We have posted the transcript for our recent webcast: “The Top Compensation Consultants Speak.”
Here’s another webcast to check out: Deloitte is hosting a webcast this Thursday, April 16th – “Executive Reward and COVID-19 – A Changing Picture“. Deloitte’s Stephen Cahill, Mike Kesner and Caroline Zegers will discuss:
– Latest market data in terms of approach to COVID-19 related board and senior management pay cuts in the UK, as well as early insights from the 2020 AGM season
– Evolving investor and proxy views around pay decisions in the current environment
– Consideration of the global perspective, including insights from Deloitte’s experts in the US and Continental Europe
Over the last few weeks, we’ve received many law firm memos and other materials about a variety of compensation-related issues resulting from the Covid-19 pandemic. To help bring some order to those references, we’ve set up a new “Covid-19 Issues” practice area here on CompensationStandards.com. We’re hoping this helps you find the resources you need.
Yesterday, ISS issued updated guidance about how it will apply its proxy voting policies this year in light of the challenges companies face. Most of the guidance clarifies existing policies and says that it will review situations on a case-by-case basis – meaning a company’s disclosure is key. Here’s an announcement from ISS listing the policies impacted by the updated guidance – which includes annual meeting considerations, dividends, share buybacks and others. ISS compensation policies that are impacted include:
Boards are encouraged to provide contemporaneous disclosure to shareholders of their rationales for making changes to performance metrics, goals or targets used in short-term compensation plans in response to the drop in the markets and a possible recession.
For long-term compensation plans, ISS’s benchmark voting policies generally aren’t supportive of changes to midstream or in-flight awards since they cover multi-year periods. Accordingly, ISS will look at any such in-flight changes made to long-term awards on a case-by-case basis to determine if directors exercised appropriate discretion, and provided adequate explanation to shareholders of the rationale for changes.
Going forward, it is also possible that some boards may consider altering the structures of their long-term plans to take the new economic environment into consideration. ISS will assess such structural changes under its existing benchmark policy frameworks.
Option repricing – If boards undertake repricing actions without asking shareholders to approve or ratify their actions in a timely fashion, the directors’ actions will remain subject to scrutiny under the U.S. benchmark policy board accountability provisions (and equivalents in other market policies where relevant). If boards seek shareholder approval/ratification of repricing actions at 2020 meetings, ISS will apply its existing case-by-case policy approach for the relevant market. Under this policy for the U.S. market, for example, ISS will generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company’s stock price. Among other factors, ISS will also examine whether (1) the design is shareholder value neutral (a value-for-value exchange), (2) surrendered options are not added back to the plan reserve, (3) replacement awards do not vest immediately, and (4) executive officers and directors are excluded. ISS will consider this approach to continue to be appropriate during the circumstances of the COVID-19 pandemic.
Changes to directors and senior management – for boards needing to fill vacancies or add critical expertise to address pandemic-related concerns, ISS will apply case-by-case considerations and assess any explanation provided by the company and the same case-by-case considerations will be applied when the board needs to fill senior executive roles on an interim basis.
The announcement says that ISS will update its guidance and provide new information as needed throughout the remainder of the 2020 annual meeting season as additional issues and impacts from the pandemic develop.
A recent Pearl Meyer blog discusses the importance of temporary CEO succession plans as we confront the Covid-19 pandemic. Among other things, the blog lists considerations for the compensation committee about the form and structure of temporary CEO compensation – noting there is no prevailing practice. One practice pointer is to keep the temporary CEO’s compensation plan simple so it will be easier to communicate and disclose. Here’s an excerpt:
– Salary: It is common practice to increase the interim executive’s salary while in the CEO role. Raising the salary to the 25th percentile of the CEO pay benchmark for the period the executive will be serving as CEO may be a sound approach. The salary can revert to the prior level once the executive is back in his or her original role.
– Annual Incentive:You can employ the same concept here. Raise the target award based on the 25th percentile CEO benchmark levels. The more difficult actions are whether to modify existing goals or add new goals, and the committee should discuss how to incorporate discretion in assessing the temporary CEO’s performance.
– Long-term Incentives: Depending on the length of time the executive fills the temporary role, the committee may not need to make any adjustments to the “regular” long-term incentive grant. But, depending on the circumstances, the committee may want to consider a one-time grant either at the time the company appoints the temporary CEO, or after the original CEO returns, to acknowledge the additional service provided by the executive filling the temporary role.
A recent report from Semler Brossy includes predictions for the 2020 proxy season along with early vote results for say-on-pay, equity plan proposals and director elections. Here’s some of the data:
Predictions
– The firm predicts the Russell 3000 say-on-pay failure rate trend will reverse and drop below 2% and
– Say-on-pay vote support will be more varied across companies in 2020
– Russell 3000 average director election vote results will fall below 94.5%
Review of voting results so far in 2020
– 2 companies of the 147 reviewed have failed say-on-pay
– Current say-on-pay failure rate of 1.4% is the same as it was at this time last year
– 91.4% average say-on-pay vote result is 20 basis points lower than the average vote result at this time last year
– Current average say-on-pay vote result for companies receiving an ISS “against” recommendation is 38 percentage points lower than for companies that received an ISS “for” recommendation
– Current average vote support for equity proposals (91.7%) is higher than the average vote support at this time last year (84.6%)
– No equity plan proposals have received vote support below 50%
Here’s a recent Equilar blog that looks at say-on-pay vote trends over the last 5 years. The blog also reviewed say-on-pay votes from the largest asset managers and notes that only BNY Mellon and Prudential voted in favor of say-on-pay at less than 75% of the Russell 3000.
Last year, Liz blogged about gender pay gap proposals and how Citigroup was the first company to post unadjusted “pay gap” numbers on its website. Arjuna Capital and Proxy Impact recently issued their 2020 “Gender Pay Scorecard” and this year, Mastercard and Starbucks joined Citigroup on top of the list. The scorecard ranks 50 large companies on their pay equity disclosures.
Like last year, half of the companies included in the scorecard received a failing grade, so despite progress at the top of the list, it doesn’t sound like progress for everyone. The report also recaps the six-year history of gender pay gap proposals and although the proposals continue, so far this year the pace of proposals appears to be slowing down with 19 proposals submitted as compared to 29 last year. Here’s an excerpt:
As of March 2020, 19 proposals have been filed, with several more likely to be filed before the end of the year. Most of these proposals ask for median pay gap reports and several ask for racial, ethnic and gender pay data.
Thirteen of this year’s proposals are resubmissions, with nearly all of them targeting companies that averaged more than a 30% vote in 2019. Most of these companies have received three or more pay equity proposals already. These companies have either not provided gender/racial pay gap disclosure or still have significant omissions in their reporting.
For another look at pay equity, here is JUST Capital’s recent analysis saying that it’s still critically important in the time of coronavirus. Among other things, the non-profit found “companies that disclose they’ve conducted a pay equity analysis report, on average, an 8 percentage point higher mean 5-year ROE compared to their counterparts.”
Not too long ago, I blogged about Meridian’s memo discussing the $1 CEO salary coupled with equity awards approach. As Frank Glassner from Veritas Executive Compensation Consultants noted said “this approach was first used by Lee Iacocca at Chrysler back in the 70s and during the current COVID-19 pandemic, significant caution and thoughtfulness should be called for, as the current grants would likely be made at all time lows. This of course can potentially create ‘space-shot’ realizable value and subsequent payouts as the economy eventually recovers.”
Amid the current economic turmoil, there seem to be daily reports about CEO and employee pay cuts. Now this MarketWatch opinion piece from two academics has another take on executive compensation – it suggests U.S. CEOs donate their 2020 salary and stock compensation to workers and cities and towns on the front lines fighting the coronavirus pandemic. The authors specifically call on members of the Business Roundtable – and others – to stand by their commitment to social responsibility.
Many companies have in fact stepped up – among others, Apple has introduced a digital screening site aimed at helping users determine whether they should be tested for the coronavirus and Google has pledged $800 million in a pandemic relief package. Comcast announced that it was setting aside $500 million for employee wages and benefits where their jobs have been impacted by the crisis. Comcast also said its CEO and other executives were donating 100% of their salaries for coronavirus relief efforts.
Other CEOs have also already given up their salary and/or bonus to help companies pay worker salaries, see these reports about Texas Roadhouse, Marriott and Yum Brands. Although the pay reductions don’t include stock compensation and there hasn’t been a broad statement by members of the Business Roundtable as the MarketWatch opinion piece seems to want, the increasing number of companies announcing CEO pay cuts and/or donations shows companies are listening and aware of optics. With the economic effects from the pandemic far from over, this likely isn’t the last call for help.
We’ve blogged before about incorporating ESG metrics into incentive programs. Even though doing so can seem daunting, a recent report from Willis Towers Watson says that 50% of S&P 500 companies include ESG metrics in annual incentive programs compared to 4% that do so for long-term incentive programs. The report discusses some of the design features for plans incorporating ESG metrics including funding formula components and payout formula modifiers.
The report shows that funding formula components generally cover topics such as people & HR, customer service, diversity & inclusion, employee health & safety, governance and environmental & sustainability. It also says that 44% of S&P 500 companies include human capital measurements in their incentive plans. This seems somewhat intuitive as companies are likely further ahead in terms of tracking human capital data as compared to topics such as environmental and other sustainability measures.
The COVID-19 pandemic will likely lead to more calls for tying ESG factors to executive compensation as more are recognizing that environmental and social issues can create large-scale financial risk. This NY Times article shares thoughts from ISS and says that some directors may see ESG metrics as something management has more control over as investors will likely be more sensitive to executive pay given all the tragic consequences of the COVID-19 pandemic.