A recent blog post on the HLS Corporate Governance Forum from Dan Marcec of Equilar provides some early CEO pay trend data. Data cited in the blog is based on proxy statements filed as of March 18 and represents approximately 40% of the Equilar 500. It’s still early but a trend pointing toward a rising CEO pay ratio is worth watching. If the trend showing an increase in CEO pay ratios pans out, the blog reminds companies that they may be faced with a challenging situation in communicating this to stakeholders:
CEO pay ratio appears to be rising – Equilar’s review of early proxy statement filings shows CEO pay declining but median employee pay also declined and the median employee pay declined at a steeper rate, leading the CEO pay ratio to increase.
All of this adds up to a potentially contentious discourse among companies and their key stakeholders — inclusive of employees, investors, advocacy groups and others. The fact that executive compensation is mostly equity and incentive-based, and any change from 2020 will be felt much further beyond when the award was reported, is difficult to communicate clearly to a wide audience.
Unfortunately, a stark realization that employee pay is dropping and the ratio is rising amidst a time of crippling unemployment would shine a light on the fact that regardless of the reason, CEOs are on a different plane than the average employee. Companies will need to be prepared to address this difficult conversation if this trend persists.
We’ve posted the transcript for our recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.” Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners shared their thoughts on:
– Key Issues & Considerations for Compensation Committees Now
– Human Capital Management Topics Compensation Committees are Discussing Now
– Setting Goals Under Uncertain Circumstances
– Balancing Internal Needs with External Pressures
– Using a ‘Resiliency Scorecard’ During COVID-19 & Beyond
You hear quite a lot in this space about CEO pay levels ratcheting up due to peer benchmarking and every company wanting to pay “above median.” A recent academic paper confirms that variations in CEO pay really have diminished over the last decade, since companies started disclosing peer groups and submitting “say-on-pay” resolutions. The more interesting thing that the paper found was that CEOs appear to be less inclined to take risks that could spur jumps in company performance, supposedly because they don’t see a lot of room for upward pay mobility if they get recruited away to a peer company.
I’m not completely sold, because CEO mobility has also been blamed for skyrocketing pay packages. But the data (from 5000 US companies from 2002 – 2018) did seem to support the findings. Here’s an excerpt:
That is, if the manager is successful, she could receive an offer by the industry peer paying the highest amount and/or has an external benchmark for a wage renegotiation with her board. To retain the executive the incumbent firm may then have to match this alternative pay offer. Figure 9 confirms that external tournament incentives decrease significantly over the sample period.
Overall, our evidence suggests that recent institutional developments have induced a decrease in pay variation, with meaningful consequences for firms’ outcomes.
CalPERS’ recently presented this “Proxy Voting & Corporate Engagements Update” to its Investment Committee. Page 5 contains an eye-popping trend line for the pension fund’s opposition to say-on-pay votes. Back in 2013, CalPERS voted down 9% of executive pay plans. The last two years, that number has been over 50%.
Comp Committee members are now also facing real-time consequences from that opposition. Last year, CalPERS voted “against” 3402 directors last year at 1267 companies – a significant increase from the tally of 2716 that I blogged about last summer. Last year was the first year the pension fund applied its policy to vote against comp committee members in the same year as voting against say-on-pay. CalPERS also says that it wrote to all of those companies to discuss the negative vote. Only 35% responded.
I blogged a couple of weeks ago about pre-IPO equity incentive plan practices. Recent research from ISS Governance Solutions (available for download) reinforces the finding that evergreen features are on the upswing. Here are a couple of the findings:
– With the repeal of Section 162(m) of the Internal Revenue Code, mandatory approval votes on equity plans reverted from once every five years to the exchange listing’s rules, which is generally once every ten years.
– The two-year trend from 2019 to 2020 of equity plans authorized at newly listed IPOs reveals the practice of including evergreen provisions does not appear to be declining, which points to the need for increased monitoring by investors.
It’s hard to tell from this summary whether ISS is suggesting the possible return of once-in-a-decade equity plan votes. That would be pretty shocking to me, absent a “controlled company” situation, and I’d think that – at most – a company could get away with that exactly one time post-IPO. But, I also never expected to be so excited to have a needle jabbed into my arm, which goes to show that you never know what this wild world will bring.
Activist CtW Investment Group is taking a close look at comp committees this spring. Three recent letters on their engagement page show which issues are drawing scrutiny:
1. Artisan Partners – calling for an overhaul of the comp committee because executives’ cash bonuses weren’t dependent on achievement of pre-set performance goals, and because the company has received low(ish) say-on-pay and comp committee votes in recent years (65% approval for say-on-pay in 2019, below 80% approval of comp committee members last year, repeated adverse say-on-pay recommendations from ISS)
2. General Electric – calling for an overhaul of the comp committee because of a decision to grant a replacement award to the CEO with lower performance vesting targets
3. Uber – calling for amendments to the comp committee charter and disclosure focused on human capital issues – in particular, diversity, pay equity and safety precautions for the company’s workforce – and specifically, the driver community
Here are some of the key findings from this Willis Towers Watson study of share utilization by S&P 500 companies:
– Companies have continually increased the use of full-value awards, while use of options has steadily decreased – sectors with highest use of certain forms of equity were: RSUs (IT, 79% of long-term incentive mix), performance-based stock (utilities, 54% of LTI mix), options (consumer staples and industrials 23% of LTI mix)
– Median run rates have declined by 19% since 2016, with this trend continuing based on an early look at 2020 grants
– Overhang changed slightly from 7.4% in 2017 to 6.9% in 2019, and again the trend continues based on early review of 2020 filings
– LTI fair value, in terms of dollars, has continued an upward trend – at median levels, LTI fair values increased by 27% while LTI fair value as a percentage of market cap had a 5% decrease from 2015