Yesterday, the SEC announced it had settled charges against a gas exploration & production company and its former CEO for failing to disclose $650,000 worth of perks. Here’s an excerpt from the press release:
The SEC’s separate orders against Gulfport and Moore find that, from 2014 to 2018, Gulfport failed to disclose approximately $650,000 in executive compensation in the form of perquisites received by Moore, and also failed to disclose certain related person transactions involving Moore. According to the orders, the undisclosed perquisites included the cost of Moore’s use of Gulfport’s chartered aircraft for certain travel.
The undisclosed perquisites also included costs associated with Moore’s use of a Gulfport corporate credit card for personal expenses that he did not repay on a timely basis, which resulted in Gulfport extending Moore interest-free credit and carrying a related person account receivable. The orders also find that Gulfport failed to disclose that it paid Moore’s son’s landscaping company approximately $152,000 in 2015 for its services. The order against Moore further finds that Moore caused Gulfport’s violations by failing to supply required information that would have allowed Gulfport to identify and disclose the perquisites and related person transactions.
Similar to the perks enforcement action last fall, the Commission highlighted that it considered the company’s cooperation and prompt remedial acts when determining whether to accept the settlement offer – and this time, there was no penalty at all imposed against the company. Here’s what those efforts included:
– Replacing key personnel
– Developing an internal internal audit function
– Enhancing existing policies & procedures
– Instituting new review & tracking processes
This is the third perks settlement that the SEC has announced since last June – we list all the cases in our “Perks” Practice Area. To make sure that your company is disclosing everything it needs to, make sure to check out our 102-page chapter on Perks & Other Personal Benefits as part of Lynn & Borges’ “Executive Compensation Disclosure Treatise” posted on this site. If you attended our “17th Annual Executive Compensation Conference” last fall, you can also use the video archives to refresh your memory on the two-step analysis.
This one-page checklist from Semler Brossy is great because it acknowledges that your peer group can’t please everyone – but there are still ways to identify one that will accomplish your defined objectives. Here are the steps it recommends:
1. Engage the Committee and management to define how the “peer group” will be used (e.g., pay levels, pay practices, or both)
2. Outline a set of objective characteristics for which to evaluate potential peer companies (e.g., size, growth, valuation, industry)
3. Determine whether additional secondary criteria should be used to narrow the universe of potential peers (e.g., geographic footprint, ownership structure)
4. Acknowledge that no peer group will be perfect and that not all companies in the resulting peer group will necessarily be direct competitors for business or executive talent
5. Ensure that peer companies are within a reasonable range of the client’s revenue if using for pay levels comparisons
6. Engage Compensation Committee Chair and management early to ensure buy-in and thorough understanding of the purpose of the peer group and rationale for peer constituents
7. Confirm disclosure requirements with company’s internal and external counsel
The International Corporate Governance Network recently issued this 10-page memo on integrating ESG into executive compensation plans. Consistent with what we’ve been hearing from investors, ICGN notes that the COVID-19 pandemic has the potential to re-invigorate the debate about high levels of executive pay and income inequality.
ICGN proposes key characteristics of short- and long-term pay programs that can advance sustainability initiatives, regardless of location-specific market practices or regulations. It recommends using the SASB materiality map and guidelines from the European Commission as a starting point – and suggests that LTIPs be extended to cover 5-year periods.
What may be especially helpful to companies as they prepare for proxy season disclosures and engagements is this list of sample questions that investors can ask:
1. What are the top three environmental, social or governance considerations of your company?
2. (How) have you engaged with key stakeholders to determine these? Who are the key stakeholders? Where is the process documented? How often is this consultation repeated?
3. How many of these ESG considerations are part of the strategic outlook of the company for the next 5 years? For the next 10 years?
4. Can you define opportunities for balancing long-term value creation, short-term strategic agility, and the building of stakeholder ecosystems all at the same time?
5. How does the company’s mission and its board-level narrative on sustainability issues get translated into robust governance of these issues, a clear strategy, risk (and opportunity) management as well as metrics and KPIs?
6. What are the company-wide KPIs related to these issues?
7. Do you have along-term incentive plan in place? What are the relevant ESG-related performance metrics and gateways for these? What is the evaluation and vesting period for it?
8. How you approach setting well-fitting multiyear performance targets in long-term incentives plans, in a changing – and sometimes unpredictable – world?
9. Do executives have a share-ownership requirement? What multiple of their annual fixed salary is this? What’s the time-frame after their appointment that they need to reach this level? What is the holding period requirement after cessation of their executive role?
10. How do you entice ownership of environmental, social and governance issues in company governance and among directors, executives and employees?
11. What makes your disclosure on these issues credible and reliable?
12. How are these issues integrated in the compensation packages of executives and others?
13. What are your three-and five-year targets regarding integrating sustainability in the remuneration and what is the roadmap to get there?
14. What help would you welcome from the investment community on this?
15. Do you benchmark your current remuneration practices against peers (also in the context of the pandemic)? How do you know which peers to look at for best practice?
Tune in tomorrow for our webcast – “Your CD&A: A Deep Dive on Pandemic Disclosures” – to hear Mike Kesner of Pay Governance, Hugo Dubovoy of W.W. Grainger and Cam Hoang of Dorsey discuss how to use your CD&A to tell your story and maintain high say-on-pay support, trends and investor expectations for COVID-related pay decisions, addressing “red flags” through storytelling, linking your CD&A to your broader ESG and human capital initiatives and ensuring consistency between your CD&A and minutes.
This recent memo from Compensation Advisory Partners also discusses what actions companies are taking – 42% of companies are making changes, mostly to annual incentive plans.
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We’ve blogged before about studies showing executive pay actions in response to the pandemic. Recently, CG Lytics, the data service provider to Glass Lewis for the proxy advisor’s say-on-pay recommendations, issued a report summarizing Covid-related pay actions by Russell 3000 companies. For companies in hard-hit sectors that are interested in conserving cash, the report offered this bold, albeit potentially unrealistic, suggestion:
If CEOs in hard-hit businesses would like to help their companies save cash and support employees, bigger sacrifices, such as returning part of their compensation packages or taking bonus cuts and reductions in other short-term cash incentives, may be impactful.
The report presents high-level data about pay cuts and adjustments to incentive plans by sector. The data is generally consistent with prior reports and shows most actions have been by companies in the consumer discretionary and industrials sectors. For companies that made base salary cuts in response to challenges from the pandemic, CG Lytics characterizes these actions as “window dressing” as it notes that base salary is commonly only a small fraction of compensation packages.
In a recent Directors & Boards article, Blair Jones and Greg Arnold of Semler Brossy discuss incentive goal setting amid the pandemic. Uncertainty about the pandemic’s duration and its effect on company performance has made 2021 goal setting all the more challenging. To help compensation committees set 2021 incentive plan goals, the article provides several considerations for companies whether they’re in hard-hit or well-performing sectors. For companies that had a banner year in 2020, the article suggests the following as possible considerations to help reduce risk of a disconnect between incentive payouts and shareholder expectations:
– Change the leverage curve: while targets may be lower than 2020 performance, if these are missed, the payouts decline quickly and for maximum payout levels, those should be much harder to reach
– Use a multi-year lens: consider what is fair progress from 2019, or for 2020 and 2021 combined
– Set different performance curves based on macro environment: boards could establish one set of performance goals if the broader economy declines by 5% and a lower range of goals if it goes down by 10%, and the payout opportunity could be adjusted as well
Throughout the year, and particularly this time of year when many companies dole out bonuses, many keep a watchful eye on CEO pay. A recent Pay Governance memo takes a look at S&P 500 CEO compensation increase trends. The memo analyzes S&P 500 CEO pay trends by focusing on CEO median total direct compensation (base salary, actual bonus paid and grant date value of long-term incentives) and finds that historical CEO pay increases have been supported by historical TSR, with annualized pay increases trailing TSR performance by 9 percentage points. Here’s an excerpt with some projections about what might be in store:
– We expect that 2020 overall CEO actual TDC will decrease, potentially by 3-4%, due to the pandemic and weaker financial results that impacted bonus payout decisions, although this will vary based on industry performance
– We expect median CEO target pay increases in early 2021 to be in the low single digits due to some companies providing “supplemental LTI grants” for lost value for performance equity that was lost during COVID-19 – again, we’ll likely see variation with executives in industries with favorable economic conditions and higher growth seeing more significant pay increases, while those in hard-hit industries seeing flat or continued pay declines
– Individual CEO pay increases will continue to be closely tied to overall company performance and peer group compensation increases; it is notable that S&P 500 TSR was +18% in 2020, primarily driven by large-cap technology companies
– Although the study found a positive correlation between CEO annual pay increases and TSR performance, it says they’re confident the correlation isn’t as significant as that between realizable pay and TSR increases
Disney is one company that’s been hard-hit by the pandemic. During the last year, it’s been in the news as, among other things, it imposed executive pay cuts and made plans to furlough employees. A couple of weeks ago, the company filed its 2021 proxy statement and disclosed the compensation committee made “a determination to pay no executive bonuses despite achievement of certain performance metrics.” As we start seeing more 2021 proxy statements, for companies in hard-hit industries, we’ll see whether Disney’s decision on executive bonuses turns into a trend.
Last week, the SEC issued this order against a former CEO & CFO, which relied on Sarbanes-Oxley Section 304 to require the former execs to reimburse their company for incentive compensation. The SEC determined that they had made false & misleading statements that caused revenue to be improperly recognized, resulting in a restatement.
As this Cooley blog explains (and as we’ve detailed on TheCorporateCounsel.net), restatements are more rare these days than they used to be. Maybe that’s part of the reason that clawbacks under SOX 304 are also rare. The SEC made a point in its order that misconduct by the CEO & CFO themselves isn’t required to trigger that provision, and this order shows that the Commission is still willing to pursue recovery when the circumstances are right.
We’ve posted the transcript for our recent webcast: “The Latest – Your Upcoming Proxy Disclosures.” Topics covered in this wide-ranging program by Compensia’s Mark Borges, Hogan Lovells’ Alan Dye, MoFo’s Dave Lynn and Gibson Dunn’s Ron Mueller included:
1. Key Lessons from the 2020 Proxy Season – virtual shareholder meetings, pay ratio, say-on-pay, E&S proposals, no-action trends
2. Expectations for 2021 Proxy Season – human capital, say-on-pay, pandemic disclosures, pay ratio, ESG disclosures, equity plan proposals, perquisites
3. Director Matters – diversity & board composition, director pay
4. Section 162(m) – final regulations, disclosure expectations
Last week, Arjuna Capital announced that it had withdrawn a racial & gender pay equity reporting resolution at BNY Mellon – following the bank’s agreement to disclose its unadjusted median pay gaps (i.e., pay gaps aren’t adjusted based on role or position, which is thought to show whether underrepresented groups have equal opportunities to access higher paying roles).
I’ve blogged about other companies taking this course of action in response to Arjuna’s proposals. More recently, in addition to BNY Mellon, Adobe agreed in December to start providing unadjusted gender pay gap disclosure immediately and racial pay gap data by the end of this year – the first tech company to do so. Arjuna submitted 13 proposals on this topic last year and shows no signs of letting up. Here’s more detail from the press release:
Since 2016, Arjuna has compelled gender pay gap disclosures at 22 companies, and race pay gap disclosures at 17 companies, including leading U.S. tech, finance, and retail firms Apple, Amazon, Intel, Microsoft, Google, Facebook, JPMorgan, Bank of America, Nike, and Adobe.
Pay inequity persists across race and gender. Black workers’ hourly median earnings, adjusted for inflation, have fallen 3.6 percent since 2000, representing 75.6 percent of white workers’ wages. The median income for women working full-time in the United States is 80 percent that of men.
Citigroup estimates that closing U.S. minority and gender wage gaps 20 years ago could have generated 12 trillion dollars in additional national income and contributed 0.15 percent to United States GDP per year. PwC estimates closing the gender pay gap could boost Organization for Economic Cooperation and Development countries’ economies by $2 trillion annually.
Arjuna also isn’t the only investor interested in this information. For a recap of what comp committees should be doing to prepare for these types of proposals & disclosures, check out the transcript from our recent webcast with Mintz’s Anne Bruno, BlackRock’s Tanya Levy-Odom, Equity Methods’ Josh Schaeffer, and Pax World Funds’ Heather Smith.