Lynn blogged a few months ago that peer groups might shift more this year due to the pandemic and resulting economic fallout. So although there’s no requirement to do so, there may be more reason this year to give input to ISS on what that group will look like. For companies that have meetings between September 16th & January 31st, the window to give input is open until this Friday – specifically, 8pm ET. Here’s more info from this Davis Polk blog:
As one input in its peer group selection methodology, ISS will generally look to the peer group disclosed in the company’s last proxy and utilized by the company in determining CEO pay. However, ISS will also consider modifications or changes the company has made to the peer group since the last proxy disclosure or if the company anticipates making changes to the group in connection with the next proxy disclosure. Particularly given the COVID-19 pandemic and the ensuing stock market dislocation, companies may be considering changes to their self-selected peer groups and, if so, these companies should consider submitting any appropriate peer group updates prior to the July 17 deadline.
Tune in tomorrow for the webcast – “Executive Compensation Planning in a Down Market” – to hear Tony Eppert of Hunton Andrews Kurth, Richard Harris of Aon and Jamin Koslowe of Simpson Thacher & Bartlett discuss emerging disclosure practices and how companies and compensation committees should approach executive compensation planning in a turbulent environment.
Off-season shareholder engagement is always important but this year it may be even more so with attention focused on social issues, company responses to the pandemic and related matters. As proxy seasons seem to be rolling from one right into the next, Teneo recently issued a memo titled “20 Imperatives for Fall 2020 Shareholder Engagement” to help companies prepare for upcoming off-season shareholder engagement and the 2021 proxy season.
The memo lists 20 topics and questions, primarily focused on diversity and executive compensation and suggests companies prepare for Fall engagement by asking themselves those questions. Here are a few:
– Strategy: How are we reassessing and resetting our strategy, business, brand, and reputation to align with the new normal? Over the medium and long term, the new normal may call for a different strategy, brand changes that mitigate inclusiveness concerns, or a reprioritization of business lines. Stakeholders will view the strategy through a new lens and expect companies to do the same.
– Diversity Goals: Should we set and disclose concrete diversity goals? The evolution of sustainability reporting has led to the practice of companies setting and disclosing concrete goals, typically relating to the environment. It is less common for companies to set and disclose any goals relating to social issues. However, the current environment could prompt investor calls for goal setting on this issue as well.
– Consistent Grant Values: How will our year-over-year grant values be perceived by investors? Maintaining year-over-year grant values during periods of extreme stock price volatility poses a unique set of challenges. While lowering annual grant values may raise retention and motivation concerns, proxy advisors and many shareholders expect lower grant date values when the stock price is low, as granting more shares has a dilutive effect. The recent stock market rally has only increased the scrutiny of significant gains from equity awards at the height of the pandemic.
Back in May, I blogged about ClearBridge Compensation Group’s report analyzing trends in non-employee director compensation. ClearBridge recently issued a second report, this time addressing trends in mid-cap non-employee director compensation – the previous report addressed large-cap. The latest report looks at compensation for directors among 100 S&P MidCap 400 companies from 2009 – 2019. Some high-level findings relating to board service include:
– Standard board compensation levels have homogenized around the median as fewer companies have maintained programs that are significantly above or below market, resulting in a narrower spread of values
– Average mix of cash and equity compensation for board service was weighted more heavily toward equity (41% cash and 59% equity), an increase from 2009 (49% cash and 51% equity)
– Use of meeting fees has declined markedly, falling from 66% of companies in 2009 to only 23% in 2019
We’ve blogged before about annual incentive plans – recognizing some companies are considering whether to exercise discretion at year-end when determining bonus payouts. A recent Pearl Meyer blog discusses use of discretion and other approaches for determining 2020 bonuses, noting that no single approach fits all companies. Using discretion requires careful proxy statement drafting as companies will need to clearly disclose the rationale for the ultimate payment. The blog suggests some companies might want to consider deferring 2020 bonuses into 2021. Here’s an excerpt:
Under this approach, all or part of the 2020 bonus opportunity would be deferred into 2021 based on goals established for the 2021 fiscal year. In other words, rather than making a plan modification to rationalize a bonus for 2020 performance, increase the 2021 bonus opportunity to give management a chance to earn all or a portion of the “lost” 2020 bonus. One appeal of this approach is that the external environment needed to set more realistic goals likely will exist. Another is that, unlike committee discretion, it maintains a direct tie-in between payout and performance versus preset, objective goals.
A recent Akin Gump memo discusses considerations relating to non-compete agreements for companies that might be implementing cost-saving measures during Covid-19. Depending on state statutes, implementation of certain cost-saving measures may cast enforceability of non-compete agreements in doubt.
For example, some states prohibit enforcement of non-compete agreements when an employee has been terminated through no fault of their own. The memo also says that given the current economy, some courts may hesitate to enforce restrictive covenants. Here’s what the memo says about the effect of an employer’s material breach on the enforceability of a non-compete:
An employer may lose its right to enforce a noncompete covenant if the employer is the first party to materially breach the contract housing the covenant. Determining whether an employer’s breach is material will depend on the applicable state law and the specific circumstances and contract at issue, but employers should review existing agreements and take note of any fixed term requirements, compensation and benefits requirements, duties provisions, and termination provisions, such as advance notice and severance. For example, a furloughed employee could argue that the furlough violates the term and/or compensation provisions of the contract. Likewise, an employee whose contractual salary or benefits are cut (e.g., guaranteed bonus, 401(k) match) could claim that the reduction rendered the noncompete covenant unenforceable.
For companies implementing cost-saving measures while also intending to enforce non-compete agreements, the memo suggests getting an employee’s written consent to the proposed action. Companies should also consider updating severance agreements so they acknowledge and reaffirm the restrictive covenants – this can help eliminate an argument that the severance agreement superseded the restrictive covenants. On the other hand, if a company doesn’t plan to enforce restrictive covenants, it suggests incorporating a release of the covenants in the severance agreement to guard against an argument of selective enforcement.
Over on TheCorporateCounsel.net, we blog quite a bit about corporate purpose and shareholder vs. stakeholder primacy. This “Corporate Board Member” article brings that discussion to executive pay, asking Semler Brossy’s Kathryn Neel how companies are looking at purpose-related executive pay goals in light of the Covid-19 crisis. Here’s part of her response:
It’s absolutely true that purpose is as front and center as ever. There’s risk, maybe more so now than ever, for any organization unable to develop a strong connection for employees, the communities it serves and customers to their company’s purpose. Once they’ve been alienated, it may be difficult to win them back.
Shifts in financial objectives include things like managing or cutting costs in a fair, balanced way; maintaining investment in critical R&D; and protecting the solvency of the business. These may all become higher priorities than typical measurements of sales and profits.
Incorporating purpose-related goals into executive pay and incentives may also mean giving greater prominence to some non-financial objectives and letting purpose lead the way. This could mean, for example, a greater focus on the quality of the products a company produces, the perceived level of customer service it provides or, perhaps, the measured impact its operations have on the environment.
We’ve blogged that most companies are now conducting “equal pay audits” – and as compensation committees get more involved in human capital management, it’s likely the board will want to see the results of those assessments. But collecting the data is only the first step in the lengthier process of addressing pay inequities. This 8-page memo from Equity Methods points out that at first blush, the data might even give you more questions than answers, like:
– Should all employees paid below their expected pay range be adjusted?
– Should males and non-minorities flagged as having below-expected pay be adjusted, or only women and minorities with below-expected pay?
– Should we increase the pay for all or a large portion of women and/or minorities, or only for those with severe discrepancies?
– Should the messaging reference the occurrence of a pay equity study?
– What were the root causes that led to the situation and how can they be addressed?
– What non-pay-related programs would help drive sustainable improvement?
The memo explains how to use a regression analysis to pinpoint the root cause of discrepancies. Those causes might be surprising and appear unrelated to pay equity – e.g. differing turnover rates between men & women. Finding these causes allows the company to create a nuanced response that resolves the true issues. Usually, that requires some combination of short- and long-term strategies. For example:
Suppose the model estimates a 2% pay gap and indicates that anything up to 1% could be caused by random noise in the data. This means that aside from remediating outliers, an additional adjustment of 1% or so for all or most women could swing the modeled pay gap to zero.