Despite pressure on boards to broaden clawback policies and seek payback in the event an executive causes “reputational harm,” companies have to fight an uphill battle when they try to recover compensation that’s already been paid. Now, there appears to be a growing recognition that “a bird in the hand is worth two in the bush.”
Yesterday, the WSJ reported that several healthcare & pharma companies are adopting pay deferral policies and planning to enhance proxy disclosures about how pay can be revoked if executive misconduct comes to light. The policies arose out of negotiations with an investor consortium that had previously submitted – and withdrawn – proposals on this topic. Here’s an excerpt:
Participants in the working group say they expect more companies to implement or disclose mandatory pay-deferral provisions. Some of the investors hope other industries will pick up the practice as well.
The group’s principles intentionally leave board compensation committees with flexibility.
They envision companies setting annual bonus payout levels as normal, then retaining some or all of the pay, potentially for a year or more. If the recipient is found to have hurt the company’s reputation or finances, the board could choose to reduce the deferred pay. Equity compensation is most often deferred by paying it in restricted shares or similar instruments that vest over time.
The article says that Bristol-Myers Squibb will be requiring execs to hold three-quarters of their equity grants for at least a year after the awards vest, and that Walgreens Boots Alliance and CVS have added misconduct as a factor that lets them revoke deferred pay. A portion of pay to CVS executives will be held back even after they leave the company. It’s definitely shaping up to be an interesting proxy season in terms of pay disclosures.
Liz blogged last fall about the Business Roundtable’s statement encouraging voluntary public disclosure of key diversity metrics. In the statement, the BRT also called for closing pay gaps. In terms of what companies are doing to close pay gaps and how they’re doing, a Pearl Meyer study provides some insight.
Although most companies participating in the study indicated that D&I, gender pay equity and closing the gender pay gap were either “important priorities” or “among a company’s highest priorities,” the study found a disconnect with results from programs and actions that can begin to close gender and minority pay gaps. In fact, the study found only a small percentage of companies are choosing levers that can actually lead to closing of this gap. There are opportunities for improvement though as the study suggests different levers to measure outcomes, here’s an excerpt with some of the findings:
– Less than half measure D&I outcomes (44%) with the most widely used measure being number of diverse hires (74%), which is a lagging indicator. Measuring outcomes in the talent pipeline, including number and percentage of diverse applicants and promotions of diverse staff, can be better leading indicators of D&I outcomes.
– One area presenting a big opportunity to impact D&I are internal training and development programs and formal processes to increase female and minorities in management and/or executive positions – there’s a lot of potential upside here as just 13% have a process in place to increase female and minority representation in management and/or executive positions. One lever that isn’t reported as often as might be expected is a requirement of diverse candidates in the preliminary and final slates of candidates, just 17-20% of respondents used this lever
– Measuring D&I progress can be more powerful when combined with prioritizing and holding leaders accountable for progress – a small percentage of firms tie D&I outcomes to incentive pay (8.5%), with most being organizations with revenues/assets of $3 billion or greater and for those that do tie incentives to D&I outcomes, the CEO, executive team and CHRO are all held accountable through a variety of short- and long-term incentive plans
Sharing information with the comp committee or the board is one way companies can move things forward and it’s another area with room for improvement. The study found almost 70% of organizations share D&I information with the board. But in terms of the information shared, there’s wide gulf between those that share general information about overall gender and minority representation (85%) and those that share pay equity (34%) and pay gap (17%) information.
We continue hearing more about how companies are incorporating ESG metrics into incentive programs – earlier this week, I blogged about Marathon Oil’s changes to its incentive programs and here’s an entry about how Apple is incorporating an ESG measure in its annual incentive program. A recent Farient Advisors’ report analyzes global data on stakeholder measures incorporated in incentives. The report includes comparative data across global regions and industries, along with high-level data about common issues, such as how much weight to assign to the measures. Here’s an excerpt with a few takeaways:
In terms of mechanisms for incorporating stakeholder measures in incentive plans, the report shows that they’re typically incorporated as weighted measures or within a weighted scorecard. Fewer companies use measures as a modifier or a basis for general discretion.
One challenge for companies incorporating stakeholder measures in incentives is how much weight to assign to the measures. Globally, stakeholder measures are weighted at approximately 20% in incentive plans – the median weighting across regions is also 20%, with Australia being the only outlier at 30%. Even in industries in which stakeholder measures are more prevalent, companies commonly weight the measures at about 20% of total incentive mix.
When it comes to measuring progress on stakeholder interests, most companies use internally-derived goals. The report notes that there are reasons supporting use of internal goals – they can be tailored to a company’s specific strategy and corporate purpose. The report also notes that there are reasons supporting use of external benchmarks – they can provide objectivity and help promote better engagement with investors and third-party rating agencies. For companies using external benchmarks, the Dow Jones Sustainability Index and Carbon Disclosure Project are the most frequent benchmarks.
The different industry mix in each region is one reason why the incidence of stakeholder measures in incentives differs by region – Australia has the highest prevalence of stakeholder measures in incentives and has a heavy mix of materials and financial services companies in its economy whereas the U.S. has the lowest prevalence of stakeholder measures in incentives and has a more diversified economy with a heavy mix of technology companies. Information technology and consumer discretionary industries use stakeholder measures in incentives less frequently and as a result, the U.S. and Continental Europe exhibit the lowest prevalence of stakeholder measures in incentives.
One aspect of CEO succession that you don’t read a lot about is the effectiveness of steps taken to help ensure retention of other senior leaders. To help limit post-CEO succession turnover, companies sometimes make special retention grants to other senior leaders. A helpful FW Cook memo examines the effectiveness of this strategy and found retention grants can help minimize departures within one or two years of a CEO succession, but they’re not a permanent solution.
In analyzing the effectiveness of retention grants, FW Cook looked at large-cap companies with CEO turnover from 2010 – 2016. The study sample included 65 companies and of those, approximately 40% made succession-related retention grants to non-CEO NEOs. It found NEOs receiving retention grants were most likely to stay with the organization for the first two years following a CEO transition compared to those who don’t receive them. Here’s some of the study’s other findings:
– Among grant receivers, the most common departure point was in the third year after the succession (33% of those who left within the first five years, and 29% of all who eventually departed) suggesting that NEOs will often leave a company after receiving the entirety of an award with a three-year vest or majority of an award with a five-year pro-rated vest.
– In contrast, among grant non-receivers, the most common departure point was within one year of CEO succession (28% of those who left within the first five years, and 16% of all who eventually departed). Our research found that departure rates for non-receivers show a steady downward trend through five years, suggesting that stability of the leadership team is most tenuous in the initial year of a transition, and special one-time awards may provide an effective retention tool during that time.
– When it comes to the value of the grant, the study found the more valuable the grant, the stronger its ability to retain – but the ability to do so levels off once the grants pass the $2 million mark.
Although retention grants don’t keep some leaders around forever, they do promote organizational stability and allow time to develop leaders within an organization. The memo notes several other factors that of course play into whether an executive decides to stay following a CEO succession – and suggests as fodder for a future study possibly exploring the correlation between outstanding equity value and retention results.
A few things come to mind when thinking about possible themes for the 2021 proxy season and one could involve companies linking executive pay to progress on sustainability initiatives. And, last week, Marathon Oil took action by modifying its incentive programs to better align with the company’s ESG framework. The company issued a press release about the changes, which also includes new targets for greenhouse gas emissions reductions. SEC filings show the company usually files its proxy statement in the spring but this excerpt from the press release helps explain changes made to the company’s executive incentive programs:
Marathon Oil’s short-term incentive (STI) annual cash bonus scorecard has been restructured to better reflect the Company’s financial and ESG framework. The scorecard has been simplified to prioritize performance in 5 areas deemed critical for long-term shareholder value creation:
safety (total recordable incident rate);
environmental (GHG emissions intensity);
capital efficiency (corporate free cash flow breakeven);
capital discipline/free cash flow (reinvestment rate); and
financial/balance sheet strength (cash flow per debt adjusted share).
All production and growth metrics have been eliminated from the Company’s annual bonus scorecard.
Additionally, the Company has revised its LTI compensation framework, now focused on three vehicles, all of which are denominated in shares: restricted stock units (RSUs), relative total shareholder returns performance stock units (TSR PSUs), and free cash flow performance stock units (FCF PSUs). The revised framework is intended to mitigate an overreliance on relative TSR against direct E&P peers by introducing the S&P 500 and S&P Energy indices as peer comparators within the relative TSR calculation to promote improved performance vs. the broader market. Additionally, the introduction of FCF PSUs further diversifies the LTI performance metrics and underscores the Company’s priority to generate sustainable free cash flow.