Saving the best for last may sound good but when it involves proxy season, it can amplify stress levels. So, if you’re drafting the CD&A as the proxy statement filing date closes in, this blog from Pearl Meyer says focus on three areas will help you pull the CD&A together. Here’s where the blog says it’s best to spend your energy:
– CD&A Executive summary – this is an opportunity to provide overall context for your pay outcomes, reinforce strength of your leadership team, emphasize your commitment to shareholder engagement and underscore compensation governance practices
– Annual incentive plans – break this narrative down into shorter sub-sections organized by each of the key areas of your plan, which will help with navigation of what is generally a long narrative
– Long-term equity incentives – highlight or lead with the role of performance-based equity and provide strong rationale for the metrics and be clear about the timeframe over which performance is measured
Hopefully this can help wrap-up the drafting process and give time for reviewing the overall narrative to make sure it’s clear and complies with rules!
This recent blog from Foley & Lardner lists 10 considerations for management and compensation committees when establishing performance awards. The blog includes considerations to keep in mind when selecting performance goals as well as when adopting or modifying a clawback policy. One consideration to keep in mind is that if you’re agonizing over what the “right” performance goal is, you can select more than one and don’t need to settle on a single goal. Here’s an excerpt:
Typically, long-term incentive compensation programs use more than one performance goal, including at least one earnings metric (such as Net Income, EBITDA, or net operating profit) and one return metric (such as ROIC, EPS, or TSR). Therefore, companies shouldn’t agonize to figure out the “one right goal” or feel like they should have their executive team focused on only a single outcome. If more than one goal is selected, use their weighting (e.g., achievement of goal #1 results in 70% of the award being earned and achievement of goal #2 results in 30% of the award being earned) to reflect their importance to the company’s overall business strategy.
A recent Equilar blog analyzes CEO pay ratios by industry sector. The data is interesting to review but as the blog points out, the usefulness of pay ratio data is questionable since there’s difficulty comparing pay ratios across sectors due to some companies employing more part-time workers and differing employment practices and labor needs. Equilar found sectors with the highest pay ratios included services, consumer goods and health care – noting that both the services and consumer goods sectors employ high numbers of part-time workers.
The blog also includes “extreme” pay ratios and notes the difficulty comparing CEO and worker pay. Here’s an excerpt:
SEC disclosure requirements for calculating pay ratios create concerns about the usefulness of the metric. For example, Tesla CEO Elon Musk’s pay will only become realizable if the company clears very high performance targets. Regardless, the entire pay package must be used in the pay ratio calculation. This can cause extreme ratios that may not accurately reflect realized CEO compensation in a given year.
In this recent paper, three law & business profs ran some stats on “Say-on-Golden-Parachute” votes. Here’s an excerpt from the abstract:
We find that unlike shareholder votes on proposed mergers, there is a significant amount of variation with respect to votes on golden parachutes. Notwithstanding the variation, however, the SOGP voting regime is likely ineffective in controlling golden parachute (“GP”) compensation.
First proxy advisors seem more likely to adopt a one-size-fits-all approach to recommendations on SOGP votes. Second, shareholders are more likely to adhere to advisor recommendations. Finally, the size of golden parachutes appears to be increasing in the years since the adoption of the Dodd-Frank Act in 2010, and the golden parachutes that are amended immediately prior to SOGP votes tend to grow rather than shrink.
These findings contrast with the research that has examined Say on Pay (“SOP”), and we suggest that the differences between the two regimes lie in the absence of second-stage, market-based discipline for SOGP votes. We offer potential avenues for improving SOGP’s ability to shape change-in-control compensation practices, such as making SOGP votes (partially) binding, and making the GP payment and SOGP voting information more readily available to shareholders of corporations where the target directors also serve as directors of acquiring corporations.
Lots of considerations go into selecting a compensation peer group and proxy advisors tend to select peers based on industry, companies of similar size in terms of revenue and what they call “peers of peers”. Pre-IPO companies though are likely to have different considerations.
This memo from Jim Heim at Meridian discusses the reasons why pre-IPO peer groups should be constructed using different considerations and says that understanding what the benchmark data will be used for impacts selection of the peer group. The memo sets out key compensation actions that a pre-IPO company faces and says that a peer group for a pre-IPO company could be selected by considering the following factors:
– Industry and related sectors (i.e. 2-digit GIC rather than 4)
– Recency of IPO
– Market value at time of IPO
– Size/complexity of organization at time of IPO
– Growth trajectory leading up to the IPO
– Founder status and overall ownership position of management prior to IPO
This recent Pearl Meyer survey covers compensation committee governance, 2020 executive pay projections, incentive plan design changes and gender pay – and it looks like the workload for compensation committees is only getting heavier. Some nuggets include:
– Increased oversight responsibilities for compensation committees – 39% are now overseeing leadership and talent development, 29% are overseeing diversity & inclusion and 26% are overseeing corporate culture & employee engagement
– Half of survey respondents – 199 companies – recently made or are considering annual incentive plan design changes
– 43% of survey respondents made or are considering long-term incentive plan design changes – most common action being adding new metrics
– Only 14% of public company respondents use or plan to include ESG metrics in executive incentive plans
On a “pay ratio” note, the survey says that CEO salaries are expected to increase by an average of 2.9% next year – compared to 3% for other employees. So that pay component might have a steadying affect on next year’s pay ratios. Of course, CEOs are getting a lot of variable pay too. And in hard numbers, 2.9% of billions of dollars is quite a bit more than 3% of median employee pay…
Georgeson recently issued a good reminder in this blog that ISS’ policy on non-employee director compensation took effect February 1st – and under the policy, ISS will recommend shareholders vote against directors who are responsible for setting director comp when a company’s non-employee director pay is “excessive” for two or more consecutive years unless a compelling rationale is disclosed. ISS introduced the policy in 2018 but it didn’t take effect until earlier this month.
According to the blog, last year, ISS identified almost 100 companies as having excessive non-employee director pay. The memo helps explain how ISS determines “excessive” pay and the disclosure necessary to provide a compelling rationale for the pay so that companies can take steps to help avoid “against” recommendations for directors.
Here’s a recent report from Willis Towers Watson showing trends over the last 10 years for S&P 500 companies on executive stock ownership guidelines and retention requirements. The report shows that 63% of S&P 500 companies have both stock ownership guidelines and also retention requirements, while another 33% of the S&P 500 have stock ownership guidelines only. The report says that the prevalence of retention requirements has increased 82% since 2010.
The report also shows trends in retention requirement design and says that although 52% of the S&P 500 companies have a retention requirement for executives to hold shares until ownership guidelines are met, some companies have either a stand-alone retention requirement or a requirement to hold shares beyond meeting the stock ownership requirement.
Liz blogged last fall about how one company was planning to tie executive compensation to elements of strategic ESG goals. Shareholders continue to ask for standardized ESG disclosure and talk continues about finding ways to tie executive comp to ESG goals. Acknowledging that most agree with monitoring ESG goals and that it’s undecided whether ESG goals should be factored into incentive plans, this recent Directors & Boards blog highlights key areas of focus for compensation committees in 2020 and what they should do, one area being ESG:
– Identify the key ESG measures for your organization: based on the nature of your business, what are the most critical ESG metrics (e.g., environmental emissions, energy consumption, employee safety, pay equity, diversity)?
– Determine what the goals are for improving ESG performance: what level of progress is required to meet the objectives of the organization or be an industry leader?
– Assess whether there is a role for ESG in compensation decisions: should ESG measures be incorporated into the individual performance assessment for the CEO and other members of management? Are there any ESG measures (e.g., employee safety, diversity or environmental progress) that are critical enough to be included in the incentive plan for executives?
The blog also highlights other compensation committee to-dos for 2020 involving pay equity and diversity, ISS EVA metrics and pressure testing the company’s compensation structure.
Tune in tomorrow for the 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 growing pressure 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. Tying ESG metrics to executive pay may improve outcomes, but challenges abound.