyond once for S-4 purposes. Even if perhaps “latest practicable date” means that comp really should be updated to final, that’s easier said than done and sometimes impacts the type of prospectus that can be used and seems more trouble than it’s worth (not to mention the legal costs)).

– If the deal straddles two fiscal years, and forward incorporation by reference is not available, I would probably advise the registrant to roll forward when new annual numbers become available. Otherwise I’ve never thought of the executive compensation tables as ones that had to be updated more frequently than that.

– In most other contexts where “latest practicable date” or “recent practicable date” is used, I’ve had the Corp Fin Staff comment if it wasn’t in the last month or two. I would think the other issue, from a shareholder vote perspective (for deals where there is a vote) is making sure the s/h has all the material information they need to make an informed vote.

– I assume this is talking about the golden parachute comp disclosures, in which case it doesn’t seem like the Staff is too focused on those and my hunch is that companies get away with sticking with the initial date used in the first filing. The few deals I’ve been involved in that have included this disclosure haven’t been updated, but none of those were long registration processes. But I bet if you actually asked the Staff, they’d say it should be updated as time passes.

– Broc Romanek

This article from Semler Brossy’s Kathryn Neal is interesting, illustrating how pay practices at private companies can be something that public companies can look to for examples of good practices…

– Broc Romanek

Here’s the intro from this piece by Semler Brossy’s Barry Sullivan and Rami Glatt:

Today, nearly one-third of the S&P 500 companies measure Return on Invested Capital (ROIC), or a similar capital measure, in their executive incentive programs. Why is there so much interest in ROIC for executive incentives? Investors often look to ROIC as a key indicator of management’s effectiveness and an important driver of premium shareholder returns. The financial theory is pure: ROIC captures how well a company and its management team uses its capital — both equity and debt — to generate earnings.

ROIC can be useful in absolute — to help ensure a company is generating a return above the cost of the capital it uses. ROIC can also be useful as a relative test. Investors often pick stocks based on whether – and by how much – a given company is outperforming other players in the same industry.

Again, the financial theory is pure, and there is real-world evidence to support it. The chart below shows that premium shareholder returns come with strong ROIC, in balance with top-line growth over time. Importantly, growth is a necessary balance to ROIC, in our view, to help ensure a company’s ROIC is sustainable over time, and not simply a function of short-term behaviors (e.g., “pumping” earnings, or “starving” the asset base).

– Broc Romanek

Here’s the intro from this memo by Meridian Compensation Partners:

Given its strong alignment with shareholder value creation, earnings per share (EPS) is a common performance metric selected for short-term incentive and long-term incentive plans. A company’s generally accepted accounting principles (GAAP)-based EPS is equal to its after-tax net income divided by the number of common shares outstanding (either on a basic or fully diluted basis). However, in performance arrangements, companies often use an adjusted EPS performance measure, which is a non GAAP measure. Directors should consider examining the different approaches companies use to develop non-GAAP EPS measures when deciding what’s best for their own company’s compensation program.

– Broc Romanek

Recently, a member asked this in our “Q&A Forum” on TheCorporateCounsel.net (#9860):

Are ERISA-governed severance plans typically approved by a company’s full board or the compensation committee or both? Our compensation committee charter does not specifically address authority relating to benefits plans.

John noted:

I think practice for broad-based ERISA plans varies & there’s not a one-size-fits-all approach. Take a look at Section C of this Wachtell Lipton memo. Even if your committee charter does not expressly extend to ERISA plans, it seems that the full board could opt to delegate those responsibilities to the committee if it desired to do so.

– Broc Romanek

The SEC’s new rule requiring companies to disclose their practices or policies regarding their employees’ (including officers) and directors’ ability to hedge the economic risk of owning the company’s equity securities now applies to companies with fiscal years beginning on or after today. Check out this new Compensia memo that provides reminders about the key provisions of the new rule (and here’s other memos about it)…