Over the last year, we’ve blogged about shareholder proposals dealing with racial & gender pay equity – here’s an entry about Arjuna Capital’s continued push for companies to provide unadjusted pay gap disclosure. Recently, Arjuna and Proxy Impact issued their 2021 “Racial and Gender Pay Scorecard” and this year, two more companies made it to the top of the list with an “A” grade. The scorecard ranks 51 large companies on their pay equity disclosures and it’s notable for companies to receive an “A” because there are only 5 companies with that score, up from 3 last year.
The report also recaps the seven-year history of pay equity proposals and although the proposals continue, so far this year the pace of proposals appears to have slowed down significantly with 7 proposals submitted as compared to 19 last year. In a sign of progress, the report attributes the reduction in number of proposals to companies being more willing to engage on the topic. To help companies improve racial and gender pay equity disclosures, Arjuna and Proxy Impact list these expectations:
Full disclosure of:
Quantitative adjusted racial equal pay gap %
U.S. unadjusted median racial pay gap %
Quantitative adjusted gender pay gap %
Global unadjusted median gender pay gap %, not only for U.K. operations
Pay components used to determine gap: base salary, bonus, and equity
% of employee base covered by analysis and disclosure
Methodology used in pay gap analysis
Policies and actions to address gap
Public commitment to:
100% pay equity
100% global coverage of employee base
Annual disclosure
For an overview about Arjuna’s and Proxy Impact’s racial & gender pay scorecard grading methodology, see the report’s appendix on page 20.
Over the last year, we’ve blogged a few times about companies announcing inclusion of diversity metrics in executive compensation programs – here’s an entry about D&I metrics in the Fortune 200 and another entry about Starbucks’ plan to link executive pay to diversity targets. Glass Lewis recently issued a report with some high-level stats about diversity-related goals included in executive pay programs. The report primarily focuses on proxy statement board diversity disclosures and discussion of diversity as a compensation metric begins on page 15. Here are a few takeaways:
– In the 12-month period to September 30, 2020, 99 S&P 500 companies included a diversity metric in their compensation program, nearly doubling from 51 companies in the 12-month period to September 30, 2018
– When included, diversity metrics are usually not a fully-weighted metric, but rather a specific consideration under individual performance or strategic goals
– Achievement is generally assessed subjectively – usually no clear goals or achievements are described and instead a sentence or two describes what was considered.
– Often no real standard is established as what is considered ‘good’ performance because it’s highly dependent on the company, making comparison between companies’ performance difficult
The report lists a few 2020 proxy statements as examples of diversity metrics and goals – check these out if you want to see sample disclosure about certain approaches:
– Verizon Communications: an early adopter of diversity and sustainability metrics, weighted at 5%, under their STIP that discloses tangible goals
– Edison International: tangible goals disclosed for a weighted diversity metric under the STIP
– Prudential and Starbucks: inclusion of a diversity modifier to a certain LTIP performance cycles with a quantifiable goal to measure performance
As companies begin linking diversity, equity and inclusion metrics to certain elements of executive pay, in a recent NACD blog, Robin Melman and Christina Andersen of Baker Botts predict the next wave of executive pay metrics could include employee engagement goals. With investors increasingly taking interest in employee engagement, the authors say we should expect interest in linking employee engagement with executive performance goals. The blog offers these tips for how to do so:
– Assess the company’s employee engagement measurement practices – look for areas of improvement for accurately measuring various aspects of employee engagement
– Consider the company’s structure when establishing employee engagement goals, such as whether engagement goals should apply only to employees within the direct reporting line of the executive or whether it would be helpful to incentivize cross-departmental employee engagement measures
– Track and align progress – consider whether to tie payout to year-over-year improvement or to achievement of specific goals
– Start small – test the waters when adding a new employee engagement performance goal, consider adding an employee engagement goal as a metric with a relatively low weight associated with it
The blog also touches on governance-related reminders such as potential disclosure of the performance goals in next year’s proxy statement. With many companies starting to address whether, how and when employees might return to the office, employee engagement may be one element that factors into decisions and the authors say linking employee engagement with executive pay is one way to emphasize the importance of a company’s workforce to its overall strategy and performance.
Periodically, Liz and I have blogged on TheCorporateCounsel.net about cybersecurity risk and it seems unusual to blog about cybersecurity risk here on CompensationStandards.com. Recently though, the DOL issued cybersecurity guidance directed at ERISA plan sponsors and fiduciaries. The DOL’s guidance provides tips for hiring service providers and outlines service provider cybersecurity best practices. Tips listed by the DOL include considerations relating to a service provider’s security standards, audits and validation of cybersecurity practices and policies, contract provisions giving you the right to review audit results, service provider track record and service provider insurance coverage.
A Sidley memo says this development could indicate that plan sponsors and fiduciaries may soon be subject to focused scrutiny over their cybersecurity practices in DOL investigations. Given the potential cyber risk involved with employee benefit plans, in addition to considering DOL’s guidance for hiring a benefit plan service provider, many who work with benefit plans and their service providers may want to consider the DOL guidance and revisit existing benefit plan service provider contracts to update provisions as necessary. Sidley’s memo lists these considerations for plan sponsors and fiduciaries:
– Select and monitor service providers with an eye toward cybersecurity
– Conduct periodic reviews of the cybersecurity programs of recordkeepers and other service providers – ask your benefit plan service providers to demonstrate the manner in which their cybersecurity program reflects Best Practices
– Review the terms of agreements with service providers to ensure they require ongoing compliance with cybersecurity and information security standards – compare against provisions identified in the DOL guidance for hiring a service provider
– Educate participants and beneficiaries who manage their retirement accounts online about online security
This new 49-page analysis (download required) from SquareWell Partners looks at how proxy advisors & large investors are evolving their approach to climate change. Here are the key takeaways on executive pay (also see the table on page 18):
Half of the world’s 30 largest investors have incorporated sustainability considerations, including climate change, into their evaluation of executive pay frameworks. Some examples include:
– As part of its assessment of the robustness of company’s climate risk governance, J.P. Morgan Asset Management’s policy (pg. 2) says it will look at whether executive pay has been linked to environmental metrics.
In celebration of Earth Day, we’ve launched a new site dedicated to ESG developments – PracticalESG.com. Be among the first 422 people to sign up for the free daily blog and get a tree planted in your name.
This WSJ article says median CEO pay reached $13.7 million last year and is on track for a record. While a good number of investors seem to appreciate that retaining good leadership can be expensive, it’s looking like there are also quite a few who are unhappy with those statistics.
I shared predictions last month that these high payouts and investor attention to human capital issues were setting up companies for a difficult say-on-pay season. Here are observations from the latest weekly tracking memo from Semler Brossy (posted in our “Say-on-Pay” Practice Area):
– The current failure rate (4.8%) is nearly 4x higher than the failure rate at this time last year (1.3%); however, it is still early in the season and we will monitor whether the failure rate remains at an elevated level following annual meetings for the 12/31 FYE filers
– The average vote results of 88.9% for the Russell 3000 and 84.4% for the S&P 500 thus far in 2021 is well below the average vote results at this time last year
– Nearly all companies were challenged by the Covid-19 pandemic in 2020, and some responded by adjusting compensation design and magnitude; early proxy season vote results indicate shareholders are likely to hold companies that made changes to a high standard
On that last point, it also was reported just last week that proxy advisors are recommending “against” Say-on-Pay at one big company due to the decision to lower the CEO’s performance goals in the midst of a stock market dip, without adjusting the payout opportunity.
Glass Lewis recently published this 22-page report on gender & racial pay equity – looking at disclosure issues, equal pay laws, litigation risks, and factors that could contribute to a pay gap.
Although the report concludes that pay transparency can benefit companies & workers and help address systemic inequalities, it also acknowledges that there are risks to disclosure – e.g., the data could be oversimplified or misinterpreted. Check out the full report for a nuanced discussion.
Glass Lewis also published this 16-page report on human capital management.
Last week, MicroStrategy – a small-cap company that trades on the Nasdaq Global Select Market – filed this Form 8-K to announce that its four independent directors will now receive compensation in the form of Bitcoin instead of cash. Here’s the stated rationale:
In approving Bitcoin as a form of compensation for Board service, the Board cited its commitment to Bitcoin given its ability to serve as a store of value, supported by a robust and public open-source architecture, untethered to sovereign monetary policy.
It works with the company’s business strategy – here’s an excerpt from the Form 10-K:
MicroStrategy® pursues two corporate strategies in the operation of its business. One strategy is to grow our enterprise analytics software business and the other strategy is to acquire and hold Bitcoin.
MicroStrategy held over a billion dollars of digital assets at the end of the year, which this article says jumped to nearly $5 billion last month when the company made additional Bitcoin purchases. HSBC has even categorized it as a “virtual currency product” (and banned its online customers from trading the company’s shares).
However, the board fees here will actually still be nominally denominated in dollars – which helps the company avoid some of the disclosure & risk issues that would otherwise exist. At the time of payment, the fees will be converted from USD into Bitcoin by the payment processor and then deposited into the digital wallet of the applicable non-employee director. So this is a baby step into Bitcoin compensation, not a leap.
If you’re curious about cryptocurrency as compensation, check out the webcast transcript from our 2019 program on that topic.
Over on the “Proxy Season Blog” for TheCorporateCounsel.net members, I blogged about Legal & General’s 2020 “Active Ownership Report“. The report summarizes the asset manager’s 2020 engagement and voting actions. It’s clear from the report that Legal & General has a strong focus on climate (it was the asset manager’s most frequent engagement topic) but among other topics, the report also touches on human capital and executive pay.
Human capital: Legal & General likely wants the SEC to make the rule more prescriptive. In the report, Legal & General said the new Regulation S-K rule requiring human capital disclosures is a “first step in transforming corporate disclosure to recognize the critical role of human capital in corporate value creation. However, there is still too much room for cherry-picking data and metrics.”
Executive Pay: In 2020 Legal & General increased executive pay engagements by 51%. With that, Legal & General still voted against 54% of say on pay management resolutions at North American companies, which seems like a lot! The report cites the primary driver of these “against” votes being related to either performance conditions not being measured over a three-year period or at least 50% of long-term incentives not being linked to any performance conditions at all.
This excerpt from the report provides further information about the asset manager’s view on retrospective changes to performance targets, which it generally doesn’t support:
A number of companies fell short of our expectations when they retrospectively changed metrics or targets that did not yield the performance needed for awards to vest.
For example, a retail company received shareholder dissent on the adoption of its remuneration report from 67.29% of votes cast. The investor backlash followed the company’s retrospective amendment of its Long-Term Incentive Plan by removing a strongly performing peer from the total shareholder return peer group, citing a change in the peer company business strategy that made it no longer comparable. We disagreed with the company’s decision and voted against the resolution.
Many other companies used the pandemic as justification for poorer-than-expected performance, applying discretion to allow for director bonuses to vest despite pre-set targets not having been met or providing for additional payouts after the fact to compensate for lost remuneration. Another company received investor pushback on a substantial discretionary one-off bonus to its CFO for work that led to securing approvals from the Israeli tax authority on certain advantageous tax treatments. We engaged with both companies prior to their AGM to communicate our concerns clearly, and in the case of latter company the resolution to ratify the additional bonus was withdrawn.
Some may recall that in addition to “traditional” proxy voting guidelines issued annually by ISS, the proxy advisor also issues “specialty” proxy voting guidelines aimed at investors with certain objectives such as investors focused on sustainability or social responsibility. Trillium Asset Management is an example of one investor that follows the ISS Socially Responsible Investment Guidelines, sort of.
Trillium’s 2021 proxy voting guidelines show where it’s aligned with the ISS SRI vote recommendation and then details situations where it varies and say-on-pay is one item where Trillium has a voting guideline that’s more specific than the ISS SRI vote recommendation. Page 16 of Trillium’s voting guidelines has a comparison and it’s worth noting that Trillium’s guidelines say it will vote “against” say-on-pay proposals if any of the following apply:
– CEO pay is excessive compared to its peers
– Equity awards vest in less than five years
– CEO pay is not tied to ESG performance
– The company CEO-worker pay ratio exceeds 50:1. If the company doesn’t report a CEO-worker pay ratio (presumably for companies not subject to SEC disclosure rules), CEO pay exceeds 50 times the median household income.
This is a pretty strict say-on-pay voting guideline and it seems fairly apparent that Trillium is focused on pay equity and long-term holdings. With that, an “against” vote from Trillium looks like it could be in the cards for a lot of large companies. This ClearBridge report discusses trends about long-term incentives for large-cap companies and says three-year vesting periods are the most prevalent for time-vested LTI awards and three-year performance periods are the prevailing practice for performance-vested LTIs. Separately, Farient Advisors’ CEO Pay Ratio Tracker shows median CEO pay ratios by sector, and so far in 2021 none of the S&P 500 company sector medians are below 50.