Earlier this week, I blogged about FW Cook’s 2020 “Top 250 Report.” Depressed stock prices have led to stock ownership compliance problems for some companies and executives and the report includes strategies to help resolve this issue. Problems tend to occur under stock ownership guidelines that include a timeline requirement such as compliance with an ownership requirement within X number of years. For companies encountering this issue, the report provides a couple of strategies for consideration:
1) Remove the timeline requirement altogether and retain (or add) a retention requirement.
For example: require executives to retain 50% of their net-after-tax shares until compliance is achieved. Compliance becomes a moving target, whereby one does not “run out of time”. Companies should consider the impact that a high retention ratio has on executive liquidity
2) Adopt a “once-met-always-met” provision.
Once an executive achieves compliance, the minimum number of shares that must be held to retain compliance becomes set (i.e., changes in share value are inconsequential, so long as the executive does not liquidate more shares than their required minimum)
As an example of a once-met-always-met provision, the report references page 38 of Danaher’s 2020 Proxy Statement that states: ‘Once an executive officer has acquired a number of Company shares that satisfies the ownership multiple then applicable to him or her, such number of shares becomes his or her minimum ownership requirement (even if the officer’s salary increases or the fair market value of such shares subsequently changes) until he or she is promoted to a higher level.’
Throughout 2020, we’ve posted various reports about executive pay changes in response to challenges resulting from the pandemic – here’s a blog from earlier this year about executive and director pay cuts. Semler Brossy, in partnership with The Conference Board and ESGAUGE, recently posted a new database tracking tool regarding Covid-driven incentive changes across the Russell 3000.
The database is pretty slick – it lists companies and the date of its public filing disclosing the incentive change, denotes whether changes are for a modified go-forward plan or a modified in-flight plan, while allowing users to sort and filter the information. Here are some initial key findings:
– 177 Russell 3000 companies announced structural changes to their in-flight and/or go-forward incentive plans
48% of the sample announced changes to their annual incentive plan only, about 30% announced changes to both the annual and long-term incentive plans, and about one-fifth – 21% – announced changes to the long-term incentive plan only
– Annual Incentive Plan Changes (in order of prevalence)
Reduced the target and/or max payout opportunity
Added new metrics (focused on liquidity or strategic measures in the context of the pandemic)
Modified performance period
Canceled/suspended the annual incentive plan
Delayed goal-setting to later in the fiscal year (this practice may be more prevalent among companies that have not disclosed such actions)
Added Committee discretion to determine payouts (we expect to see more use of discretion)
Switched to equity from cash
One-time special bonus
Reset goals
– Long-Term Incentive Plan Changes (in order of prevalence)
Granted special awards to one or more NEOs (with varying rationale)
Cancelled/suspended plan
Reduced target/max payout opportunity
Modified PSU metrics
Increased weight of time-based vehicles (i.e., RSUs or stock options)
FW Cook recently issued its annual “Top 250 Report” and this year, given the economic environment, the report looks at the evolution of long-term incentive design over the last 5 years, lessons from the top 250 relating to incentive plan design features to mitigate challenges with goal setting and administering incentives, and stock ownership guidelines. With annual comp season around the corner for many and the current environment making goal setting challenging, here’s an excerpt discussing potential goal-setting strategies:
– For companies experiencing increased difficulty setting financial goals (as a result of COVID-19 or otherwise), one strategy would be to set wider performance ranges, and another would be to establish a target range (instead of a singular goal). The former allows for greater variability in outcome that still leads to a payout, while a target range provides a modest downside and upside buffer, such that any outcome within the range is deemed at-target achievement. It is important that the ranges in both cases are set symmetrically, such that threshold performance levels become easier while maximum performance levels become proportionally more difficult. Though proxy advisors and investors generally would prefer to see more narrow target ranges, investor outreach and sufficient proxy narrative disclosure providing a clear rationale for the wide goal posts could alleviate the risks of scrutiny and a negative result for Say-On-Pay.
The report includes a hypothetical example of programs that either widen the goal range or establish a target range and it shows this graphically.
Late last week, Goldman Sachs announced in a Form 8-K filing that it agreed to pay more than $2.9 billion to resolve investigations into the 1MDB matter. With that, the company also released a statement from the board of directors saying it’s taking action that impacts $174 million in compensation of current and former employees. Liz blogged about this when the matter first emerged almost two years ago and noted at that time, that the board added a forfeiture provision to equity awards granted as part of the company’s 2018 year-end compensation decisions.
The $174 million pales in comparison to the $2.9 billion settlement, but for compensation it’s a large and notable amount. As much as news report headlines refer to this as a claw back, some of it is claw back of compensation, but not all. Some of the amounts relate to potential forfeitures (as payment of some long-term incentive awards were deferred) and other amounts relate to compensation reductions. The board’s statement describes the breakdown:
For those former employees implicated in the criminal scheme, the Firm has undertaken clawback actions to the full extent of its contractual entitlements with respect to three individuals and the amounts the Firm is seeking to forfeit from these individuals total approximately $76 million, of which the Firm is currently holding approximately $24 million.
For other former senior executives, to the extent not already paid, they will be asked to forfeit all or a majority of their outstanding Long-Term Performance Incentive Plan Awards that were granted in 2011 and which have a performance period that includes 2012 and 2013 when the 1MDB bond underwritings took place, and forfeit a portion of other previously awarded compensation, if applicable. One of these former senior executives has voluntarily agreed to return the majority of their 2011 award. The amounts for these individuals represent a portion of the pre-tax value of these awards granted or paid and total approximately $67 million.
In addition, we think it is appropriate that the current executive leadership team, the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as well as the current CEO of Goldman Sachs International, have their overall compensation reduced by $31 million for 2020.
Even with the company’s announcement, the matter will likely continue for a while. Seeking the return of previously paid compensation from former employees isn’t a slam dunk and the board’s statement says that it has formed a special committee to oversee and review the company’s remediation efforts.
Late last week, the Business Roundtable issued this statement on advancing diversity & inclusion through employment practices. In addition to encouraging voluntary public disclosure of key diversity metrics, the statement says:
Unjustified disparities in compensation are one of the drivers of gender- and race-based wealth and income inequality. Business Roundtable calls on companies to conduct periodic pay equity reviews and regular pay equity analyses, and to implement processes to review and close gaps.
Most large companies already conduct pay equity reviews – but the BRT’s statement is significant because it also calls for closing pay gaps. That can be a complicated process – especially if you’re truly looking to close the unadjusted pay gap, which can reflect the difficulties in advancing underrepresented groups to high-level positions.
We’ll have info on how to prepare for – or move forward with – pay equity initiatives in our November 19th webcast – “Pay Equity: What Compensation Committees Need to Know.” Mark your calendars to hear from Mintz’s Anne Bruno, BlackRock’s Tanya Levy-Odom, Equity Methods’ Josh Schaeffer and Impax Asset Management’s Heather Smith.
Last week, Starbucks announced that it would tie executive pay to 2025 diversity targets – joining a smallbut growing number of companies to do so (JPMorgan also recently got some press for cutting executive bonuses due to a failure to advance diversity, which was notable since that program doesn’t rely on formulaic goals).
Starbucks’ commitment is part of the company’s overall effort to advance racial & social equity, including anti-bias training and mentorship programs. Here’s more detail:
We will be transparent in our approach to Inclusion and Diversity goal setting and progress.
– We are committed to publicly sharing our current workforce diversity. (View Public Data).
– We will set annual Inclusion and Diversity goals based on retention rates and progress toward, achieving BIPOC representation of at least 30% at all corporate levels and at least 40% at all retail and manufacturing roles by 2025.
– We will complete the roll out of an analytics tool that will provide leaders with visibility to current diverse representation relative to Starbucks representation goals.
– We will continue to publicly share our Inclusion and Diversity commitments, goals, and progress through annual reporting.
We will hold ourselves accountable at the highest levels of the organization.
– We will incorporate measurements focused on building inclusive and diverse teams into our executive compensation programs beginning in FY21.
– We will establish an internal governance structure to integrate Inclusion and Diversity throughout the organization, beginning with an Inclusion and Diversity Executive Council in Q1 FY21.
– We will require all vp+ leaders to complete a 2-hour anti-bias training and the foundational and racial bias courses from the To Be Welcoming Curriculum as a role expectation.
– We will join the Board Diversity Action Alliance to act alongside peer companies as we are committed to representation of racially and ethnically diverse directors on corporate boards of directors.
CalPERS voted “against” 52% of say-on-pay proposals this past proxy season – and nearly 3000 comp committee members at those companies also received “against” votes under the pension fund’s policy to vote against directors in the same year that it votes against say-on-pay or compensation plans. Now it’s updated its Executive Compensation Analysis Framework to add a “grant date target pay” methodology to the pay-for-performance assessment, which could make it even more difficult for some companies. Here’s an excerpt:
Grant date target pay analysis allows us to assess whether target pay is being set at a reasonable level relative to peers after taking into account a company’s historical performance relative to its peers. As an example, a company that sets target pay at the 50th percentile of peers while its historical performance is at the 25th percentile of the same peers would be considered to be setting target pay outside of what appears justified by its historical performance.
The updated framework also clarifies that CalPERS wants companies to prohibit hedging & pledging for execs.
– CalPERS’ preference for 5-year performance periods
– What components of pay are included in “realizable pay”
– Peer group methodology and views on problematic benchmarking
– CalPERS’ preference for 5-year minimum vesting periods or 5-year minimum holding periods for equity awards vs. stock ownership guidelines
– Views on use of discretion by comp committees
The FAQs also emphasize that a high score on the quantitative P4P model doesn’t guarantee a vote “for” say-on-pay – qualitative factors are also important. We’ve posted the framework along with the FAQs in our “Investor Voting Policies” Practice Area.
ISS has issued these FAQs to explain how it will approach COVID-related pay decisions in its pay-for-performance qualitative evaluation. As in the past, an elevated concern from the quantitative screen will continue to result in a more in-depth qualitative review.
The FAQs explain what disclosure ISS will be looking for if there were changes to salary, bonus programs or incentive cycles or grants of one-time awards – e.g., to show that compensatory actions further investors’ interests versus creating windfalls for executives. The FAQs also note a couple of changes to the proxy advisor’s responsiveness policy and Equity Plan Scorecard. Here’s an excerpt:
10. Are there any changes to ISS’ responsiveness policy in light of COVID-19?
When a company receives less than 70 percent support on the say-on-pay proposal,ISS’ responsiveness policy reviews three factors:(1) the disclosure of the board’s shareholder engagement efforts;(2) the disclosure of the specific feedback received from dissenting investors; and (3)any actions or changes made to pay programs and practices to address investors’ concerns.
The expectations regarding the first two factors will remain consistent with prior years. With respect to the third factor, if a company is unable to implement changes due to the pandemic,the proxy statement should disclose specifically how the pandemic has impeded the company’s ability to address shareholders’ concerns. If pay program changes are delayed,or do not necessarily fully address shareholder feedback, the company should disclose a longer-term plan on how it intends to address investors’ concerns.
11. Are there any changes to ISS’ Equity Plan Scorecard (EPSC), Problematic Pay Practices (PPP), or option repricing policies in light of COVID-19?
There are no changes to these policies specifically related to the pandemic. However, for the 2021 policy year, the passing score for the S&P 500 EPSC model will increase to 57 points. The passing score for the Russell 3000 EPSC model will increase to 55 points. For all other EPSC models, the passing score will remain 53 points.
For compensation committees, getting outside advice can be critical. A Pillsbury Winthrop memo discusses the value of collaboration between executive compensation counsel and compensation consultants, especially when developing and approving compensation arrangements. As much as it can be a hassle to coordinate busy schedules, the memo says taking steps to ensure both the compensation consultant and executive compensation counsel are present for committee meetings can have an immediate impact. The memo walks through several examples to highlight the importance of compensation committees receiving input from both advisers as part of the committee’s decision-making process. As one example, the memo discusses advance modeling of possible compensation decisions:
Having executive compensation counsel collaborate with a compensation consultant to model how different executive compensation decisions will be disclosed in a Form 8-K filing or in the proxy statement, specifically the CD&A, prior to approval is a great way for a compensation committee to screen out decisions that may garner scant support. This exercise eliminates the headache of drafting and defending poor or rushed executive compensation decisions at the end of the year after those decisions were made. Additionally, with the early exposure of gaps in potential compensation decisions, the two advisors can then work together to prepare an executive compensation decision that will receive better support.
State Street Global Advisors recently released its Q2 2020 stewardship report. In addition to providing insight into how the Covid-19 pandemic affected the asset manager’s 2020 engagements generally, it also provides insight into potential upcoming focus areas for engagements addressing executive compensation. Here’s an excerpt:
Use of discretion: SSGA expects compensation committees to be clear about the discretionary powers available to them and when committees use discretion to adjust payouts, they should ensure the outcomes will reflect company and executive performance and align with shareholders
Bonus plan complexity: SSGA says annual plans are becoming overly complex and making it difficult to understand how executives are being incentivized – SSGA encourages companies to simplify bonus plans and ensure they have a clear link to strategy.
Relative TSR: SSGA says relative TSR shouldn’t be used as the sole performance metric and it encourages companies to take a more holistic approach by using a blend of relative TSR and long-term operational metrics that align with a company’s strategy