We’ve blogged before about incorporating “people” metrics in executive compensation programs. A recent Mercer memo says it’s still not too common, while PwC’s annual director survey says only 39% of directors support including diversity & inclusion metrics in company pay plans. Mercer estimates only 15-20% of S&P 500 companies include diversity, equity and inclusion (DEI) metrics in their executive incentive programs and most don’t include an objective, quantitative metric. As investors are focused on company D&I initiatives and looking for progress, more companies may think about how to advance D&I efforts and incorporating related metrics into incentive programs. To get started, Mercer’s memo suggests companies answer these 6 questions:
(1) Where is your company today on DEI? Where do we want it to be and by when? Determine organizational DEI strategy and objectives and clearly communicate the information – you need to be able to measure DEI by identifying key outcomes. Determine metrics for evaluating success and set specific time frames.
(2) How will we create an environment to support real DEI change? Companies need authentic support from leaders of compensation plans and also from the board and other stakeholders.
(3) Will we use the short-term incentive plan or the long-term incentive plan?
(4) What DEI metrics will we track?
(5) Will our measures be quantitative and objective, or qualitative and subjective?
(6) Who will be held accountable? Some companies may prefer to start with a smaller, more manageable group of senior executives and expanding deeper into the organization later. Other companies may limit the program to the US, while others may extend the program globally. In determining the extent of the program, consider how you might communicate differently to, and across, groups.
Every company is different and what makes sense at one company may not be effective at another – but these questions provide a good starting point to help get everyone on the same page.
Semler Brossy issued a recent report reviewing incentive design changes in response to the Covid-19 pandemic, which so far, have been less frequent than reported CEO salary reductions. Semler Brossy reviewed filings from 36 Russell 1000 companies disclosing changes between June 1 and September 10 and observed that almost 1/2 of the announced changes were to annual incentive plans and about 1/3 were for changes to both annual and long-term incentive plans. Here are the most common changes these companies announced for annual incentive plans:
– 69% of the announced changes added new metrics – commonly added metrics have been cash flow, EBITDA, and strategic/ operational health measures
– 41% reduced target or maximum payout opportunities – both for the in-flight plan and the go-forward plan
– 34% modified the performance period – typically to measure partial year performance
– 28% added committee discretion to determine payouts – the report notes this approach may be more prevalent in practice given the qualitative measurement of certain additional metrics
The report also includes findings from review of announced changes to long-term incentive plans – which were less common than changes to annual incentive plans. For specific actions some companies took, the report provides case studies detailing more extensive actions taken by six companies and Mike Melbinger blogged a while back with a nifty chart showing disclosures from companies that made changes to their short- and long-term incentive plan performance targets or metrics.
Last week, ISS released the results of its annual policy survey, which is part of its process in formulating next year’s proxy voting policies. In short, investors expressed a desire for clear disclosure about the pandemic’s impact on compensation decisions and non-investors expressed a need for flexibility in making adjustments to performance expectations and related changes to executive compensation in addition to expressing a need for clear disclosure of such decisions. Here’s an excerpt with the responses to questions involving executive compensation – John also blogged on TheCorporateCounsel.net about other results from the survey:
– Expectations regarding compensation adjustments: When asked about the respondent’s viewpoint regarding executive compensation in the wake of the pandemic, a significant majority of investor respondents – 70% – indicated that 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. Among non-investors, a majority – 53% -indicated that 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.
– Adjustments to short-term/annual incentive programs: Regarding short-term/annual incentive programs and the respondents’ views on what is a reasonable company response under most circumstances, slightly over one-half of both investors – 51% – and non-investors – 54% – indicated that both (1) making mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities; and (2) suspending the annual incentive program and instead making one-time awards based on committee discretion could be reasonable, depending on circumstances and the justification provided.
Here’s another reason to get your arms around your “equal pay” data – especially if you have a large employee base in California. The legislature there has passed Senate Bill 973, which if signed into law by Governor Newsom would require California employers with 100 or more employees to submit annual pay data reports to the state, similar to what would’ve been required at the federal level if the EEO-1 Component 2 data reporting requirement hadn’t died last year. This Skadden article walks through how SB 973 would work – here’s an excerpt:
Modeled after the now defunct EEO-1 Component 2 data reporting requirement, SB 973 would require that California employers with 100 or more employees submit annual pay data reports to the state’s Department of Fair Employment and Housing. California employers’ annual reports would include the following information: (A) the number of employees by race, ethnicity and sex broken down into nine specified job categories; (B) the number of employees by race, ethnicity and sex whose annual earnings fall within specified pay bands; (C) the total number of hours worked by each employee counted in each pay band during the reporting year; (D) for employers with multiple establishments, a report for each establishment and a consolidated report that includes data on all employees; and (E) any clarifying remarks regarding the information provided, which is optional.
The article notes that SB 973’s express intent is to allow for more targeted enforcement efforts against companies who may be engaged in discriminatory pay practices. That heightens the stakes for companies to not only conduct equal pay audits, but to understand the data that’s gleaned from that process and adequately correct shortcomings (as I’ve blogged, that can be complicated).
The article also notes that although SB 973 adds a compliance rationale for California businesses to address this issue, shareholders and other stakeholders are pushing for pay equity even outside the borders of the Golden State. For help in navigating all these demands, mark your calendars for our November 19th webcast on this topic – “Pay Equity: What Compensation Committees Need to Know.”
Today is our “17th Annual Executive Compensation Conference” – Monday & Tuesday were our “Proxy Disclosure Conference.” For those who haven’t been attending the conferences – or for those who have and want to watch again – we ran a special tribute video yesterday to honor Marty Dunn. Marty was a legend in our community and is deeply missed.
You can still register online to get immediate access to these virtual events. Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.
– How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
219.05 In reporting compensation for periods affected by COVID-19, questions may arise whether benefits provided to executive officers because of the COVID-19 pandemic constitute perquisites or personal benefits for purposes of the disclosure required by Item 402(c)(2)(ix)(A) and determining which executive officers are “named executive officers” under Item 402(a)(3)(iii) and (iv). The two-step analysis articulated by the Commission in Release 33-8732A continues to apply when determining whether an item provided because of the COVID-19 pandemic constitutes a perquisite or personal benefit.
– An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
– Otherwise, an item that confers a direct or indirect benefit and that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, is a perquisite or personal benefit unless it is generally available on a non-discriminatory basis to all employees.
Whether an item is “integrally and directly related to the performance of the executive’s duties” depends on the particular facts. In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive’s duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive’s duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees.
Today: “Proxy Disclosure Conference – Part 2”
Today is the second day of our “Proxy Disclosure Conference” – tomorrow is our “17th Annual Executive Compensation Conference.” You can still register online to get immediate access to these virtual events! Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.
– How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
Today and tomorrow is our “Proxy Disclosure Conference” – Wednesday is our “17th Annual Executive Compensation Conference.” Here are the agendas: 15 substantive panels over 3 days – plus 6 breakout roundtables today that you can choose from. Check out my promo video to see what’s in store! You can still register online to get immediate access to these virtual events! Both conferences are paired together and they’ll also be archived for attendees until next August. That’s a huge value.
– How to Attend: Once you register, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to Participate in a Roundtable: New this year, we have added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions. Space is limited for those, but you can save yourself a seat ahead of time by navigating to the agenda tab in the mvp platform and clicking on the seat icon next to the roundtable you want to attend.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
Last spring, I blogged about initial reports of Covid-19 related executive and director pay changes. For another look at pay actions taken in response to Covid-19, an Equilar and Stanford study provides a more recent review of CEO and director pay actions taken by Russell 3000 companies. The study examined Form 8-K and proxy statement filings from companies for the period January 1 – June 30, 2020. As companies continue to struggle with challenges presented by the pandemic, the study found 17% of companies made adjustments to CEO salary, bonus or long-term incentive programs or director fees.
The study’s narrative includes representative examples of specific pay actions some companies took – so for those looking for a sample disclosure of certain pay actions, this could be one place to look. Some of the study’s other findings include:
– Industries most likely to make pay changes were retail, manufacturing and transportation – which the study says includes airline companies
– Vast majority of pay changes were to CEO salary or director fees
– For companies that made changes to annual bonus programs, most reduced current or previous-year bonus payments
– Companies that took pay action had a median stock price decline of slightly over 30% compared to companies that didn’t take pay actions, which only saw a median stock price decline of 18%
– Of the companies reducing CEO or director pay, 82% also implemented workforce reductions or reduced average employee pay
The authors noted surprise in that the pay actions appeared to have little relation to ESG ratings – finding that the median ESG rating of companies taking CEO/director pay actions was not significantly different from the median rating of companies that left pay unchanged
With heightened scrutiny on executive pay and pay equity, a study by researchers at the University of Michigan, Simon Fraser University and The World Bank Research Group examines CEO pay ratio data and indicates that as a company’s CEO pay ratio increases so does the cost of capital. The study was released in 2019 and advocates for continued disclosure of CEO pay ratio data – but, a more recent University of Michigan news release touts the pay ratio – cost of capital connection. Here’s an excerpt from the news release:
The researchers wanted to know if more powerful CEOs actually harm their companies. They used publicly reported pay ratios to measure CEO power, and they chose cost of capital as an indicator of potential harm to companies. Quoting one of the authors, a professor of finance at Michigan, it says ‘If the firm is doing things that are inefficient, that are not in the best interest of the shareholders, that would be reflected in the cost of capital. We found that holding all else constant, as CEO power increases, it’s costing the shareholders more money.’
As a “sneak peek” for our members who are attending our “Proxy Disclosure & Executive Pay Conferences” that are starting next Monday, September 21st, we have posted the “Course Materials” – 167 pages of practical nuggets. For conference attendees who are not members, the materials will be posted later this week on our conference platform – so those folks can use the mvp@markeys.com registration email to access the platform and navigate to the “View Course Materials” link on the homepage.
With so many pandemic and rule-related developments this year, the Course Materials are better than ever before! We don’t serve typical conference fare (i.e. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers go the extra mile!
Here’s some other info:
– How to Attend: There’s still time to register for our pair of upcoming conferences, and once you do, you’ll receive a Registration Confirmation email from mvp@markeys.com. Use that email to complete your signup for the conference platform, then follow the agenda tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here are the agendas for all three days! If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– Register for a Roundtable: New this year, we have added interactive roundtables to discuss pressing topics! We hope you’ll join us for one of these half-hour breakout sessions – you can sign up here.
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives until July 31, 2021 by using their existing login credentials. Or if you’ve registered for the Conferences but aren’t a member, we will send login information to access the conference footage on TheCorporateCounsel.net or CompensationStandards.com.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.