– Liz Dunshee
This blog from Hunton Andrews Kurth’s Tony Eppert is a good one to keep on hand for whenever you’re making equity grants. Here are some of the reminders he lists:
– Verify the Equity Plan’s Share Reserve Not Exceeded. With respect to the upcoming grants, the Company will need to verify that the equity plan’s share reserve will not be exceeded. This has two parts. First, to the extent the equity plan has liberal share counting, the Company will need to track equity grants (which are a subtraction from the share reserve) AND track forfeitures of equity awards (which are an addition to the share reserve). Second, the Company should determine whether a sufficient number of shares would exist if the outstanding performance awards were settled at their maximum levels (i.e., some companies only track share counting of performance-based awards at their target levels).
– If Applicable, Verify Compliance with any Prior Delegations of Authority. Absent a valid delegation of authority, only the Board of Directors has the authority to grant equity. Typically, the Board delegates such authority to the Compensation Committee pursuant to the Compensation Committee Charter. And sometimes the Compensation Committee provides for a further downward delegation to a sub-committee or to the CEO in order for the latter to act quickly in new hire situations (as opposed to waiting until the next regularly scheduled Compensation Committee meeting). Also, verify the grant complies with the parameters of the delegation (e.g., using pre-approved award agreements, complying with share cap restraints).
– Service Provider Must Be a “Natural Person.”Under Form S-8 rules, the recipient of an equity award must be a natural person. As a result, equity awards cannot be made to entities and also be covered under the Form S-8 (though there are rules that would allow in individual of the intended entity to receive the equity award in name only and on behalf of the entity).
– Liz Dunshee
We’ve blogged a few times about the trend of compensation committees taking on a broader role – and held a webcast about it a couple of years ago. And at our upcoming “Proxy Disclosure Conference” – which is being held virtually in September so that everyone can attend – we have a panel devoted to the comp committee’s role in “human capital management.”
It’s great timing for anyone considering a broader mission for their own committees, particularly because Former Delaware Chief Justice Leo Strine has now co-authored this 34-page essay that might give the concept more steam. He reimagines the compensation committee as being “deeply engaged” in human capital management, including oversight of:
– Workforce motivation & retention programs
– Employment practices
– “Fair gainsharing” with employees
This blog from Cooley’s Cydney Posner gives a detailed review & analysis. Here’s an excerpt:
The authors contend that, to address these issues, “the most sensible answer is for the mandated board committee that is required to address the related area of top management compensation—the compensation committee—to expand its perspective and become a committee focused on the company’s workforce as a whole.” Reimagining the committee will require that the board gain some understanding of the historical context of “gainsharing” among executives, workers and shareholders over time. The committee will need to arrive at a fair balance that “will best align the interests of all stakeholders in sustainable wealth creation, and develop compensation plans for the board that implement that goal.” The authors contend that understanding this broader context will help boards “constrain top management pay in sensible ways”:
“If, for example, the company’s workforce is getting no raise, does it really make sense to give top management an increase for “managing through tough times”? And if the company is doing well after a period of employee sacrifice, are their raises keeping up with gains for stockholders and the CEO? Does the company have a goal of paying its CEO and top management at or above the 75th percentile on the industry average? If so, does this goal extend to all company management? To all company employees? Or just to top management? If the latter, why?
If the board has a better sense of how the entire workforce is compensated, and the importance of the workforce to the company’s plan for selling products and services, the board is also better positioned to understand what will have the most important effect on productivity. Is it increases to top executive compensation? Or increases that motivate a much greater number of company employees?… Perhaps it is just the magic four or five at the top who really have a bottom line impact, or perhaps, and much more likely, the overall workforce’s productivity is more vital to the company’s profitability, and that providing all the company’s workers with quality pay and the opportunity for continuous training, employment, and advancement makes good business sense.”
As Cydney notes, the essay suggests data points and questions that comp committees should start considering:
1. What are the employee functions most critical to the company’s ongoing vitality?
2. How is the company treating workers that are essential to its operations?
3. What are turnover rates?
4. What is the extent of retraining of existing workers to master new skills?
5. What is management’s process for setting employee compensation?
6. To what extent does the company bargain with workers or give them any leverage?
7. What is the company’s view regarding its employees’ right to form a union? If opposed, how does that harmonize with the company’s ESG commitments to workers and with its treatment of executives?
8. Does the company pay equally for equal work, regardless of gender, race or ethnicity? Does it promote equally? Is the workplace welcoming and inclusive?
9. Are employees treated with respect and dignity (perhaps by reference to surveys or other behavior monitors)?
10. Do the data provided by management reflect productivity and effectiveness of company practices?
11. Is the board using metrics and factors for determining executive comp (e.g., use of a 75th percentile goal) and not applying the same metrics to company employees?
12. Is executive comp “tilted toward the stock price and risk taking,” thus potentially undercutting the company’s commitment to sustainability? Is the salesforce incentivized to sell customers “things they do not need”?
13. Does the company’s compensation system appropriately recognize the importance of ethics and compliance executives or “hold them down in pay because they do not run ‘profit centers’”?
– Lynn Jokela
I’ve blogged before about starting the conversation of tying ESG metrics to executive comp – as it’s not necessarily easy. Wells Fargo appears to be taking a step in that direction as news outlets reported that the bank will be tying progress on diversity to executive pay. This American Banker article says that members of the lender’s operating committee will be evaluated annually on progress made in terms of representation and inclusion of diverse employees in areas they oversee and it will impact operating committee members’ year-end pay.
Other goals include doubling black leaders at Wells Fargo within the next five years and creating a new diversity and inclusion executive that will report directly to the CEO. An article from The Charlotte Observer describes the moves by Wells Fargo as being some of the most aggressive on Wall Street – time will tell if other financial services firms follow Wells’ lead…
– Lynn Jokela
Tune in today for the CompensationStandards.com webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
– Lynn Jokela
Earlier this year, I blogged about a report analyzing use of ESG metrics in S&P 500 company incentive programs – it showed 50% of those companies include ESG metrics in annual incentive programs. Here’s another report – this one from Semler Brossy – that looks at use of ESG metrics in Fortune 200 company incentive programs. Semler Brossy reports that over half of the Fortune 200 also use ESG in their incentive plans but distribution is inconsistent across industries. The report attributes the variation to differences in external pressures and the level of strategic/competitive importance of ESG within sectors and then shows the breakdown of ESG metric prevalence by industry.
– Lynn Jokela
Last year, Liz blogged about how ISS would analyze “outliers” for its voting policy on director pay. Under the policy, if ISS identified a company as having high director pay for two or more consecutive years without a compelling rationale, ISS would recommend shareholders vote against directors responsible for setting director comp. According to a NY Times article, it sounds like Tesla is one company where ISS has applied it’s new non-employee director pay policy as it’s recommending shareholders vote against Tesla’s Chairwoman, Rhonda Denholm.
The article also cites an increase in shares pledged by Tesla’s directors and executives as a concern – it says over 10% of shares outstanding are pledged. Tesla’s annual shareholder meeting is scheduled for July 7, but Elon Musk tweeted Friday evening that it would be delayed due to social distancing concerns. Musk tweeted again Sunday evening saying the meeting has been tentatively set for September 15.
The news of ISS recommending against Denholm probably won’t garner as much attention as recent news about Elon Musk’s big payday. Just a couple of weeks ago, Musk received a tranche of options to purchase Tesla shares when certain operational goals were met – his potential gain has been pegged at around $770 million.
– Liz Dunshee
A recent DealBook article and FT analysis found that about 50 companies gave their CEOs 50% more options than last year – and although the grant size was due to formulas and the timing was consistent with past practices, execs are profiting off of market upswings and it’s not playing well right now. But thanks to market volatility, there are plenty of companies facing the opposite problem – option grants that are now underwater and doing little to motivate execs.
Lynn blogged recently about what to consider if you’re modifying performance awards or granting supplemental awards due to pandemic-related underperformance. This 7-page Aon memo gives even more detail on alternatives – including repricings, which have been rare in recent years but may be an option of last resort for companies whose stock prices haven’t recovered. Here’s an excerpt (and as Gunster’s Bob Lamm discusses in this blog, don’t lose sight of the optics of pay changes):
A repricing or an exchange is more complex than additional grants, but it may be an attractive program to return value to employees and address retention concerns. We recommend a balanced approach to any stock option exchange by looking at the impact to dilution, potentially putting shares back in the pool (if allowed by your plan and shareholders), and not creating significant incremental expense. In order to balance these priorities, companies should consider exchange ratios above 1-for-1, which offsets some incremental expense and helps to address dilution.
For most companies, repricings or exchanges require shareholder approval, which poses significant obstacles to the design and implementation of the program. If taking this action does not require shareholder approval, it is still important to understand the institutional shareholder perspective, to have a business justification for your actions and to be prepared to respond to the shareholder criticism that will come—which may include negative say-on-pay votes and/or votes against the election of board members.
– Liz Dunshee
We’ve wrapped up the May-June issue of The Corporate Executive – and will be mailing it soon! It’s available now electronically to members of TheCorporateCounsel.net who also subscribe to the print newsletter at each of their locations (try a no-risk trial). This issue includes pieces on:
– The Impact of COVID-19 on Executive Compensation
– ISS and Glass Lewis Voting Policy Changes Due to COVID-19
– New Proposed Regulations under Internal Revenue Code Section 162(m)
– Liz Dunshee
With furloughs, layoffs and changes to executive & workforce pay, many companies’ 2020 pay ratio calculations are going to require some extra thought. This memo from Willis Towers Watson suggests strategies to anticipate these issues and minimize pay ratio effort. Here’s an excerpt:
Given all the changes that have occurred and may occur during 2020, companies should develop a dynamic model now, to avoid competing against other HR priorities that will fall in Q4. Changes in compensation programs that could take place during Q4 could include bringing back furloughed employees or taking further actions to reduce pay or headcount before year-end.
If a company is performing a recalculation in 2020, this analysis may influence the Determination Date it selects. For those companies still hoping to use the three-year rule using the median employee identified in 2018 or 2019, these changes during 2020 could mean they must start anew to determine a median employee for 2020.
Assuming companies intend to use the 2020 median employee in ensuing years, global pay demographic changes as a result of companies restoring stability will present complications in the Year 2 and Year 3 calculations. While companies may aspire to use the three-year rule, for many 2020 may simply not be an appropriate baseline going forward as demographics continue to change from 2020 to 2021.
The memo goes on to explain how to factor furloughs in to pay ratio calculations – based on CDI 128C.04 and Instruction 5 to Item 402(u). For even more info, check out the “Pay Ratio” Chapter in Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise.”
– Liz Dunshee
We’ve just added Bill Hinman – Director of the SEC’s Division of Corporation Finance – as another top-notch speaker at our popular conferences – the “Proxy Disclosure Conference” & “17th Annual Executive Compensation Conference” – which will now be held entirely virtually, September 21-23rd. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Act now to get an “early bird” discount – here’s the registration information. Here are the agendas – 18 panels over three days.
Among the panels are:
– Bill Hinman Speaks: The Latest from the SEC
– The SEC All-Stars: A Frank Pay Disclosure Conversation
– The SEC All-Stars: Q&A
– Pay-for-Performance: What Matters Now
– Pay-for-Performance: Q&A
– Directors in the Crosshairs: Pay, Diversity & More
– Dave & Marty: True or False?
– Pay Ratio: Latest Developments
– 162(m): Where Things Stand
– Clawbacks: What to Do Now
– Dealing with the Complexities of Perks
– How to Handle Negative Proxy Advisor Recommendations
– Human Capital: The Compensation Committee’s Role
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 60 Minutes