– Lynn Jokela

Last week, Liz blogged about FW Cook’s analysis of compensation decisions from S&P 1500 companies with early fiscal year ends (April – June of this year).  This Compensation Advisory Partners’ memo provides another in-depth look at pay actions from companies with early fiscal year ends and in addition to the memo, the firm has a searchable Covid-related pay action tracker available on its website.  The memo cautions that it’s too early to say whether the actions by the early filers are indicative of trends we’ll see when most companies file their proxy statements in the spring, but it’s helpful to see generally what some companies have done.  Here’s some of the memo’s high-lights:

– From an industry-sector standpoint, the early filers show significant representation from Information Technology (28%), Industrials (15%) and Consumer Staples (15%).

– Of the 65 early filers, 43% announced changes to their outstanding and go-forward incentive plans because of Covid-19.

– Modifying the performance period was the most prevalent change for both annual and long-term incentive plans.  CAP predicts goal-setting will remain as a key challenge for incentive plan design for 2021 and beyond. The COVID-19 pandemic hurt many companies and helped others (e.g., consumer staples), resulting in highly unusual results for 2020. To address future uncertainty during goal-setting, breaking performance periods into smaller periods may become more common until economic conditions stabilize.

– Although only 4 of the 65 early filers provided special awards to executives, CAP expects to see more special awards in the future – examples of special awards include awards to replace annual and long-term incentives that weren’t paid because of Covid-19 and special grants to incentivize executive performance.

– Lynn Jokela

In August, I blogged about the San Francisco ballot initiative – Proposition L – that would impose a tax on companies doing business in the city if a company’s highest paid employee earns 100x more than the company’s average San Francisco worker.  The city’s vote totals show that the law has passed – here’s the full text of the measure.  Under the law, the tax increases as the pay ratio increases.  Here’s an excerpt from ABC News on the new law:

Under the new law, any company that pays its top executive 100 times more than their average worker will pay an extra 0.1% surcharge on its annual business tax payment. If a CEO makes 200 times more than the average employee, the surcharge increases to 0.2%; 300 times gets a 0.3% surcharge and so on.

Some fear the new tax will drive some businesses out of the city but San Francisco City Supervisor, Matt Haney, said the tax is modest compared to the cost for a company to move.  He hopes the tax will lead companies to re-examine their compensation structures.

Questions remain about the new law though as it doesn’t define how compensation will be determined – so there’s more to understand before businesses can understand how this will impact them.  The text of the law says it becomes operative on January 1, 2022 and ABC News says that the law is expected to generate between $60 million to $140 million per year.

– Liz Dunshee

As we brace for a possible surge in Chapter 11 filings due to the pandemic, this memo from Compensation Advisory Partners suggests that some shareholders might be more understanding of executive awards intended to retain executives who can guide the company through these challenging times – if the rationale is adequately explained. Here’s an excerpt:

While situations vary by industry, most agree that this flurry of bankruptcy filings is not the result of poor management but rather the inevitable impact of unprecedented and unforeseeable broad shutdowns across the country to contain the pandemic. The companies entering bankruptcy need continuity, stability, and motivated leadership. Carefully designed and communicated retention and performance awards can play an important role in keeping leadership in place and focused on moving the company through the restructuring process.

The memo sorts through recent Form 8-K announcements to summarize common parameters for these types of awards. It notes that a few companies have included a performance-based clawback to improve optics. It also touches on the rare arrangement of executive severance programs in bankruptcy.

– Liz Dunshee

Many comp committees still use some form of “tally sheet” to understand total compensation payable to NEOs under various scenarios – some also use it to track accumulated wealth. A new “CEO Wealth Tracker” from Farient Advisors makes those wealth numbers more easily accessible to anyone who’s interested – and the data can be filtered by stock index, time frame, founder status and sector. Here’s more info:

For many top executives, personal wealth is far more impacted by the value of their company shares than by their disclosed total pay. Farient Advisors is pleased to release our CEO Wealth Tracker™—a new tool that highlights the change in the value of CEO shares in the companies they lead. For companies in the Russell 3000, this interactive resource shows a CEO’s current wealth, wealth change over time, and the portion of wealth change due to stock price changes versus net new shares, all in a sortable table.

– Liz Dunshee

This FW Cook blog analyzes FYE compensation decisions that have been recently disclosed by S&P 1500 companies whose fiscal years ended in April – June of this year. Here are some takeaways:

– For annual bonus plans, 13 companies (22%) exercised positive discretion to increase the formulaic bonus outcome – the average payout increased from 16% of target to 80% of target and the most common approach was to pro-rate performance based on outcomes up to the onset of the pandemic

– For annual bonus plans, 12 companies (20%) delivered zero payout and didn’t exercise positive discretion – that included 2 companies that exercised negative discretion to decrease the formulaic bonus outcome to zero

– For annual bonus plans, about half of the companies that didn’t exercise discretion had a non-financial component or some other means by which to award a payout even when the financial component didn’t fund

– For long-term incentive plans, 6 companies exercised positive discretion to measure performance up to the onset of the pandemic (e.g. calculate performance using 11 of 12 quarters)

– For long-term incentive plans, only 2 companies disclosed modifications to in-cycle performance awards

– Approximately 25% of companies prospectively disclosed they were making changes to fiscal 2021 annual bonus and/or long-term incentive plans in light of pandemic challenges

The blog notes that calendar year companies may not gain much ground by pro-rating annual incentives as some of these “early filers” have done – but it may be reasonable to explore that approach for long-term incentive plans (i.e., use data for 8 or 9 of 12 total quarters). Here’s an excerpt:

We believe this approach to pro-rate the payout is an important signal to investors of the trade-offs that are necessary to deliver fair incentive plan outcomes to management participants who have faced huge challenges outside of their control, while recognizing that many shareholders are facing negative returns and rank-and-file employees have also made sacrifices (e.g., furloughs and layoffs).

Calendar year companies that decide to exercise positive discretion to increase the formulaic bonus outcome will need to articulate a more holistic rationale for the higher payout that is tailored to their individual facts and circumstances. Common themes we have observed in working with our clients include post-pandemic absolute financial performance, relative performance versus key industry peers, the shareholder experience, and the execution on the operational and supply chain challenges that arose from the pandemic, including safeguarding the health and safety of employees, suppliers and customers.

Due to accounting and disclosure consequences, the blog cautions compensation committees to consider a broad range of options before proceeding with any changes to in-cycle awards, such as changes to metrics, goals, the measurement period, or revisions to adjustments. Check out our “Covid-19″ Practice Area for lots of memos on pandemic-related pay adjustments. And mark your calendars now for our February 25th webcast, “Your CD&A: A Deep Dive on Pandemic Disclosures,” for tips on how to tell your pay story in your proxy statement.

– Liz Dunshee

Based on two years of outreach, The Aspen Institute & Korn Ferry announced the release of these “Modern Principles for Sensible & Effective Executive Pay.” These 5 Principles are intended to reflect shifting priorities and attitudes and guide boardroom dialogue. Here they are (see the full document for Principle a bullet-point explanation of each Principle and key questions for compensation committees):

1. Pay is unambiguously tied to the company’s purpose and the drivers of its long-term success – e.g., avoid excessive focus on TSR; consider financial & non-financial outcomes

2. Executive pay outcomes are fair – e.g., balance CEO pay with other executives and the employee population, and share rewards fairly; do not rely on external pay benchmarking as the sole basis for setting executive pay

3. Goals used in incentive plans are credible and their outcomes difficult to manipulate – e.g., meaningful downside for under-performance; don’t encourage excessively risky behavior; align long-term incentives with at least a full business cycle

4. The executive pay program is fully described in clear, jargon-free language – e.g., actively reduce complexity in pay packages; be able to summarize your program in two pages or less

5. The Board bears ultimate accountability for making decisions about executive pay and for aligning pay with the long-term health of the enterprise