– Lynn Jokela
For those working with stock plans, periodic questions arise about how quickly other companies use up shares reserved under incentive plans or about the number of shares typically included in additional share requests. To help answer some of those questions, FW Cook recently issued its 2020 aggregate share-based compensation report. The report reviews share usage trend data covering the three-year period 2017 – 2019 from 300 companies spread across five industry groups. Data analyzed includes annual grant rates based on annual share usage and fair value transfer (FVT), potential share dilution, prevalence of long-term incentive plan share requests and the allocation of long-term incentive pools to the “top 5” proxy officers. Here are a few high-level highlights:
– FVT rates as a percentage of market cap were generally stable compared to the firm’s 2017 study – the median 3-year average annual rate was 0.92% in the current study
– Potential dilution from outstanding equity awards trended down over the last three years, and continues a downward trend observed over the last 12 years – driven by companies granting more equity in the form of restricted and performance shares, which typically use fewer shares than stock options and remain outstanding for far shorter periods of time
– Over 1/2 of the sample companies requested shareholder approval of an incentive plan share request and the median size of the requests was approximately 4% of common shares outstanding – with requests varying based on company size and the year of request
In terms of what we might see going forward, the report says that if companies encounter ongoing stock price declines for the rest of 2020 and into 2021, we’ll likely see increased FVT rates as companies grant more shares to help offset the market decline
– Liz Dunshee
Check out this 66-page Argyle guide to enhanced compensation disclosures in proxy statements. It highlights sample disclosures – organized into these categories:
1. Inclusion of Table of Contents in CD&A
2. Inclusion of a Letter from the Compensation Committee
3. Executive Compensation Overview
4. Presentation of Compensation Principles/Objectives/Philosophy
5. Presentation of Feedback & Responses on Shareholder Engagement
6. Presentation of Compensation Elements
7. Presentation of Metrics Used in Incentive Programs
8. Inclusion of the Evolution of the Company’s Executive Compensation Program
9. Presentation of Compensation Process
10. Presentation of Peer Groups
11. Presentation of Goals & Performance
12. Presentation of CEO & NEO Scorecards
13. Presentation of Other Compensation Policies & Practices
14. Other Compensation Disclosure Enhancements – Q&A, etc.
– Liz Dunshee
Compensation Advisory Partners is out with its annual “CAP 120″ survey – which analyzes 120 companies from ten industries, to provide a broad representation of market practice among large U.S. public companies.
CAP reviewed Annual Incentives, Long-Term Incentives, Perquisites, and Stock Ownership Guideline Requirement Provisions of these companies in order to gauge general market practices and trends. Especially helpful this year is the new interactive tool that breaks down the data by industry. Here are some of the overall takeaways:
• 84% of companies use 2 or more metrics in their annual incentive plans (ensuring a broader view of company performance and mitigates risk within the program).
• 43% of companies incorporate strategic and non-financial (including ESG – environmental, social, and governance) annual incentive measures that are unique to a company’s strategy.
• Performance-Based Long-Term Incentives are the largest portion of the LTI mix for the CEO and their use has continued to increase over time (from 46% in 2011 to 63% today, a shift from stock options to performance-based incentive awards).
– Liz Dunshee
The annual “Corporate Governance & Executive Compensation Survey” of the 100 largest companies from Shearman & Sterling is always a “hot ticket” item, perhaps because it’s one of the oldest. With perquisites getting more attention lately – due to the impact of the pandemic and recent SEC Enforcement Actions – I was interested in some of the takeaways on that topic. Page 78 gives this info about aircraft use:
– 82 companies allow personal use of corporate aircraft – 46 offer this perk to all NEOs, 21 offer it to only the CEO, 5 offer it to the CEO & CFO, and 10 offer it to the CEO, CFO and other NEO
– 30 require execs to reimburse the company for all or a portion of their personal aircraft usage
– In many instances, personal usage is limited to availability and requires approval by the CEO
– 7 companies disclose that they provide tax gross-ups on some or all perks to execs
– Liz Dunshee
This recent report from the CFA Institute takes a look at progress on “short-termism” since 2006 – a concept that originally targeted the pitfalls of practices like sacrificing R&D and hiring to meet quarterly earnings targets but has now evolved to encompass long-term sustainability. On the executive compensation front, the report’s contributors (investors and various corporate governance leaders) concluded that say-on-pay and majority voting for directors have helped drive increased engagement – and “egregious” practices like tax gross-ups are now pretty rare. Progress! Now, though, the hurdle is complexity. Here’s an excerpt:
The consensus of the group focused on the complexity of many pay packages as the most pressing ongoing problem, noting that compensation consultants employed by most companies to design compensation plans are not paid to come up with simple pay plans. Those around the table stressed that it can be simple to align pay to performance, but that such an outcome rarely happens.
According to the group, compensation often focuses on share price but not on shareholder value. The group appreciated pay packages in which executives (and board members) had to buy shares in the market with their own money and hold them for a long period of time. Such a structure is one of the best ways to align management incentives with shareowner interests.
Investors acknowledged that annual targets are needed for metrics linked to pay, because that is a time period that management should feel is somewhat under their control. A large and often majority share of compensation, however, should be tied to a shared incentive with shareowners. Investors want to ensure that compensation is aligned with the long-term execution of strategy. If benchmarks are changing year to year, or compensation goal bars are being lowered, investors see these as red flags.
Succession planning was noted as a key responsibility of a board that has a major influence on a company’s compensation strategy and its long-term strategy. Firms that do a poor job of succession planning often have to go into the market and overpay to induce a manager to leave their current situation. Strong succession planning also signals to investors that companies are managing for the long-term success of a company by taking the time to pick and groom internal candidates that can seamlessly execute on the company’s long-term strategy.
The report goes on to discuss some hesitancy around further complicating incentive plans by adding ESG metrics that don’t have a clear link to value. The takeaway recommendation is that companies work with investors to simplify executive compensation plans so that executive incentives align with shareholder interests – and are easily understood.
– Lynn Jokela
Yesterday, as the SEC’s Division of Enforcement wrapped up its fiscal year, it announced another perquisites enforcement action. The latest action involves Hilton Worldwide Holdings and is the second perks-related enforcement action in just the last few months. We list perks cases in our “Perks” Practice Area and you can see they aren’t too frequent – so to see two in just the last few months is surprising.
The SEC’s order provides some of the details and says the company failed to disclose $1.7 million worth of travel-related benefits to its CEO and NEOs.
Items that Hilton incorrectly viewed as business expenses and paid for on behalf of its Named Executive Officers, but did not disclose, include, in the case of the CEO, expenses associated with personal use of corporate aircraft, and in the case of Named Executive Officers, expenses associated with hotel stays, as well as taxes related to such items. As a result, Hilton understated “All Other Compensation” portion of its Named Executive Officers’ compensation by an annual average of approximately $425,000 in the company’s 2016 – 2019 proxy statements.
According to the SEC’s order, Hilton’s system for identifying, tracking and calculating perquisites incorrectly applied a standard whereby a business purpose would be sufficient to determine that certain items were not perquisites or personal benefits that required disclosure.
The SEC’s order acknowledges that Hilton took prompt remedial acts and cooperated with the Commission:
Among other things, the order says after receipt of a written document and information request from the Commission staff, Hilton conducted an internal review of its perquisite disclosures and its system for identifying, tracking and calculating perquisites. On April 24, 2020, Hilton filed a definitive proxy statement, which, among other things, provided revised disclosures regarding perquisites and personal benefits provided to its CEO in 2017 and 2018 and to other Named Executive Officers for the same time period.
Without admitting or denying the SEC’s findings, Hilton consented to the SEC’s cease-and-desist order, which requires Hilton to pay a $600,000 civil penalty.
Perks can be tricky – to help guard against this type of action, we have a 102-page chapter on Perks & Other Personal Benefits as part of Lynn & Borges’ “Executive Compensation Disclosure Treatise” posted on this site. Also, if you missed the perks session at last week’s “2020 Proxy Disclosure” and “17th Annual Executive Compensation” conferences, you can access the video archives or if you didn’t register to attend, you can register now to watch any and all sessions.