– Broc Romanek

Check out this Exequity memo for the latest say-on-pay voting stats and ISS vote recommendations for the Russell 3000, as well as examples of companies that had failed SOP votes in 2018 but bounced back and received SOP votes above the average 90.9% support level in 2019.

Also see this summary of say-on-pay results from Mercer…

– Broc Romanek

With 40 proxies filed under the new hedging disclosure rules, this FW Cook memo notes these stats:

– 100% have hedging policies in place
– 62% have hedging policies that cover directors and all employees
– 58% disclose policies that prohibit both transactions in company stock with a hedging function and derivative transactions generally
– 60% include their hedging disclosure only in the CD&A

Please take a moment to participate in our own “Quick Survey on Hedging Policy Disclosures“…

– Liz Dunshee

Disclosure of “realizable pay” seems to be less prevalent these days than it was when say-on-pay first hit the scene. But as I blogged a few months ago, ISS is considering making it a more prominent part of its pay-for-performance analysis – and CalPERS has already taken that step. And a recent WSJ article has me wondering whether it will get revived as a talking point by the many people who want to reign in executive pay. Here’s an excerpt:

The Wall Street Journal compared what S&P 500 companies reported paying their CEOs over three years with a measure of what that pay was worth at the end of the period, called realizable pay, using data from ISS Analytics, the data intelligence arm of proxy adviser Institutional Shareholder Services. (For more information, see the methodology note at the end of this article.)

On average, the value of the pay at the end of the period was 16% higher than originally disclosed. Pay rose at three out of five companies. And at a third of companies, pay rose by more than 25%.

That said, there was a big snafu with this article! A correction was subsequently issued to explain that the “realizable pay” at issue was miscalculated. This Equilar blog explains why that calculation is ripe for confusion:

It turns out that the change in value between reported and year-end pay was a result of differing option valuation models between the disclosed pay and realizable pay values used by the company versus the ISS model. Two commonly used models are the Black-Scholes option pricing model and the Monte Carlo simulation, both of which use a series of underlying assumptions to calculate the value an executive can expect to earn from an option grant. Changes in these assumptions can have significant impacts on the value of an option.

In the case of performance-based awards, the Monte Carlo simulation also takes performance considerations into account in order to come to a fair value based on the probable payout of the award. When more rigorous performance goals are set, a Monte Carlo simulation will produce a lower fair value.

Oracle originally determined the grant date value of Mr. Hurd’s largest option award during the evaluation period using a Monte Carlo simulation and valued the grant at $103.7 million. This is the disclosed value that was used in the study. Because a Monte Carlo simulation was used, it factored in the likelihood of achieving the rigorous performance goals placed on the option. At the end of the year, even though his options were underwater, the different option valuation model made it look like the award increased by 59.7% due to the exclusion of performance criteria. Given the decline in stock price, one would expect a realizable value lower than the disclosed value.

At a minimum, the takeaway here is that if more investors start to look at “realizable pay,” it’s worth understanding the specifics about their calculations (despite the fact that valuation models are mind-numbingly boring). Depending on your shareholder base and executive pay structure, you may need to revisit whether to get out in front of misunderstandings with conversations and/or company disclosure.

– Liz Dunshee

Last week, Clorox announced that it will tie executive pay to elements of strategic ESG goals – it’s the most recent of a few big-name companies to do so.

Whether these moves will improve outcomes and make investors happy is still a bit of an unknown. In the case of Clorox, the ESG goals include choosing “initiatives that foster total well-being – financial, physical, professional, social & spiritual – for employees and their families.” It’s a laudable goal and aligns with everyone’s focus on human capital management. But will we see granular proxy disclosure that the CEO missed out on a bonus because employees weren’t hitting the gym often enough? I kinda doubt it.

At any rate, it’ll be interesting to see how this area develops, as it seems to be gaining steam and using non-financial sustainability metrics in executive pay plans presents a lot of new challenges for measurement, internal & external communication, etc. This Semler Brossy memo outlines 5 ways to overcome the roadblocks. Here’s the 30,000-foot view:

1. Reexamine the context: Confirm that your company’s situation calls for express sustainability measures

2. Clarify the organizational scope: Determine which parts of the organization the incentives should apply to

3. Quantify the duration: Decide on the time horizon of your initiative, which will affect how your incentives are structured

4. Consider the means & the ends: Do the processes & behaviors used to achieve your ESG goals matter as much as, more than, or less than the results?

5. Structure the incentives: Integrate the relevant metrics & payouts in designing your plan

New Quick Survey! At our conference a few weeks ago (which you can still register & watch via video archive), there were a lot of questions about how companies will handle the newly required hedging policy disclosure. Take a moment to participate in our “Quick Survey on Hedging Policy Disclosure” and see what others are planning to do.

– Liz Dunshee

As I blogged yesterday on TheCorporateCounsel.net, ISS announced a public comment period for proposed policy changes that would apply to next year’s annual meetings.

For the US, the proposed changes include adding safeguards against “abusive practices” to the policy to vote “For” management proposals for buyback programs. One “abusive practice” that’s called out in the proposed policy is the use of buybacks to boost EPS-based or other pay metrics.

Submit comments to policy@issgovernance.com by next Friday – October 18th. Unless otherwise specified in writing, all comments will be disclosed publicly upon release of final policies – which is expected during the first half of November.

– Liz Dunshee

I’ve blogged a couple times about Glass Lewis’s new (to the US) partnership with CGLytics for pay data & analysis – and we’re gradually getting more specifics about what that’ll look like. Recently, the proxy advisor announced that it’ll use a new “Equity Compensation Model” to reach voting recommendations for existing & new equity plans.

According to this data sheet, the model tests plans against 11 proprietary criteria. Glass Lewis highlights plan concerns in its reports to investor clients. Companies and others can also use ECM as a stand-alone service to test, review and adjust inputs on plans…for a fee.

– Broc Romanek

As it has for the past few election cycles, executive compensation is working itself into the 2020 Presidential campaign. Bernie Sanders announced a proposal last week that would increase the corporate tax rate if a large company’s pay ratio is 50x or more (it would apply to any public or private company with more than $100 million in revenue). Here’s some news articles about it:

– VOX’s “Bernie Sanders wants to tax companies that pay their CEOs way more than their workers”
– NY Times’s “Sanders Proposes Corporate Tax to Address Pay Gap at Big Companies”
– Washington Post’s “American CEOs deserve a pay cut. Bernie Sanders has a plan to make that happen.”
– Business Insider’s “Bernie Sanders unveils ‘inequality tax’ targeting companies where CEOs make far more than workers”

– Broc Romanek

This blog by Jim McRitchie is mindblowing! Here’s a summary:

CalPERS, the largest U.S. pension fund which manages more than $380 billion in assets, has already started implementing its new compensation framework. In an effort to drive more accountability and improved pay for performance alignment, CalPERS reports voting against 53% of compensation plans at portfolio companies during the 2019 proxy season. That is up from 43% last year.

– Broc Romanek

Here’s a nice 25-page piece from Argyle about how to handle the disclosure after a “failed” say-on-pay vote…

– Broc Romanek

Recently, CalPERS released its new “P4P Scorecard” that it built with the help of Equilar, an extension of the five-year realizable pay calculation that CalPERS and Equilar released earlier this year…