– Liz Dunshee

I’ve blogged a couple of times about companies announcing that they’re planning to link diversity metrics to executive pay. This Semler Brossy memo captures the trends that we’re seeing emerge on this topic among Fortune 200 companies. It includes a chart that tracks the metrics by company, industry, weight and performance outcome – with a link to the disclosure. Here are its key takeaways:

• 20 companies have incorporated Diversity and Inclusion metrics in their incentive compensation programs

• Of these companies, the metrics tend to be assessed qualitatively and are more operational in nature

– 19 of the 20 companies studied have incorporated these metrics within their annual incentive plan, and one incorporated it within their long-term incentive program

– Amongst the companies studied, typical Diversity and Inclusion weightings make up approximately 5%-30% of metrics within annual incentive plans

• We expect the prevalence of Diversity and Inclusion metrics to rise in 2021 as multiple stakeholders call for greater oversight/progress on HCM topics and the nature of the metrics to evolve to be more strategic

– Lynn Jokela

About a year ago, I blogged about shareholders that were scrutinizing how clawback policies apply to situations of “reputational harm.”  At the time, the NYC Comptroller led a group of proponents and submitted a shareholder proposal to McDonald’s in an effort to expand a clawback policy.  Now, according to a recent news report, a group of investors, one being the NYC Comptroller, are pressing for board turnover – including the compensation committee chairman.

The investors are calling for resignations of McDonald’s board chair and the company’s compensation committee chair because they’re unhappy with severance paid to the company’s former CEO.  The company is in the process of trying to claw back the severance, but the shareholders – who reportedly own less than 1% of the company’s outstanding shares – want accelerated board turnover.

The shareholders want action now in advance of the company’s annual meeting. Liz blogged last summer about increased scrutiny of pay decisions, especially this year.  We’ll see how this plays out but for now, the saga highlights shareholder increased scrutiny of clawback policies and other pay actions, including board responses to shareholder requests for action.

– Lynn Jokela

I blogged earlier this week about a Willis Towers Watson survey that showed over the next several years we’ll likely see an increase in how companies use ESG metrics with executive incentive plans.  Yesterday, Reuters reported that Apple is one company making a change – starting in 2021 the company will incorporate an ESG modifier in its annual cash incentive program.  Here’s an excerpt from Apple’s 2021 proxy statement:

Beginning in 2021, an environmental, social, and governance modifier  based on Apple Values and other key community initiatives will be incorporated into our annual cash incentive program. This change is intended to further motivate Apple’s executive team to meet exceptionally high standards of values-driven leadership in addition to delivering strong financial results. The financial performance measures and the threshold, target, and maximum payout opportunities under our annual cash incentive program for our named executive officers will not change. However, the Compensation Committee will use the modifier to determine whether to increase or decrease the bonus payouts by up to 10% based on the Compensation Committee’s evaluation of our named executive officers’ performance with respect to Apple Values and other key community initiatives during 2021.

As Reuters notes, the company cites the new ESG modifier in its opposition statement to a shareholder proposal relating to executive compensation.  The proxy statement doesn’t give details about how the company will measure ESG progress so we’ll likely wait until next year to understand more about the impact the new modifier has on executive compensation but it sends a message that the company intends to measure and incent ESG progress.

– Lynn Jokela

Before the end of the year, I blogged about incentive compensation trends for large-cap companies.  ClearBridge Compensation Group recently issued a companion report examining incentive compensation trends for mid-cap companies over the last 10 years.  Here are some of the findings:

Annual Incentive Plans

– Like large-cap companies, almost all are formulaic, shifting away from discretionary plans for making bonus determinations

– Most companies use two or three performance measures

– Most common performance measure is an earnings-based measure, with EBIT/operating income being the most prevalent

Long-Term Incentive Plans

– In 2020, 86% of companies have granted at least one performance-vested vehicle, up significantly from 2010 when it was 46%

– Use of time-vested stock options has decreased even more significantly for mid-cap companies –65% in 2010 compared to 25% in 2020

– Like large-cap companies, most time-vested restricted stock/units and time-vested stock options/SARs vest ratably over the vesting period, a minority of companies use cliff vesting

– In 2020, 69% of companies used multiple performance measures compared to 52% in 2010

– Earnings-based measures are the most prevalent (58%), followed by stock-based measures such as TSR (54%) most typically measured on a relative basis

– A majority of companies (52%) used only absolute performance measures, down slightly from 2010 (62%).  Relative performance measures, most typically stock-price based measures, are usually measured against a customized comparator group

– Lynn Jokela

Liz blogged last summer about how most ESG metrics that are incorporated into incentive plans relate to shorter-term operational metrics rather than long-term sustainability objectives.  She noted the rationale for most doing so is because it’s easier to tie these operational metrics to the top or bottom line.  But, Willis Towers Watson recently reported that looking forward, things may start to change.  Here’s an excerpt from a Willis press release:

Willis conducted a survey of company directors.  Four in five respondents (78%) are planning to change how they use ESG with their executive incentive plans over the next three years. More than four in 10 (41%) plan to introduce ESG measures into their long-term incentive plans over the next three years, while 37% plan to introduce ESG measures into their annual incentive plans. Additionally, about a third plan to raise the prominence of environmental and social/employee measures in their incentive plans.

ESG metrics that fall within the sustainability bucket often include those relating to environmental, climate and broader social matters.  Even with change on the horizon, it doesn’t sound like companies and comp committees will have an easy time with it.  Willis reports that when tying ESG to incentive plans, companies encounter the biggest challenges with target setting, performance measure identification and performance measure definition.