Here’s BDO’s latest study on middle-market CEO & CFO compensation – data was collected pre-Covid-19 and was from last year’s proxy season. The study found that total CEO and CFO compensation for middle market companies rose 3.6% and 3.7% respectively. Other findings include:
– Most of the CEO and CFO compensation increases were in the form of bonuses and annual incentives and long-term incentives
– Incumbent CEOs saw more significant pay increases, with average salary increasing 7% and total direct compensation increasing 12%
– Incumbent CFOs also saw more significant pay increases, with average salary increasing 3% and total direct compensation increasing 13%
For additional thoughts on what to do about incentive compensation during the pandemic – with continued economic uncertainly – a Mercer memo provides examples. Here’s a few involving adjustments to the equity grant formulas:
Consider use of a collar: Continue to base the number of shares on the stock price (value-based guideline) or number of shares (fixed-share guideline), but set a floor and maximum for the number of shares that can be awarded — for example, + or – 20% of the estimated pre-stock price drop (or prior year’s) number of shares or share value.
For value-based grant guidelines, consider basing the number of shares on an average stock price over a longer period of time (for example, the prior 90 days) to smooth out recent volatility. (This could also be done to assess compliance with stock ownership guidelines.)
For fixed-share grant guidelines, consider whether a temporary increase is warranted to keep compensation competitive with peers and retain executives.
Not too long ago, I blogged about repricing options & exchange programs and noted there may be renewed discussion about them due to market volatility and depressed stock prices. There’s definitely more discussion, although it’s hard to say how many companies will move forward with a repricing or exchange program. For those wanting to get up to speed on considerations if they elect to go down this path, here’s a recent K&L Gates blog that touches on ISS, Exchange Act, Securities Act and Nasdaq/NYSE issues.
Use of discretion has been mentioned as a possible mechanism for dealing with equity awards granted earlier this year before Covid-19 became a pandemic but it’s not the simplest thing to do, especially for boards concerned about catching any flack from proxy advisors and investors. A recent Pay Governance memo provides a framework for compensation committees that are considering use of discretion.
Use of discretion, if used at all by compensation committees, is usually done when making downward adjustments in pay. Now with equity awards negatively impacted by ongoing uncertainty resulting from Covid-19, some compensation committees are thinking about what they can do to get the intended results from recent equity grants.
For compensation committees thinking about potentially using discretion, it’s not too early to start preparing. The memo high-lights several key considerations, including:
– Affordability: considerations regarding company cash flow, including whether other forms of payout delivery should be considered to manage expense
– Participation: which group of the employee population should be considered for discretion and should any groups be excluded
– Performance: discretionary assessment of company performance should be grounded in the company’s preparation for and ability to return to normal operations post-Covid-19 (the memo includes criteria examples relating to financial/operations, shareholder, employee, customer and community)
– Award amounts: if plans miss threshold, expectations will be that discretionary payouts will be well below target
– Payout delivery: company stock discretionary awards can help strengthen retention, demonstrate commitment and align with shareholders
– Exclusions: consider any positive financial outcomes that might be excluded to ensure there aren’t any unintended windfalls
When compensation committees do use discretion, careful planning and thoughtful deliberation will prove helpful for drafting eventual proxy statement disclosures. Use of discretion will require a solid rationale that will need to be explained along with how this aligns with interests of shareholders – something to keep in mind before making discretionary adjustments.
Survey data seems to be coming out pretty regularly now as companies continue thinking about what to do with executive and director pay as uncertainty about the effects of Covid-19 continues. For another look, Semler Brossy recently published a report looking at how companies and boards are responding to the crisis when thinking about executive comp. The continued uncertainty makes it all the more important for compensation committees to carefully deliberate any potential actions they might take relating to executive compensation.
The most recent report is based on data gathered from over 100 companies representing a broad set of industries and highlights current actions taken and those in consideration for late 2020 and 2021. The report says so far, there is no universal response, many companies are delaying action until there is more clarity and companies that have taken action, are doing so out of necessity. Here’s some of the findings, check out the report to see more detail:
– Most respondents have already set goals for 2020 bonuses and of those, 63% expect to use discretion to adjust payouts
– 40% are considering resetting performance goals part way through the year once the effect of Covid-19 is better understood
– Most respondents have already made 2020 equity grants and don’t anticipate making any in-flight changes at this stage
The report also includes data on the impact of Covid-19 on the broader employee population, timelines for pay reductions and employee populations impacted by pay reductions.
I’ve blogged about results from a couple of Pearl Meyer surveys about the impact of the Covid-19 pandemic on executive compensation. With their most recent report, Pearl Meyer takes a look at the impact of Covid-19 has had on director pay and it says they’re seeing trends in director pay not seen since the 2008-09 financial crisis. Here’s an excerpt:
– While the impact of COVID-19 on director pay is just beginning to emerge, it appears that most companies are poised to stay the course – with 38% freezing director pay prior to the pandemic and 17% moving ahead with proposed pay increases
– 20% of respondents have either rescinded a planned director pay increase or temporarily reduced director compensation
– In terms of the duration of director pay adjustments that have been made in response to Covid-19, 40% don’t know how long the adjustments will last
– About one-half of respondents have no plans to change their annual director equity grant value or methodology
Not long ago, I blogged about starting the conversation with the board on integrating ESG into executive compensation plans. As much as investors might be calling for companies to do that, this blog from Alexa Kierzkowski and Dan Ryterband of F.W. Cook in Corporate Board Member says “proceed with caution.”
As most of us know, moving too quickly to try and integrate anything can backfire. Here’s some of what Kierzkowski and Ryterband had to say for those considering integrating ESG with comp plans:
How ESG is embraced in a compensation plan creates the potential for unintended consequences.
ESG goal setting is challenging and missed goalposts are potentially more problematic. For example, failing to meet a carbon emissions target or a diversity goal is not as easily explained in proxy statements as missing a profit target.
There’s also the possibility that efforts to incorporate ESG-related metrics in bonus opportunities will be interpreted as signifying how much, exactly, a specific concern matters to a company. Also, inclusion of some ESG metrics may raise questions about the exclusion of others.
One of the challenges for management and the board when trying to incorporate ESG-related metrics in bonus opportunities will be to vet investors’ and other stakeholders’ priorities against their strategic vision for the company. Applying resources to maximize your ESG scores and improve on the metrics investors may believe are most important may not actually deliver on the organization’s value proposition.
What’s the takeaway? Proceed cautiously and think about whether incorporating ESG-related metrics in compensation plans is the only or best way to measure ESG-related effort/progress.
A couple of weeks ago, I blogged about Pearl Meyer’s quick poll on the impact of COVID-19 and executive compensation plans. The firm also recently published results from a poll on executive base salary planning and includes responses from over 380 participants. Here’s an excerpt:
– About half of poll respondents said 2020 pay actions have already been made and for the other half, 45% have 2020 pay actions that are usually made in April or May and the other 55% later in the year
– For companies that usually set pay in April or May, 25% said they plan to freeze executive base salaries but more than 70% haven’t decided what to do yet
– For companies that make executive pay decisions later in the year, over 60% said it’s too early to tell what they will do and another 24% are considering base salary freezes for 2020
I recently blogged about changes to executive pay at several companies as a result of the fall-out from Covid-19. Here’s a recent report about the Covid-19 impact on executive and director pay at Russell 3000 companies from Semler Brossy. The 20-page report goes into some detail about the pay actions…data looks at magnitude of salary reductions and median CEO and NEO salary reduction by sector.
Over half of the pay reductions have come from the consumer discretionary and industrial sectors. The report says 63% of companies that reduced CEO pay also reduced director pay.
The report then lists companies in the Russell 3000 that have made executive and/or director pay cuts and includes company specific actions…
Not long ago, I blogged about increased workloads for compensation committees. As issues related to the Covid-19 pandemic continue, a recent KPMG memo says investors are looking for compensation committees to increase oversight of human capital management issues. With health and safety issues top of mind, the memo says it’s increasingly important for compensation committees to ensure compensation incentives align not only with long-term value creation but also with workplace safety and corporate culture. Here’s some of the what the memo says about broadening compensation committee oversight:
– Consider expanding the committee’s focus to include human capital management in addition to traditional compensation matters
– Review the committee title and charter against current oversight activities and consider whether any changes are needed
– Consider whether to incorporate nonfinancial or sustainability metrics into executive compensation plans
– View shareholder proposals on compensation issues as a bellwether
– Be mindful of changes to proxy advisors’ assessments of executive compensation policies
– Help ensure long-term incentives are aligned with sustainable long-term value creation
– Expect greater scrutiny of director pay
– Leverage disclosures and shareholder engagement to tell the company’s story about compensation