We’ve blogged before about potential use of discretion by compensation committees this year when determining incentive plan payouts and a recent Pay Governance memo says 77% of companies have considered using discretion at the end of the 2020 performance year. To help companies prepare for anticipated heightened investor scrutiny of incentive pay decisions, the memo urges compensation committees to conduct a rigorous assessment of performance prior to applying discretion, which can help make it easier to communicate any use of discretion to shareholders.
In terms of how to conduct this rigorous assessment of performance, the memo walks through a common example and summarizes several sample assessment criteria in what it calls a “resilience scorecard.” A scorecard may not be for everyone but it’s one way to put some structure around upcoming compensation decisions and as noted in the memo, it can go a long way in providing a strong rationale behind discretionary awards.
The scorecard is intended for use by compensation committees when finalizing incentive awards for 2020 and it breaks the assessment criteria into different categories relating to financial/operations, employees, customers/community and governance/shareholder matters. By way of example, the scorecard applies a discretionary score weighting to each category and can help committees explain decisions to shareholders in the CD&A – it provides more of a quantitative approach and shows considerations that were factored into final incentive awards. It’s worth checking out – especially in a year when investors and proxy advisors have their antennas up.
Compensation Advisory Partners recently completed its annual analysis of non-employee director compensation among the 100 largest companies. This is the 10th year CAP has conducted this analysis. Here are some highlights:
• Median total comp is now $310K, up from $305K last year. This is the lowest year-over-year increase during the 10 years that CAP has been conducting this study
o 10-year look: Median compensation has increased 32%, or 2.8% per year on an annualized basis, over the past 10 years (it was $235K in 2009)
• Median additional compensation for Lead Director is now $45K, up significantly from $35K last year
o 10-year look: Lead Director pay increased 80%, or 6% per year on an annualized basis, over the past 10 years (it was $25K in 2009)
• 11 percent of companies announced pandemic-related temporary compensation reductions for directors, with most decreases only impacting cash compensation.
According to this analysis just released by Willis Towers Watson, median CEO pay in the S&P 1500 was up “only” 5.5% for 2019 performance – the smallest rate of increase since 2016 – due to lower annual bonuses. A 13.1% increase in the S&P 500 positively influenced the average – things were more bleak at small- & mid-cap companies. And this was all based on performance before the pandemic! This announcement summarizes the findings. Here are some high points:
– Total earned pay for S&P 1500 CEOs increased 5.5% at the median in 2019, a sharp drop from a 13.7% jump in the previous year
– While S&P 500 CEOs saw a 13.1% increase at the median, total pay for S&P 600 and S&P 400 CEOs grew just 4.8% and 0.2%, respectively
– There was a -3.2% decrease in annual bonus payouts compared with a 5.8% increase in the previous cycle – the average annual bonus payout dropped from 114% of target in 2018 to just 102% for 2019, the lowest mark since the Great Recession
– Earned long-term incentives, the largest component of executive pay at major companies, increased 8.4% in 2019, down sharply from an increase of 13.1% in 2018
– CEO salaries, which have held steady the past few years, increased a modest 2.5% at the median in 2019 – in 2020, nearly one-fifth of companies have reduced CEO salaries in response to the pandemic
You can still register for our popular conferences – the “Proxy Disclosure Conference” & “17th Annual Executive Compensation Conference” – to be held virtually Monday – Wednesday, September 21st – 23rd. We’ll be covering the latest issues that you need to know – including COVID-related pay adjustments and disclosures, human capital management, navigating proxy advisors, and shareholder proposal rules & trends. Here are the agendas – 15 panels over 3 days.
New this year, we have also 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. To make the most of your experience, check out this blog for tips for “virtual networking” for lawyers. Here’s an excerpt:
– Be On-Camera: Speaking of cameras, please do not participate in a zoom networking event without being able to have a camera available. That black square with your name will not allow others to see who you are. It would be the equivalent to going to an in-person event and wearing a paper bag over your head. People would like to see who you are. Also, make sure that you are well lit when you are on camera. Too many people are on camera with the light behind them and you cannot see their faces clearly. A light should be in front of you.
– Show up on time (or even early): This is something I advocate for IRL networking, but concerning virtual networking, it is even more important. It is distracting to have someone enter a conversation in the middle of a virtual event, as opposed to a live networking event, and should be avoided at all costs. And, if you have to leave early, you can just make mention that you have an appointment that you have to attend to and thank everyone who was there. You can send a note to the host using the chat feature. Or, you can just leave quietly.
As the blog notes, there are no marketing and business development tactics that cannot be done virtually. So take advantage of this opportunity to meet with your fellow practitioners in a low pressure way, have a good conversation, and make a connection or two.
Earlier this summer, I blogged about a Semler Brossy Report that found 62% of Fortune 200 companies incorporate ESG measures in executive compensation programs – here’s a NYT article discussing what some companies have done. More recently, Semler Brossy issued a follow-up report on ESG and incentive programs and Liz blogged about how it shows many of those ESG metrics relate to shorter term, operational metrics. The report also gives some interesting info on D&I metrics.
“People” metrics have frequently been included in incentive program design, but in contrast to explicitly measured ESG metrics on topics like customer satisfaction and climate change, the report says that over half of companies with a diversity & inclusion metric include it on a discretionary basis. Here’s more:
Of companies with ESG measures, 38% use a D&I metric (or 23% of all companies in the sample). However, well over half of companies with D&I include it on a discretionary basis. Despite seeming prevalence, only 10% of all companies in the overall sample include a D&I metric with a formal weighting in executive incentives.
This trend speaks to many Boards’ traditional hesitation to set and disclose formal targets around D&I initiatives, likely due both to general discomfort around setting “quotas” and optics as well as risks associated with disclosing performance that may be subject to external criticism. In addition, many companies recognize that “hard” metrics of representation in an employee population do not capture the cultural aspect of a truly inclusive organization – measuring “Diversity” results without assessing “Inclusion” is an incomplete answer. A more balanced assessment may require discretion and judgement.
As much as there’s hesitation to disclose formal D&I targets, there may be increased demand for companies to do so. Debate about the proper way to incentivize progress on diversity & inclusion efforts will likely continue and as the report notes, existing examples of how companies have integrated social metrics into incentive plans will prove helpful for other companies as they step forward. The same will also likely be true for other sustainability metrics.
We’ll be addressing ESG & use of other non-financial metrics in incentive plans, along with related 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.
Amid Covid-19 and the related economic turmoil, many companies experienced significant stock price declines – many have since seen decent recoveries. Earlier this year though, as companies granted equity awards, they undoubtedly used more shares from their stock plans than initially projected. A recent Equilar blog reviewed additional share requests of Russell 3000 companies from 2018 to 2020. Upon first glance, it didn’t appear that 2020 share requests were more frequent than prior years. But, when Equilar drilled into the data further, it did see accelerated share requests in April 2020.
Equilar found that, in addition to more frequent share requests, the volume of shares requested also increased. Similar to the number of share requests, the increase in volume of shares requested becomes more obvious when drilling into 2020 data further. In terms of the number of shares requested as a percentage of shares outstanding, Equilar found a median of 4% at the end of March, which then rose to 4.3% by mid-April and 5.1% by mid-May.
The blog says that proxy advisors have recommended against companies making share requests that the proxy advisors view as too large. At the same time, Equilar includes data showing a downward trend in vote support as share requests become larger. Rather than scrambling come proxy season, as we don’t know when or whether stock prices may dip again, if companies haven’t already done so, it might be worthwhile to schedule more frequent assessments of shares remaining available for grant.
A recent Pearl Meyer memo discusses long-term incentive plans and private companies. For many reasons, trying to put a LTIP in place at a private company that offers the same potential benefit as plans provided by public companies can be difficult. For private companies that want to consider implementing a LTIP, the memo lists 7 key LTIP design questions for consideration. The questions are broad and can help illuminate potential paths as well as ‘non-starters’, from a structural perspective:
– What is the company’s vision, exit strategy or transition plan? A potential exit or transition strategy will affect decisions relating to equity vehicles, performance metrics, vesting parameters and liquidity options.
– What is more important to emphasize: performance or retention? The answer can provide clarity about whether appreciation-oriented vehicles or full-value vehicles would be more appropriate.
– Should we share ‘real’ equity with our employees? If potential earnings dilution and administrative headaches are obstacles, the memo discusses some benefits to offering equity-like vehicles, along with some disadvantages.
– Should we provide in-service liquidity? Depending on a company’s strategy, doing so may cause executives to take their eyes off the prize.
– Who should participate in the LTIP? This is probably the most company-specific question and companies need to consider whether all levels of the organization will really value potential future equity above a higher salary today.
– Can we set and track performance metrics and goals? Some companies outsource this process by conducting a periodic third-party valuation, while others establish an internal valuation model, such as a multiple of EBITDA.
– Who has the authority to approve the plan and administer it? With established governance structures less common in private companies, the memo suggests selecting a member of HR and finance to work with the CEO as part of a ‘management committee.’