On January 1st, CGLytics officially will become Glass Lewis’s exclusive global partner for its “pay-for-performance” modeling and grading system. As part of that, Glass Lewis will be using a “significantly different” peer group methodology this year – which will impact its pay-for-performance model and its say-on-pay recommendations. Check out this Glass Lewis blog for responses to FAQs on the impact of the proxy advisor’s new (to the US) partnership with CGLytics. Here’s an excerpt:
1. Will these new peers change Glass Lewis’ recommendations on Say on Pay proposals? For individual companies, yes. The changes to the Glass Lewis peer methodology will change individual outcomes, which will influence our recommendations in positive or negative directions for some companies.
At a market-wide level, there will be no material change to the distribution of grades awarded or the number of against recommendations as a result of the new peer methodology because our Pay-for-Performance Model distributes grades evenly. Glass Lewis expects to support the same level of Say on Pay proposals it has in recent years.
2. Are there any other material changes to Glass Lewis’ Pay-for-Performance Model? No. The rest of the model continues to operate as it has. Changes in score outcomes will be driven by the changes in the peer methodology, which is difficult to simulate or replicate to ensure its integrity.
3. Will there be any future changes to Glass Lewis’ Pay-for-Performance model? There will be no other changes for the 2020 proxy season. We will continue to assess the rigor and independence of our models going forward, as we do with all our policies, with continued research and extensive engagement with our clients and the public companies that they own.
The blog also emphasizes that CGLytics is the only authorized distributor of Glass Lewis’s compensation models, peers, etc. Glass Lewis research & recommendations will be exclusively available via Glass Lewis’s website.
Even as some investors might be cooling on “pay-for-performance,” there’s been an uptick in performance awards at smaller companies. This blog from Willis Towers Watson has details about CEO pay practices in the S&P 1500. Here are a few takeaways:
– Performance awards are now 50% of the average long-term incentive program mix
– Small-cap companies experienced the most pronounced shift in granting CEO performance awards – increasing from 61% in 2017 to 67% in 2018 – while S&P 500 and S&P 400 companies held steady in 2018 at 88% and 79%, respectively
– The value of LTI earned — the combination of time-vesting awards vesting, stock options exercised and performance plan payouts — grew 13% at the median in 2018, but at a much lower rate than the previous year when the median earned grew 33%
– Looking specifically at performance awards, the average payout was 110% of target based on the underlying shares or units granted for performance periods completed in 2018. Strong market performance over the recently completed performance cycle led to substantial value gains because of stock price growth. Consequently, the average realized value from payouts for awards completed during 2018 was 157% of target
ISS recently updated its FAQs for compensation policies and equity plans. Along with those FAQ updates, ISS issued a pay-for-performance mechanics document intended to help explain how ISS evaluates pay quantitatively and qualitatively – it includes details on use of EVA metrics in the financial performance assessment analysis.
Earlier this week, the IRS released proposed regulations under Section 162(m) aimed at providing more color for the 2017 Tax Cuts and Jobs Act changes to 162(m). Mike Melbinger’s blog from Tuesday provides a nice summary of some of the good news in the proposed regs along with some of the not-so-good news.
If you’re looking for additional guidance on the proposed regs, check out our “162(m) Compliance” Practice Area on Compensation Standards where we’ll be posting memos.
Recently in our Q&A Forum (#1294), one of our members articulated a question that seems to be on everybody’s mind:
Our 2019 CD&A was 23 pages long, or 50% longer than the first proxy statement I drafted 25 years ago. Most of us who draft CD&As can likely agree that they are too long and contain much more detail than most investors want or need. Very few investors, whether retail or institutional, actually read them or if they do read them, get beyond the first five pages. Investors become frustrated by trying to extract and understand the most important information, even with the help of graphics and plain English. For issuers with significant institutional ownership, the CD&A is largely irrelevant to ISS and Glass Lewis when determining their say on pay vote recommendations.
Would you please point me to a CD&A that is concise (say 10-12 pages, assuming that there is one) yet effective in satisfying the SEC’s rules and explaining an issuer’s executive compensation program and outcomes to investors and the proxy advisory firms? If there is no such thing, why can’t there be?
John gave this answer:
Levi-Strauss comes to mind – as does PPG. Mark Borges blogged about both companies’ comp disclosures and you should check out some of the other companies that he highlighted in his always-informative “Proxy Disclosure Blog.”
We blog quite a bit around here about private jets – it’s a “perks” quandary that keeps on giving. Here’s more proof of how tricky it can be: a recent Reuters article asserts that CEO jet use adds millions to a company’s tax bill through lost deductions – mostly unbeknownst to investors due to lack of disclosure. Here’s the logic:
Among S&P 500 companies that pay for their CEOs to use the company jet for private trips, the estimated median value of those trips increased 11% last year to $107,286 from $96,532 in 2017. The value of those trips is taxable income for the CEO.
The argument about lost tax deductions stems from an IRS rule limiting a company’s deductions on personal jet use to the estimated value of the personal flight, which is frequently based on the price of a first-class ticket on a commercial flight – not the actual cost of flying the company jet.
This means companies lose tax deductions when companies pay for private trip use – because these trips include pilot and flight attendant salaries, maintenance costs, insurance, depreciation of the jet, etc. These costs are usually fully deductible when the jets are used for business purposes but aren’t taken into account when companies value a personal trip based on the price of a first-class ticket.
As the article points out, SEC rules don’t require disclosure of lost deductions – so most investors aren’t getting the full picture of the cost when companies pay for personal travel on company jets. Two companies disclosing the value of lost tax deductions resulting from personal use of company jets are Visa and Comcast – to the tune of $4.7 million for Visa and $8.8 million for Comcast.
For more on deductibility, see Mike Melbinger’s blog that covers how independent security studies can impact this.
A few months ago, Liz blogged about CII’s overhaul of its executive compensation policy – urging companies to reduce complexity of their incentive plans. Predictably, the suggestion that some companies may benefit from shifting away from metric-based incentives has generated a lot of discussion.
A recent memo from Pay Governance lays out a point-by-point response to CII’s policy, asserting that the practices outlined in the policy would weaken the link between pay & performance – against the wishes of many shareholders – and cautioning against oversimplification. This excerpt touches on one point of agreement, though:
We argue that companies must do a better job of communicating their incentive plan designs to participants and the investor community, explaining how particular plans are aligned with business strategy to improve company performance and influence executives to execute business plans that will create long-term shareholder value.
Last month, I announced on TheCorporateCounsel.net that Lynn Jokela has joined us as an Associate Editor for our sites. She brings a wealth of experience – here’s her bio. I’m now excited to share that Lynn will be making her blogging debut next week. Lynn’s email uses the domain from our parent company – it’s ljokela@ccrcorp.com – so keep an eye out for that in your inbox!
Our friend Bruce Dravis recently sent us a note about his research on the complementary relationship between stock buybacks & equity compensation – and a related panel that the ABA’s Corporate Governance Committee held at the Business Law Section meeting in September:
Given some of the leaders in the Democratic presidential polls, the political critique of buybacks could be a hot topic in 2020. The ABA panel looked at ways the political and academic critiques of buybacks miss the boat – particularly with respect to the assumption that dollars spent on buybacks just leak out of the capital markets and evaporate.
In the Fortune 100 companies sampled – $1.23 trillion of transactions — about 37% of buybacks reversed share dilution created by equity compensation, with 61% of the dollar cost of such repurchases offset by option exercise proceeds and tax benefits. While the other two-thirds of buybacks are “pure play” repurchases that affirmatively reduce share counts, a sizable chunk of buyback activity supports the employee compensation benefit.
In the panel, Prof. Jesse Fried also spoke to his research on “short-termism” – including how investors recycle buyback dollars in the capital and investment markets.
Given the huge amount of money spent on buybacks in recent years, Bruce is probably right that they’ll continue to draw scrutiny – whether fairly or unfairly, and even if the true issue is less about buybacks themselves and more about some perception of market manipulation to benefit insiders. This recent WaPo article takes issue specifically with insider sales after a buyback announcement. It picks up on the thread of SEC Commissioner’s Rob Jackson’s critiques – even if the post-announcement sales are made under a 10b5-1 plan or during an open window.
Yesterday, in addition to posting its annual “Diversity Report,” Intel made waves by also publishing on its website the pay data that it recently filed with the EEOC. The data covers over 50,000 US workers and provides much greater detail than the other “pay equity” and “pay gap” info that we’ve seen to-date. Here’s a few points that the company calls out with the disclosure:
– This is pay data from the years of 2017 and 2018. Therefore, it does not align with Intel’s 2019 Diversity and Inclusion Representation numbers.
– The data in this report is collected from employees’ W2 box 1 earnings, which includes all taxable income and has not been normalized for factors such as hire date, shift differentials, commissions and employee retirement contributions. For example, employees hired after the start of the year will appear to have lower earnings due to their W2 only including pay information collected from their start date. Similarly, if employees contribute more to their 401(K) then their box 1 earnings for the year will be lower.
– Intel is committed to global pay equity and uses best-in-class analysis on an ongoing basis to ensure fair pay irrespective of gender or race/ethnicity. Intel has recently achieved gender pay equity globally and continues to maintain race/ethnicity pay equity in the U.S. We will continue to perform pay equity assessments moving forward and close any identified gaps. Pay Equity is defined as the average pay gap between employees of different genders or races/ethnicities in the same or similar roles after accounting for legitimate business factors that can explain differences in pay such as performance, time at grade level and tenure.
Companies aren’t required to make the EEOC data public – and as I’ve blogged, this might be the only year the EEOC collects the “Component 2” pay data (at least in this form). For Intel, this disclosure follows a settlement a couple months back with the Department of Labor to resolve pay discrimination allegations – and so far, the company is facing some criticisms about pay disparities that the data highlights (see this Bloomberg article for lots of graphs). But the article also suggests that shareholders who are focused on narrowing pay gaps are happy with Intel’s transparency.