There are unique challenges to working with companies preparing for an IPO – especially if management and/or the board don’t have much public company experience. In this blog, Jim Heim (now of Meridian) outlines some common missteps that advisors make. And while Jim’s advice is directed to comp consultants, lawyers and other advisors can apply the same lessons. Here’s an excerpt:
1. Focusing a market check “at the time of the IPO” without encouraging a long-term compensation strategy and succession plan: this can lead to overly-generous pay that post-IPO awards won’t be able to match, or pay that’s inadequate to retain the best talent.
2. Perpetuating the view that compensation is an “event” tied to the IPO, rather than an ongoing process: this causes a disconnect between management’s pay expectations and the company’s ongoing ability to demonstrate pay-for-performance.
3. Failing to educate the compensation committee & management on the executive pay landscape, regulatory environment and shareholder views: this puts the company in a defensive posture – having to react to demands without enough time to deliberate – and past decisions could limit future alternatives.
Don’t go there! From the outset, work with the committee, management & other advisors to understand their perspectives and to develop priorities and a regular calendar of events. Regularly brief your clients on shifting shareholder perspectives and regulations (our blog makes that easy) – and keep an open dialogue. Lastly, speak up if you’re not getting the information or access you need – you can cite these missteps to make your case.
Even as CEOs are paid millions of dollars in stock awards each year, the majority of Russell 3000 CEOs control less than 1 percent of the companies they work for, and only 2 percent have a controlling stake. That’s according to recent research by ISS Analytics, which also points out that there are some notable exceptions to this rule. The analysis considers the impact of CEO ownership structure on corporate governance – and company performance.
This blog summarizes the key findings on this subject. Here’s an excerpt (and for more work from ISS Analytics, check out Mike Melbinger’s recent blog about the seven incentive plan features & seven executive pay practices that John Roe has classified as “Sinful”…):
– We draw a distinction between CEO ownership concentration in terms of voting power and CEO ownership in terms of a dollar value in the company’s stock. Significant ownership in value does not necessitate significant voting power.
– CEO voting power concentration is more common at smaller firms, while CEO ownership value at large firms is much higher despite lower voting power.
– Controlling for size, we find that higher levels of CEO voting power concentration correlate with several negative governance indicators, including dual class share structures, diminished board leadership independence, classified boards, lower levels of gender diversity in the boardroom and in the C-Suite, and lower levels of board refreshment.
– CEOs with significant voting power at their firms do not necessarily lead to superior economic performance. However, high levels of CEO economic ownership appear to directly correlate with better company performance. The desired effect of interest alignment between executives and shareholders is thus achieved via economic ownership but without the need for significant control by the executive team.
Here’s an interview conducted by Equilar with Simiso Nzima, CalPERS’ Investment Director – Global Equity, Head of Corporate Governance – who discusses a new pay-for-performance assessment framework that shifts from a three-year model to a five-year analysis, including the motivation behind the new methodology and what it means for compensation committees…
Here’s an interesting piece from Semler Brossy’s Todd Sirras about how the design of pay can influence the diversity of a company’s workforce. Here’s an excerpt:
It is noteworthy that the median revenue of companies referencing D&I in their CD&A disclosures has fallen by 75 percent in the same eight-year period to $6.5 billion. This implies that more boards of medium-sized companies are recognizing and reflecting the value of D&I in compensation decisions. (For reference, the median revenue of all Russell 3000 companies is approximately $1 billion.)
The large majority of these D&I references are listed as material factors in discretionary elements of pay decisions, but the usage of such references in formal, metric-driven portions of pay programs is also increasing. This trend will continue over time as D&I approaches become more standardized and commonly accepted, or even expected by investors and other stakeholders.
Also see this blog by Pearl Meyer’s Deb Lifshey about using diversity as part of your pay goals…
Here’s an excerpt from this piece by Deloitte Consulting’s Mike Kesner:
One might have expected to see an explanation of material changes in a company’s CEO pay ratio or median employee’s compensation in this year’s disclosures. However, just a handful of companies have done so. This may be a missed opportunity for companies to be transparent about the drivers of the changes, which in many cases are understandable and appropriate. For example, some companies had a drop in their median employee’s compensation of 20% to 30% due to an interest rate-driven increase in the present value of the employee’s pension in fiscal year 2017.
For fiscal year 2018, the present value of the pension did not increase, as interest rates remained stable between the two years. As noted previously, comparisons to other companies’ CEO pay ratios are not particularly useful; however, comparisons of a company’s pay ratio and median employee compensation over multiple years may be of interest to shareholders and other stakeholders, and companies might consider expanding their disclosures to explain material changes or note trends between years.
In anticipation of the 2019 pay ratio disclosures, all the S&P 500 companies received a letter signed by 48 union and government pension funds and other investors requesting more detailed information about their median employees, such as the median employee’s job and location, and its workforce, such as a country-level breakdown of the company’s entire workforce and the use of temporary or seasonal workers.
The letter suggested that the additional disclosures would “help investors put [the pay ratio] information into the context of your company’s overall approach to human capital management.” It is difficult to determine whether or to what extent this letter impacted disclosures; however, our analysis showed that 26% of companies added details about their median employee compared to 15% last year.
Legal developments and changes in an employee’s job or the nature of the company’s competition can cause employers’ restrictive covenant agreements to become outdated and potentially unenforceable. Periodic review and maintenance of these agreements is crucial to ensure employers get the maximum available legal protection from theft of their customer base and business opportunity, employee talent and confidential information.
Because they impede employees’ ability to change jobs freely, noncompetition agreements, as well as provisions barring solicitations of former customers or employees, often are subject to more stringent rules than ordinary contracts. Some states, like California, Oklahoma, Montana and North Dakota, effectively ban noncompetition agreements altogether outside the context of the sale of a business. Others, like Colorado, Georgia, Louisiana, Massachusetts and Oregon and soon Washington state, limit the types of workers to which they can apply or require that other elements be present.
Recently, Mike Melbinger gave some reasons why compensation committees should expressly take on the responsibility of human capital management. This memo from Willis Towers Watson looks at what that role would typically entail. Here’s an excerpt (also see this Semler Brossy memo):
Collaboration would typically include a review and approval of HCM strategies and regular updates on the strategies’ execution and effectiveness. We would anticipate a greater level of granularity on key talent (regardless of level) and leaders (one to two levels below CEO), while the broader employee base would be managed in aggregate or by major segment/group.
In addition to the responsibility matrix, the board will need to specifically define the broad topic of HCM covering the entire employee lifecycle from recruitment and onboarding to talent development and succession. We suggest that a broad approach is likely required to address the full value of human capital throughout the organization. The investments that are made in support of this “asset base” will include the full employee experience and both monetary/nonmonetary programs.
Management should retain the actual development of HCM policies and practices, and their implementation. The board should step in to oversee strategy and implementation, to ask the right questions and to fully vet unresolved issues.
Yes, way back in 2017 the Tax Act eliminated Internal Revenue Code Section 162(m) – the “qualified performance-based compensation” exception for deductible compensation – but not only are companies still wading through the fall-out and disclosure implications, there are also state tax laws that were modeled on the old tax provision that still exist. So, as this FW Cook blog points out, there was potentially a state income tax benefit to continuing to comply with Section 162(m)’s parameters. Now, though, there’s one less state where that’s possible – because California has conformed its tax code to the Section 162(m) changes under the tax act. Here’s an excerpt from the blog:
To the extent a company paying California taxes had been complying with the design and administrative rules of old Section 162(m) in order to reduce California taxes, it should reassess the company’s executive compensation program in light of the new law, including reviewing in-process performance-based awards to determine whether these arrangements qualify for the new grandfathering exception. It may also be possible for such a company to simplify compensation arrangements going forward, to the extent there were mechanics in place primarily intended to satisfy the requirements for performance-based compensation (for example, an umbrella goal under an annual cash incentive plan).
We’ll be discussing Section 162(m) deductibility – and whether there’s really any “grandfathering” – at our our popular conferences – “Proxy Disclosure Conference” & “16th Annual Executive Compensation Conference” – to be held September 16-17th in New Orleans and via Live Nationwide Video Webcast. Here are all the agendas – nearly 20 panels over two days. It’s only six weeks away – and our reduced rate expires at the end of tomorrow, Friday, August 2nd – so register today!