Not too long ago, Liz blogged about how director pay continues to attract more and more attention. As director pay faces increased scrutiny from investors, this blog from Pearl Meyer suggests companies should approach proxy statement disclosure about director pay much the way they approach the CD&A – that is – striking a balance between marketing the executive compensation program, or in this instance the director pay program, and satisfying the SEC’s disclosure rules.
Not that anyone wants to make a proxy statement any longer, but it’s a suggestion that could help tell the story and potentially provide comfort to investors. Decisions about director pay commonly include considerations about competitive pay as well as appropriateness based on the unique characteristics and value the directors bring to the board and company so it seems like a good story to tell.
Here’s an excerpt from Pearl Meyer’s blog suggesting companies follow the same approach with director pay disclosure as is used for the CD&A:
– Outline the philosophy, guiding principles, and objective that drive the program design
– Provide an overview of the pay mix structure and explain how it aligns with shareholder interests
– Summarize the compensation governance features of the director pay program – much like ‘what we do/don’t do’ as is commonly found in CD&A disclosures
Not long ago, I blogged about some suggestions for shortening the CD&A so when someone says expand CD&A disclosure, it makes me wonder – ‘what else is there to say’? As summarized in Deloitte’s highlights from a recent AICPA conference, Corp Fin Director Hinman noted that comp committees often take stock buybacks into consideration when setting executive comp but the CD&A might not include disclosure about the committee’s considerations. So, he encouraged companies to consider expanding CD&A disclosure accordingly.
A recent Georgeson blog sheds light on disclosure of investor engagement practices after a company failed or received a “red zone” say-on-pay vote result. Georgeson’s review included analysis of 2019 proxy statement disclosures for S&P 500 companies that received less than 80% support for their say-on-pay proposals in 2018.
The blog says there were 43 companies that fell into the fail or “red zone” bucket. Some of the findings for these 43 companies include:
– 80% disclose some information around investor outreach and/or attendees included in the outreach
– 72% disclosed director involvement in the engagement process
– 61% included charts or tables showing what they heard during engagement and actions taken in response
– Only 5 of the companies disclosed that they engaged with ISS and/or Glass Lewis and 4 of the 5 received less than 70% support for their 2018 say-on-pay proposal
The report also discusses engagement by the “Big 3” investors, BlackRock, Vanguard and State Street and shows how many of the 43 companies included in the review engaged with each of the Big 3. Some data points here include:
– Only 2 of the 43 companies didn’t engage with any of the Big 3
– 44% of the 43 companies engaged with each of the Big 3
The blog also provides reference to sample ways companies have spruced up shareholder engagement disclosure after receiving a low say-on-pay result.
Here’s something I recently blogged on TheCorporateCounsel.net: John blogged a few months ago that 70% of restatements are now “Little r” revisions, according to data from Audit Analytics. This WSJ article reports on a couple of studies that analyze the potential connection between the presence of clawback provisions & performance awards, on the one hand, and management’s discretion to “restate” versus “revise” financials, on the other. Here’s an excerpt (also see this CLS “Blue Sky” blog):
A study by Ms. Thompson found that almost half—45%—of Little r revisions from August 2004 through 2015 that she analyzed met at least one of the guidelines for them to be considered Big R restatements.
Her research points to one potential motivation: “clawbacks” that allow companies to recoup compensation from executives in the event of a Big R restatement. Companies with such clawbacks were more than twice as likely as others to use revisions for potentially material errors, her analysis found.
Although the article tries to also draw a link between “Little r” revisions and performance awards, the data doesn’t directly connect declines in performance award metrics like EPS to a company’s decision to carry out a “Big R” restatement versus a “Little r” revision. The article points out that in at least one situation, Corp Fin was deferential to a company’s decision to correct an accounting error via a revision even though the error had flipped one quarter’s earnings per share from negative to positive and the company used an annual EPS metric in its long-term incentive plan.
Also see this article suggesting that executives who are subject to clawback policies are more likely to push for tax savings – e.g. through use of tax havens. It wouldn’t seem there’s much downside to that for shareholders, but for companies that follow GRI Sustainability Reporting Standards, it’s relevant to know that GRI is recently announced a new “tax disclosure standard” to promote transparency of tax practices that could impact funding of government services & sustainability initiatives.
There’s a lot of attention lately to the fact that CEO pay growth is outpacing the growth of “average” worker pay. Maybe if companies are moving away from “shareholder primacy,” that’s a fair thing to focus on – but if you’re looking at shareholders and their retirement accounts, there’s not a lot to complain about, at least in recent years (see this blog for data over a 40-year time period). According to this “Harvard Law” blog, from 2014 to 2018:
– Median CEO pay growth (as reported in Summary Compensation Tables) was 23% for S&P 500 companies – compared to 50% growth in total shareholder return
– In the commercial banking industry, median CEO pay growth was 31% – compared to TSR growth of 40%
– In the retail industry, median CEO pay growth was 1% – compared to TSR growth of 49%
– In the computer software industry, median CEO pay growth was 59% – compared to TSR growth of 141%
The blog also offers these conclusions:
– CEO pay growth, at most public companies, is not closely correlated with TSR performance (the “pay-for-performance” rule proposed by the SEC in 2015 – SEC Release No. 34-74835 – has not yet been adopted)
– Over the 2014-2018 period, at S&P 500 companies and at the companies in the three industries examined (commercial banking, retail & computer software), the median CEO pay growth trailed TSR performance
– CEO pay decisions at most public companies reflect a variety of facts and circumstances that go beyond TSR performance
On Friday, Airbnb announced a detailed “stakeholder” approach to governance and company-wide compensation. It identifies five key groups of stakeholders (including shareholders) – as well as principles for serving each group and detailed metrics to track progress against those principles. The plan also says this about compensation:
Third, we are linking our adherence to our principles to goal-setting and employee compensation. Specifically, our principles and metrics are integrated into the company goal-setting process and are a central component of our company bonus program for all employees. Several metrics will be considered when we award bonuses to our Employees, including but not limited to progress on our stakeholder principles, such as our progress on guest safety.
Airbnb will report on its progress at a new “Stakeholder Day” – according to this NYT interview with the company’s CEO, that day will be similar to a traditional annual meeting but with a broader invite list that includes customers, hosts and employees. This WSJ piece ponders how the company’s approach will work out when it launches its expected IPO later this year.
This is further evidence of the pressure that companies are facing to consider environmental, social & governance factors in their board structures and business operations – including demands to incentivize management’s focus on ESG goals through executive pay. Mark your calendars for our upcoming webcast – “Tying ‘ESG’ to Executive Pay” – to hear Aon’s Dave Eaton, Southern Company’s James Garvie, Mercer’s Peter Schloth, and Willis Towers Watson’s Steve Seelig discuss how to handle the growing demands – and challenges – to including ESG metrics in executive compensation plans.
Now that Glass Lewis has made the switch to CGLytics for pay-for-performance modeling, as Liz blogged in December, Glass Lewis peer groups are changing. As explained in this F.W. Cook blog, historically, Glass Lewis relied on Equilar’s peer of peers approach. Now, Glass Lewis will incorporate 8 different factors when assessing the appropriateness of a single peer. Glass Lewis says the change in methodology to select peers will result in less overlap between a company’s self-disclosed peers and the peers that Glass Lewis will use to evaluate pay-for-performance.
Importantly, Glass Lewis allows companies to submit their compensation peer group directly to Glass Lewis and the deadline to submit your peer group to Glass Lewis is the end of this month if you file your proxy statement anytime between now and July 31, 2020. Here’s a Q&A from Glass Lewis about the peer group change that includes a link to submit your peer group to Glass Lewis.
Shareholders continue to scrutinize how clawback policies apply to situations of “reputational harm” – the latest examples coming in the form of shareholder proposals from a group of proponents led by the NYC Comptroller. One of the proposals was prompted by a company terminating its CEO “without cause” – i.e. with severance – despite attributing the termination to a violation of company policy. In a letter to the company’s board, the shareholders called on the company to:
– Modify the clawback policy to empower the Board to apply it in cases where an executive’s actions violate the Company’s Standards of Business Conduct, or when those actions damage the Company’s reputation
– Require approval from a majority of shareholders for any future exemption from the general policy requiring forfeiture of unvested equity grants at termination of employment
– Adopt corporate governance enhancements to the Company’s approach to preventing sexual harassment – specifically, assign a standing committee oversight responsibility for sexual harassment prevention system-wide, add sexual-harassment prevention to its director skills matrix, conduct a comprehensive review of the company’s policies and report back to shareholders by year-end 2020
In its announcement for this proposal, the NYC Comptroller’s office points out that it’s successfully negotiated expanded clawback policies at nearly a dozen companies. According to this separate announcement, another recently submitted proposal urges the target company’s board to adopt a clawback policy that will:
Provide that the Committee will (a) review, and determine whether to seek recoupment of incentive compensation paid, granted or awarded to a senior executive if, in the Committee’s judgment, (i) there has been misconduct resulting in a violation of law or Company policy that causes significant financial or reputational harm to Company and (ii) the senior executive either committed the misconduct or failed in his or her responsibility to manage or monitor conduct or risks; and (b) disclose the circumstances of any recoupment if the circumstances of the underlying misconduct are public.
One size doesn’t fit all when it comes to incentive metrics – selected metrics vary across companies and they need to due to specific business strategies, peer practice, investor feedback, etc.
This recent article in Ethical Boardroom discusses how TSR correlation analysis can provide another tool in the shed to help compensation committees and management understand how incentive metrics track with TSR – in other words, “how one variable (i.e. TSR) is affected by changes in a second variable (i.e. financial performance metric) over time.”
As compensation committees work with their comp consultants, they consider a multitude of factors when selecting incentive metrics. And many factors will impact TSR, for example, company-specific performance as well as macro-economic factors. The article walks through a sample TSR correlation analysis – explaining the inputs and how to interpret the analysis. So, if you have an eye for stats, this method can help identify metrics that:
– Have historically had the strongest correlation with value creation
– Are the most volatile
– Are reasonable relative to key value drivers and metrics used by companies in similar businesses