Tune in tomorrow for our webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners discuss what compensation committees should be learning about – and considering – evolving views of pay-for-performance, expanding roles for compensation committees, goal-setting and adjustments, and an early look & predictions for the 2021 proxy season.
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We’ve posted the transcript for our recent webcast: “Your CD&A – A Deep Dive on Pandemic Disclosures.” Mike Kesner of Pay Governance, Hugo Dubovoy, Jr. of W.W. Grainger and Cam Hoang of Dorsey shared their thoughts on:
1. Trends & Investor Expectations for COVID-Related Pay Decisions
2. Adjustments to CD&A Format in Light of Pandemic
3. Investor & Proxy Advisor Policies for Disclosure
4. Framework of Key Factors for Exercising Discretion
5. Linking Your CD&A to Your Broader ESG and Human Capital Initiatives
6. Ensuring Consistency Between Your CD&A and Minutes
Who knows whether the changes that Rule 701 amendments that the SEC proposed last fall will go anywhere. But if they do, this blog from Dan Walter gives a nice summary of 5 things that pre-IPO and private companies should be aware of (and that “pre-IPO” group could be significant given what a big year it was last year for market debuts and SPACs):
1. They are proposing changing the crazy 12-month / $10M threshold. The current process essentially requires you to be psychic. The new rule would require disclosure of the additional financial and other information mandated by Rule 701(e) only concerning those sales that exceed the rule’s $10 million threshold in a 12-month period.
2. Rule 701 would cover some equity for consultants or advisers if substantially all of the activities of the entity involve the performance of services, and substantially all of the ownership interests of the entity are held directly by not more than 25 natural persons, of whom at least 50% perform such services for the issuer through the entity. Under the current rule, entities can receive grants under Rule 701 only if they are the wholly-owned “alter ego” of the service provider.
3. Extend the coverage of former employees receiving post-termination grants as compensation for services rendered within 12 months preceding the termination. Also covers terminated employees of an acquired entity where the securities are issued in exchange for securities of the acquired entity issued as compensation during the person’s employment with the acquired entity.
4. Increase the value of securities covered by Rule 701 from $1M to $2M during a consecutive 12-month period. Also, increases coverage from 15% up to 25% of the total assets of the issuer (or up to 15% of the outstanding amount of the class of securities being offered).
5. Companies can delay required grant date financial statement disclosures to 14 days after hire for new employees. This allows companies to grant equity for an upcoming hire, without needing to disclose the grant before the individual’s start date.
Check out this updated “Compensation Committee Handbook” from Skadden Arps. Written in a non-technical style that is easily understood & 120 pages long. Here’s an excerpt that explains some of the updates:
There have been significant developments over this past year to executive and director compensation practices and related trends, and those are discussed in this new edition of the Handbook, particularly with respect to human capital disclosures (discussed principally in Chapter 10), increased scrutiny of executive perquisites, and executive compensation in the era of COVID-19, as well as increased attention on environmental, social and governance (sometimes called ESG) considerations (each discussed principally in Chapter 10).
Love this “Compensation Cafe” blog from Dan Walter about how to prepare for the compensation aspects of a fast-moving SPAC deal:
Once you are brought into the process you need to learn who’s on the team and what they will be delivering. Then you need to take that information and determine how many of those people will need to work with on your compensation deliverables. This sounds like a normal process, but it will all happen over a few days (if you’re lucky.)
1. You will work with legal on old and new cash incentive programs.
2. You will work with HR, Finance, and Legal to gather information to complete CD&A and proxy filings.
3. You will work with outside compensation and benefits counsel to determine new equity compensation plans.
4. You will work with securities attorneys to determine the timing and details for SEC filings related to pay.
5. You will probably be asked to do research and modeling of Executive and Board compensation.
6. You will again work with Finance and Legal to answer questions about employment agreements, performance metrics, and other issues that may directly or indirectly impact pay.
And that’s just weeks 1 and 2 (maybe 3).
Smart companies will assign a very strong project manager who does little else other than herd a bunch of cats toward a common goal. I do not recommend you volunteer for this position. The amount of work that needs to be done by total rewards professionals is enormous. You will be challenged by deadlines, new issues, data inconsistencies, and questions about everything you have done for several years. You will be asked to run models of things you didn’t even know could be modeled. You will often do much of this with a fraction of the information you want or need. You will not have the time to be in control of anyone except yourself. This is a good time to not be a hero.
Your job is to do in 3 months all of the work that a typical pre-IPO company does over about 12 or 18 months. You cannot clean your data up too soon. You cannot get organized too early. If your company has had any aspiration of going public in the next two years, you should assume that a SPAC may happen before the end of 2021.
Through the last year, the Covid-19 pandemic forced many companies to shift to remote-work options. Streaming service Spotify recently announced it’s moving to a work-from-anywhere policy and going even further, this Business Insider story reports it’ll continue to pay San Francisco or New York salary rates based on the type of job. This excerpt describes some potential benefits of the approach, including a hopeful impact on pay equity:
Spotify’s Travis Robinson, head of diversity, inclusion, and belonging, said the move will promote work-life balance, employee happiness, and inclusion. ‘This is an opportunity to scrap the idea that big cities are the only places where meaningful work can happen because we know first-hand that isn’t true. We want employees to come as they are, wherever they are and whatever their circumstances are,’ he said. The new program will also promote pay equity. ‘Black employees historically have been discriminated against when it comes to pay and growth opportunity, and it is likely the local market pay is lower than a comparable city with a large white population,’ Robinson said.
We’ll see whether more companies start moving toward a work-from-anywhere approach and whether the impact of this approach makes measurable gains. In theory, the approach has the potential to positively impact pay equity as it can make more high-paying and specialized roles available in broader areas that might offer more diverse talent pools.
I blogged last month about global trends relating to incorporation of ESG metrics into incentive plans. In another study, FW Cook examined use of ESG measures in annual and long-term incentive plans among US-listed companies with market caps greater than $25 billion – data was based on proxy statements filed as of July 2020. They found 56% of the companies used one or more ESG measures in their incentive plans, which sounds like a lot, but the study also cautions companies to be mindful of potential unintended consequences.
The last thing anyone wants is to charge forward, set ESG targets, fall short of achieving targets and then face the challenge of explaining that to investors and other stakeholders. As many comp committees continue discussions about whether to incorporate ESG measures into incentive plans, commentary to the study lists the following questions for consideration:
Is it feasible to set reasonable targets and make meaningful progress on the chosen initiatives within the time frames typically used for measuring performance in incentive programs (i.e., one year for annual incentives and three years for long-term performance awards)?
Are they prepared to communicate such targets internally to the employee population and externally to shareholders in the proxy statement? If not, are they prepared to defend their decision to reward executives for progress on ESG initiatives without providing transparency as to the specificity and robustness of the goals?
Is there a recognized standard for measurement of progress on the ESG initiatives, and if not, can the company track progress in a quantifiable manner?
Will they create outsized risk of embarrassment if they disclose underperformance, and could the risk of embarrassment lead management to make non-ideal short-term decisions that might impair the longer-term objectives?
Is it appropriate to compensate executives for achievement of ESG initiatives, particularly if financial performance and shareholder returns are below expectations?
A Corporate Board Member article also included commentary from the study’s authors saying ‘this is an area where we encourage companies to walk before they run.’ The article includes a helpful chart with possible stepping stones for incorporating ESG metrics into incentive plans.
I blogged a couple of weeks ago about one potential proxy season theme and another might be how investors and proxy advisors view 2020 Covid-related pay actions. A recent Compensation Advisory Partners’ memo provides insight into how ISS might view Covid-related pay changes. CAP reviewed select Covid-19-related pay actions from companies with fall fiscal year-ends and the corresponding ISS proxy research report. The memo highlights six companies that made various changes to their incentive plans and one high-level takeaway is that the proxy advisor’s assessment of Covid-related pay decisions appears highly correlated to the concern level on its quantitative CEO pay-for-performance screens. Here’s an excerpt:
CAP’s preliminary findings indicate that if a company made COVID-related compensation changes and received an elevated level of concern on the ISS pay for performance evaluation, the proxy advisor will likely recommend Against the Say on Pay proposal, thereby significantly impacting the Say on Pay vote. To date, we have observed three companies that experienced sharp declines in their Say on Pay results, with one failing to receive majority support.
Based on this early review, CAP encourages companies to prepare compelling proxy statement disclosures with the rationale supporting Covid-related pay decisions along with how they’re aligned with long-term shareholder value creation. Beware that ISS is highly critical of special one-time awards, upward (discretionary) adjustments to payouts, front loading annual equity awards, and reductions in performance-based long-term incentives.
It’s been a while since we’ve blogged about the potential impact of Covid-19 related complications for CEO pay ratio calculations and disclosures. A Freshfields blog provides several compensation-related considerations for the 2021 proxy season, including discussion about revisiting the CEO pay ratio calculation in light of Covid-19.
When preparing this year’s pay ratio calculation, many companies will need re-identify the median employee. The blog notes that even companies that identified a new median employee in the last two years need to evaluate whether referencing last year’s median employee is still appropriate – this is especially true for companies that faced significant workforce changes in the last year. This year, one complexity some companies will encounter is whether and how to factor furloughed employees into the pay ratio calculation, here’s an excerpt:
The rules themselves do not however address the treatment of furloughed populations. Subsequent guidance released by the SEC acknowledges that the concept of a “furlough” may have different meanings for different employers and leaves it up to companies to determine whether furloughed populations will be regarded as employees depending on the facts and circumstances (CD&I 128C.04). In making these determinations, companies with furloughed populations should consider factors such as whether the furloughed individuals are still acting as employees (albeit on reduced workweek schedules) or if they have been on leave for several months with no clear prospect of return. If a furloughed individual is identified as an employee, the company must take the additional step of determining the appropriate subset of classifications and calculate total compensation accordingly.
Although the pay ratio rules do not require narrative explanations of the resulting figure, companies that experience significant change in the year-over-year ratio may nonetheless elect to offer disclosure to provide additional context around the unique circumstances brought to bear this year.