– Liz Dunshee

We’ve been blogging about “human capital” as an emerging issue for a few years now, but it feels like this year has been the tipping point for the topic to attract significant attention. Momentum was building around long-term corporate purpose and commitments to “stakeholders,” and pay ratio disclosure led to greater exposure & examination of income inequality. Against that backdrop, the pandemic and social unrest have united many investors in their focus on workforce health & safety, as well as pay equity and diversity & inclusion. Investors want to know the board is attuned to these issues, and companies are recognizing that.

As I blogged last fall, some compensation committees are beginning to change their names to reflect a broader “human capital” role. This E&Y memo says that express board oversight is becoming much more common. Here’s an excerpt:

Investors’ prioritization of workforce issues manifested in a number of ways, from publicly-declared stewardship goals to high-profile letter campaigns to record-level support of related shareholder proposals.

This year’s proxy disclosures demonstrate that many companies are paying attention: the percentage of Fortune 100 companies that voluntarily highlighted human capital initiatives and commitments more than doubled over the past three years, rising from 32% in 2017 to 77% in 2020. Similarly, the percentage of companies that explicitly assigned board or committee oversight of human capital jumped from 28% in 2017 to 69% in 2020, with those responsibilities generally assigned to compensation committees.

The memo notes that the “top 5” human capital topics addressed are: diversity; health, wellness & safety; compensation; and development, skills & capabilities – and points out that how a company treats employees in the wake of the COVID-19 crisis could affect its brand value for years to come.

At our upcoming “Proxy Disclosure & Executive Compensation” Conferences, we have a panel featuring Keir Gumbs of Uber, Blair Jones of Semler Brossy and Maj Vaseghi of Freshfields who will be discussing the Compensation Committee’s growing role in human capital management. These conferences are coming up September 21st – 23rd and will be held virtually so that everyone can safely attend. Check out the agendas – 15 panels over 3 days. Register today to make sure you get the info you need to know for your fall engagements and the approaching proxy season.

– Liz Dunshee

A couple of weeks ago, I blogged about planning opportunities that may arise for RSUs and performance awards under the “Generic Legal Advice Memorandum 2020-004” issued by the IRS in May. NASPP Executive Director Barbara Baksa shared these additional thoughts:

The GLAM doesn’t change existing law (and can’t be relied on a precedent), although it does certain clarify it. It is an internal IRS memorandum to clarify the tax treatment to other persons at the IRS (in this cause, auditors). It was issued to support an update to the audit procedures in the Internal Revenue Manual relating to when taxes need to be deposited for RSUs and SARs when the IRS’s next-day deposit rule is triggered. Thus, the process Troutman Pepper recommends was always possible under the Internal Revenue Code (provided all awards are paid out within the 409A short-term deferral period) but the GLAM clarifies and draws attention to this opportunity.

Particularly for performance awards, it’s not uncommon for companies to have a short administrative delay before issuing the shares after the comp committee certifies performance. A delay of more than a day or so would generally also delay the taxable event for the award (if it didn’t, there would be no way for the tax deposit to be timely). According to a 2019 NASPP/Deloitte Survey, only 44% of companies pay out performance awards immediately upon certification by the comp committee, even though the awards are considered fully vested at that time. The remaining respondents are delaying payout for anywhere from a week to over six months (24% pay out awards within a couple of weeks of certification and 20% within a month).

The NASPP has seen a general trend to consolidate RSU vest dates for grants to non-insiders. This is most often accomplished by consolidating grant dates (e.g., everyone hired during a quarter receives a grant on the same date), but I’m not aware that this practice has extended to Section 16 insider grants—most likely because, under most companies’ procedures, insider grants generally have to be approved by the comp committee and are thus tied to the committee’s meeting schedule. The procedure Troutman Pepper suggests provides an interesting solution that I expect would be helpful to a number of companies. It will be interesting to see if companies adopt it.

– Liz Dunshee

Scrutiny of pandemic-related pay decisions is mounting, as mass layoffs and furloughs draw even more attention to the gap between executive pay and pay of the average worker. Last week, ISS released takeaways from its “2020 US Compensation Proxy Season Review.” Among the findings:

COVID-related compensation decisions expected to dominate next year’s proxy season landscape. As the pandemic arrived in the US during the 2020 compensation cycle, related changes will not be fully disclosed until the 2021 proxy season. Looking ahead, compensation topics in the 2021 proxy season are likely to be defined by mid-year adjustments to incentive programs and use of discretion or one-time awards.

That finding is emphasized by the AFL-CIO’s annual “Executive Paywatch” – which was updated last week and highlights 20 CEOs – primarily of retail companies – who furloughed a majority of their workers yet had a pay ratio of more than 1000 to 1. The unions suggest that CEO salary cuts were “symbolic” and, with base salary making up less than 10% of the average CEO’s total compensation, were more than offset by equity awards.

Although the ISS review found that the rate of say-on-pay failures decreased this year, it also found that median say-on-pay support levels dropped to the lowest level since mandatory voting began in 2011. That might foreshadow a trend as we head into next year and need to explain pandemic-related decisions.

We’ll be addressing these difficult issues at our “Proxy Disclosure & Executive Pay Conferences” – coming up virtually September 21st – 23rd. Register today to get the latest essential & practical guidance, direct from the experts. Here are the agendas – 15 panels over 3 days, plus interactive roundtables to discuss pressing topics.

– Lynn Jokela

We’ve posted the transcript for the recent webcast: “Executive Compensation Planning in a Down Market.” Tony Eppert, Richard Harris and Jamin Koslowe shared their takes on these topics:

1. Actions companies have already taken in response to recent economic volatility

2. How compensation plans are affected by a down market

3. Prevalence of changes & exceptions to stock ownership guidelines

4. Suggested modifications to Rule 10b5-1 plans

5. What to think about during fall compensation planning season

6. Compensation committee agenda items

7. Ongoing & upcoming disclosure implications

– Lynn Jokela

Liz blogged recently about purpose-related pay goals as discussion about shareholder vs. stakeholder primacy continues.  A recent Directors & Boards article from Seymour Burchman and Seamus O’Toole of Semler Brossy says Covid-19 is accelerating the move toward stakeholder-centricity.  Creating accountability to all stakeholders sounds great, but it’s obviously a bit of a balancing act.  The article walks through an example of one company that prides itself in its stakeholder-centric approach and outlines four key principles for reinforcing stakeholder-centricity through compensation:

– Emphasize the long-term: It’s impossible to attend to all stakeholders equally in the short term so companies need to make near-term trade-offs while optimizing outcomes for all over the long-run and says the company emphasized an ownership culture with greater equity compensation, broad participation and policies that promote longer holding periods.  The company steered clear of overlapping three-year performance cycles as the overlaps effectively create a series of one-year cliffs that emphasize short-term thinking.

– Explicitly tie pay to outcomes for all stakeholders: balance investor-focused metrics for the bonus with stakeholder-oriented goals such as employee engagement, customer retention and supplier satisfaction.

– Balance metrics with discretion: the board set specific priorities and definitions of success but allowed for discretion in actual assessments and payouts and allowed updates of priorities to ensure continued alignment with strategy.

– Stick to your guns: Let cash-based incentives awards follow stakeholder outcomes even when short-term financials are weak and pull back on pay when stakeholder priorities aren’t achieved.  Boards need to build the credibility to diverge from “one-size-fits-all” status quo on pay, which will require them to be consistent and transparent in their compensation decisions.

The last point about sticking to your guns is probably the most difficult aspect of aligning compensation with stakeholder interests because as the article points out, investors and proxy advisors may grow impatient as their guidelines tend to be more aligned with shareholder interests. Internal and external communication will likely be key to keeping focus on stakeholder interests.

– Lynn Jokela

A recent Pearl Meyer blog suggests companies start thinking about next year’s proxy statement now.  It seems early but with all the challenges companies have faced in 2020, the blog suggests companies plan ahead for content changes to ensure CD&A narratives are responsive to expectations from investors and others.  The blog includes several suggestions to get ahead of the game – here’s what it says about CD&A drafting:

There is no doubt CD&As will have more content this next year, so making sure that all stakeholders who are involved in the development process are clear on the overall proxy production timeline, roles for drafting and reviews, and the protocols for approval. Consider building reviews of content ideas, narrative outlines, and even preliminary working drafts into your Q3 and Q4 compensation committee meetings, so you’re not dealing with a CD&A fire drill come Q1.

– Lynn Jokela

Over on TheCorporateCounsel.net I blogged about ISS’s “Annual Policy Survey”, which it announced late last week. Like last year, ISS is using a single survey with a limited number of questions to help streamline the process.  Even though the process is streamlined, it still covers a broad range of topics, including compensation topics related to pandemic adjustments.  Check out the survey to see all topics covered, but here are two compensation-specific questions:

(1) As a result of the many impacts of the COVID-19 pandemic, many decisions regarding executive compensation and performance expectations, including both short-term and long-term, will be made by boards and by shareholders during the remainder of 2020 and throughout 2021.

Which of the following most closely reflects your organization’s view of executive compensation in the wake of the pandemic?  Possible responses include, in addition to a free-form answer:

– The pandemic is different from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executive compensation.

– The pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into compensation decisions to adjust pay and performance expectations, and should be clearly disclosed to shareholders.

– The impact of the pandemic is not substantially different from other major market downturns, such as the financial crisis of 2007-2008, and decisions regarding performance and executive pay should reflect actions taken to promote a return to profitability and financial health over a reasonable timeframe without significant short-term adjustments to performance expectations or executive compensation.

(2) With respect to short-term executive incentives, many companies have announced changes to their immediate annual incentive or bonus programs in response to the COVID-19 pandemic and the resulting general economic downturn.

Regarding short-term/annual incentive programs, which of the following best represents your organization’s view of what is a reasonable company response under most circumstances?  Possible responses include, in addition to a free-form answer:

– Making mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities

– Suspending the annual incentive program and instead making one-time awards based on committee discretion

– Both the first and second response could be reasonable, depending on circumstances and the justification provided

– Companies should avoid mid-year adjustments and make payouts based on the original program design

As always, the policy survey is just the first step as ISS formulates its 2021 voting policies.  In addition to the survey, ISS will gather input via regionally-based, topic-specific roundtables and conference calls.  From there, interested market participants can comment on the final proposed changes to the policies.