Before you dive in to crafting your next supplemental proxy disclosures about “realizable pay,” check out this recent study from ISS Corporate Solutions – suggesting that the extra disclosure doesn’t improve say-on-pay outcomes. As Mark Borges has blogged, these types of disclosures seem to be on the decline – and maybe they’re most useful when there’s a major transaction that would benefit from extra color. Here’s an excerpt from the ICS blog:
Based on our study, there appears to be no clear signal that realizable pay assessments in the proxy statements are materially impacting ISS SOP vote recommendations at S&P 500 companies, as companies that included realizable pay assessments in their proxy statement received positive vote recommendations from ISS on SOP at almost exactly the same rate as those companies that did not include a realizable pay assessment.
However, while the data above provide some initial insight into the impact of disclosing a realizable pay analysis on the ISS SOP vote recommendation, it’s important to recognize that ISS supports SOP proposals at different rates based on the initial pay-for-performance (P4P) concern levels identified in their quantitative frameworks.
For companies with elevated P4P concern levels, does the inclusion of a realizable pay assessment in the CD&A lead to a better chance of securing a positive vote recommendation from ISS on SOP?
Similar to the first outcome observed, these results suggest there is no definitive link between the inclusion of a realizable pay analysis in the proxy statement and subsequent support by ISS on the SOP proposal, i.e., companies with an elevated P4P concern level received “FOR” vote recommendations on their SOP proposal at the same rate whether they included a realizable pay assessment in their proxy statement or not.
My colleague Mike Melbinger has been blogging about the final 162(m) regulations that the IRS & Treasury Department released a couple weeks ago. They clarify “grandfathering” and other issues that resulted from the elimination of the “performance-based” exception for compensation deductions.
Here’s something my colleague John Jenkins blogged last week on TheCorporateCounsel.net: The SEC has announced a proposal to amend the provisions of Rule 144(d) to prohibit “tacking” of certain market-adjustable convertible or exchangeable securities. The proposal would also modify and update the filing requirements for Form 144. (Here’s the 84-page proposing release.) This excerpt from the SEC’s press release summarizes the proposed changes to Rule 144’s tacking rules:
The proposal would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an issuer that does not have a class of securities listed, or approved to be listed, on a national securities exchange. As a result, the holding period for the underlying securities, either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company, would not begin until the conversion or exchange of the market-adjustable securities.
“Market-adjustable” conversion provisions are a common feature of “toxic” or “death spiral” securities. Instead of a pre-established conversion rate, the securities are issued with a conversion rate that represents a discount to the market price of the underlying securities at the time of conversion. If there’s no cap on the number of shares that may be issued or floor on the conversion price, the market adjustment feature means that the number of shares issuable upon conversion may be enormous.
Currently, holders of convertible securities are allowed to tack their holding periods for the securities held pre- and post-conversion for purposes of calculating their eligibility to resell under Rule 144 period. As this excerpt from the proposing release points out, the SEC thinks that’s a problem for market-adjustable securities:
If the securities are converted or exchanged after the Rule 144 holding period is satisfied, the underlying securities may be sold quickly into the public market at prices above the price at which they were acquired. Accordingly, initial purchasers or subsequent holders have an incentive to purchase the market-adjustable securities with a view to distribution of the underlying securities following conversion to capture the difference between the built-in discount and the market value of the underlying securities.
The SEC thinks these sellers look a lot like statutory underwriters, and proposes to remove this incentive by amending Rule 144(d)(3) to preclude tacking in the case of unlisted market-adjustable securities. Why distinguish between these securities and listed securities? According to the release, the answer is that the NYSE & Nasdaq listing rules put a cap on the amount of shares that may be issued without shareholder approval, which limits the ability of a company to issue market-adjustable securities & reduces the concerns of an unregistered distribution.
The SEC also proposes to tweak the filing requirements for Form 144. If adopted, the rules would require a Form 144 to be filed electronically, but the filing deadline would be changed so that the Form 144 could be filed concurrently with a Form 4 reporting the transaction. Rule 144 transactions involving securities of non-reporting companies would no longer require a Form 144 filing. The proposal also would amend Forms 4 and 5 to add an optional check box to indicate that a reported transaction was made under a Rule 10b5-1 plan.
A couple of weeks ago, it was a bit of a surprise when BlackRock released its 2021 Stewardship Expectations and updated proxy voting guidelines, which are effective January 2021. There are quite a few updates in BlackRock’s guidelines and this PJT Camberview blog summarizes key takeaways from BlackRock’s updates to its voting guidelines. Yesterday I blogged about some of the governance-related nuggets found in the updates on our Proxy Season Blog – here’s a refinement relating to compensation:
– Removal of language stating that BlackRock will normally support advisory proposals on golden parachutes, indicating that it may be less supportive of such proposals
– For meetings on or after Feb. 1, 2021, ISS updated the quantitative pay-for-performance Multiple of Median (MOM) measure high concern threshold for S&P 500 companies by lowering it from 3.33x to 3.00x the peer median.
– For ISS’s assessment of COVID-related pay decisions, ISS didn’t really change anything but reminded readers that exceptional circumstances of the COVID-19 pandemic and its impact on company operations will be considered in ISS’ qualitative evaluation. ISS then referenced the U.S. Compensation Policies and the COVID-19 Pandemic FAQ that it issued earlier in October.
The ISS Equity Compensation Plan FAQ walks through questions about the process ISS follows to evaluate equity compensation plan proposals. ISS uses its “Equity Plan Scorecard” model when evaluating these proposals and as previewed in ISS’s October FAQs, for 2021, the proxy advisor has raised the score needed to receive an ISS recommendation in favor of an equity plan proposal:
For meetings as of February 1, 2021, the threshold passing scores will increase for the S&P 500 model (from 55 points to 57 points) and the Russell 3000 model (from 53 points to 55 points). The threshold passing scores are unchanged for other models. There are no new factors or factor score adjustments.
Compensation of an executive chairperson isn’t a frequent discussion point when reading commentary about board structure. The debate about board leadership structure often centers on whether a combined chair/CEO role or an independent chair or lead independent director structure is appropriate – with the answer differing based on a company’s particular circumstances. A KPMG memo reviews S&P 500 executive chair board leadership structures and looks at scope of responsibilities, investor perspectives and the need for disclosure and compensation considerations.
Some may question the degree to which executive chair pay differs from CEO pay and the answer likely depends on a company’s particular circumstances. The memo outlines three common compensation scenarios:
– When the executive chair is the former CEO who’s transitioning to retirement, the executive chair commonly receives a base salary, consultancy fee and/or an annual bonus
– In situations where the executive chair is a founder with significant stock ownership, it’s not uncommon for the executive chair to have no base salary and/or incentives
– When the executive chair functions as a co-CEO, the executive chair and CEO pay packages are comparable – the article says former CEOs who’ve been in an executive chair role for less than 2 years, the ratio of median CEO pay to median executive chair pay is 0.7:1
The article quotes Paul Hodgson, senior advisor of ESGauge, who cautions that investors may expect to see a reduction in pay when the CEO becomes executive chair, not only because the executive chair is likely less involved than the CEO but also because the former CEO is continuing to receive compensation in the form of vested stock awards from their time as CEO. In terms of proxy statement disclosure about executive chair pay, companies will need to take special care to explain the rationale behind decisions to help shareholders understand the intentions and choices about how the pay was structured.
This 29-page memo from FW Cook analyzes 2020 director pay at 300 companies of various sizes & industries. Here’s what it says about the pandemic’s impact on board compensation:
Due to the COVID-19 pandemic, 15% of S&P 500 companies and roughly 13% of Russell 3000 companies reported taking pay actions through the third quarter of 2020, which generally consisted of cash retainer reductions. The median decrease in director compensation was 50% at S&P 500 companies and 40% at Russell 3000 companies. The compensation analysis excludes any temporary reductions to director compensation implemented due to the pandemic.
Other than these temporary cuts, director compensation has been pretty static at most companies. Here’s another excerpt:
Year-over-year increases to total compensation, at the median, were modest among large-cap and mid-cap companies compared to small-cap companies, which had a relatively significant increase: the large-cap median increased 1.6% to $290,000, the mid-cap median increased 1.7% to $216,950, and the small-cap median increased 5.1% to $163,500. Changes were relatively stable across industries; we observe that Financial Services, Industrials, and Technology companies had no increases in median total compensation, while Energy and Retail companies had increases of 3% and 2%, respectively.
The 2020 study includes 275 companies that were also included in the 2019 study (“legacy companies”). Approximately 30% of legacy companies increased compensation by more than 1% and compensation increased 9% at the median among these companies; increases were generally weighted more towards equity than cash, with a median cash value increase of 8% and a median equity value increase of 9%.
Director compensation structure remains consistent with prior years, with an average mix of 57% equity and 43% cash across the entire sample. Small-cap companies tend to have the highest cash weighting (average of 47%) and large-cap companies tend to have the lowest (average of 37%). Most companies continue to use fixed-value equity award guidelines, with full-value stock awards remaining the most common form of equity compensation and providing the most consistent means to align director pay with shareholder interests. Equity grants most commonly vest immediately, or cliff-vest after one year.
When it comes to building trust among your institutional investors, this recent report from Edelman shows that executive pay data can make or break you. Here are a few pay factors that 100 US investors said impact trust in a company “a great deal”:
– Having CEO pay ratio in line with those of peers – 72%, up 7% from last year
– Linking executive compensation to ESG target performance – 69%, up 17% from last year!
– Linking executive compensation to financial performance impacts trust in a company a great deal – 67%, up 1% from last year
We’ve posted the transcript for our recent webcast, “Pay Equity: What Compensation Committees Need to Know.” Mintz’s Anne Bruno, BlackRock’s Tanya Levy-Odom, Equity Methods’ Josh Schaeffer, and Impax Asset Management’s Heather Smith shared their insights on these topics:
1. Why Pay Equity Is in The Spotlight
2. Differences Between “Pay Equity,” “Pay Gap” & “Pay Ratio”
3. Shareholder Expectations
4. Disclosure Trends: Pay Gaps & Pay Equity
5. How to Collect & Interpret Data
6. Remediation Strategies
7. Mechanics of Board & Committee Oversight
8. Preparing for Shareholder Engagements & Proposals
A couple months ago, Goldman Sachs announced that it intended to recover $174 million in compensation of current and former employees, following its $2.9 billion settlement to resolve investigations into the 1MDB matter. We’ve been calling the recovery a “quasi-clawback” because some of the amounts relate to potential forfeitures and future compensation reductions – but now that term is more accurate than we expected. Here’s info from a Reuters article last week:
As first reported by Bloomberg, Goldman Sachs had asked former COO Gary Cohn for $10 million, but he declined and said he instead would make a donation to Goldman Sachs-sponsored organizations, the size of which was not disclosed by his spokeswoman.
I don’t know if the board will experience increased shareholder scrutiny because of this relatively small portion of the clawback not directly benefiting the company (they were all elected with high votes last spring, and a Goldman spokesperson said the company was pleased that the donation would benefit charities that it supports). No doubt they are far from the only company that doesn’t have a strong contractual basis for recovering compensation that’s already been paid – especially to former employees who have no unvested equity that can be withheld. But as the chart in this Foley memo shows, there’s increasing shareholder appetite for more expansive policies. The memo gives a nice overview of trends & “lessons learned.”
