With more companies searching and competing for diverse and talented directors, private companies are revisiting director pay plans to ensure they’re competitive. A recent NACD blog from Susan Schroeder of Compensation Advisory Partners (CAP) takes a look private company director comp programs and outlines considerations for designing and implementing a new program.
One of the items the blog covers relates to which pay components to adopt. The memo discusses use of long-term incentives in director pay programs and says we may see increased use of these incentives in larger private companies as they compete for board talent. When it comes to director cash compensation, many public companies prefer a “retainer-only” pay model, which is certainly easier for planning purposes. This excerpt discusses a few considerations for “retainer-only” and “meeting-fees only” cash component pay models:
A CAP-MLR Media private company survey that found 50% of private companies still use per-meeting fees to compensation directors. The retainer-only pay model makes sense for companies that wish to pay for overall board roles rather than time spent at individual meetings. Indicators that favor this pay model include material director time required outside of meetings, ambiguity about the definition of a formal meeting, a more predictable board workload, and a desire for administrative simplicity. The memo includes a range of board retainers that increase for companies with higher revenues.
A “meeting-fees only” pay model makes sense if most of the board work is tied to the meetings themselves. Per-meeting fees can be set to take into account typical meeting length, preparation, and follow-up time. Indicators for this pay model include an unpredictable number of meetings, comfort with the administrative efforts required to track and compensate meeting attendance, and the majority of work accomplished during the board and committee meetings. The blog says $2,500 is the median meeting-only fee, with $1,000 the median for telephonic/virtual meetings.
There are also companies that fall somewhere in the middle with a combination of a retainer and meeting fees. Some companies with the potential for a flurry of meetings can stipulate that the basic retainer covers a certain number of meetings. If meetings are required above the number covered by the retainer, then meeting fees will be paid to directors for the extra workload.
Over the last year, we’ve blogged changes to executive pay programs in response to Covid-19. For a peek at where things are headed in 2021, Meridian recently issued its “2021 Trends and Developments Survey” about executive pay programs. The survey is based on responses from over 300 companies and includes findings relating to payments and awards in 2020 and plan designs for 2021. Here’s an excerpt about 2021 short-term and long-term incentive design:
Short-Term Incentives – 2021 Design
– Widening the goal range was the most common adjustment to 2021 short-term plan design (37%)
– One-half of participants set 2021 threshold goals for primary earnings-related measures higher than 2020 actual results, similar to prior year
– Most companies (57%) use multiple financial metrics in their annual plan; profit measures remain the most prevalent
– Increasing from 17% in 2020, just under 25% of companies included ESG metrics in 2021
Long-Term Incentives – 2021 Design
– Most companies (64%) are preserving current long-term performance metrics and vehicles used
– Consistent with prior year, 65% of companies use multiple metrics in long-term plans
– The use of performance awards has slightly decreased from the prior year (88% vs 95%)
– TSR remained the most prevalent long-term performance measure (consistent with 2020)
– Only 2% of companies included an ESG metric in their 2021 long-term plan design
Liz blogged not too long ago about market practice for stock incentive plans and employee stock purchase plans for companies going public. A recent blog from Sharon Podstupka of Pearl Meyer provides a reminder that when going public, communication planning about equity compensation is one aspect of the transaction that shouldn’t be overlooked. The last thing companies want on the day of the IPO is fallout from employees upset or concerned about how they’re being compensated and whether it’s impacted by the IPO.
The blog includes a sample roadmap for compensation communication planning, here’s an excerpt but see the blog for a handy chart:
Post S-1, Pre-IPO: Meet with leaders and manager to explain what they’ll receive, when and how they’ll receive it and what their teams and direct reports will receive and their role in communication
IPO Day: Key messages from CEO via email or other media covering the significance of the day and how equity will factor into rewarding for success
Post-IPO: Communication from leaders and managers to direct reports with information about equity awards, how the award works, award agreement and personalized worksheet with award details
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Liz has blogged about some of the early trends with this year’s say-on-pay votes. Although a proposal hasn’t technically failed when it receives support from shareholders above 50%, it’s important to remember that proxy advisors set a higher bar. ISS considers shareholder support at 70% or below inadequate and will recommend “against” comp committee members next year if it doesn’t believe the board has adequately responded to shareholders’ pay concerns – for Glass Lewis it’s shareholder support at 80% or below.
For thoughts on what comp committees can do to demonstrate responsiveness to a passing, but low say-on-pay vote result, Pete Lupo of Pearl Meyer outlines a few steps for consideration:
– Pull together a team, including the compensation committee chair, head of HR and head of investor relations to begin planning the company’s response
– Communicate to the full board so they understand the need for investor outreach and to get their buy-in
– Develop an investor outreach slide deck and seek feedback
– Meet with institutional holders representing at least 50% of combined votes, press for detailed responses during these meetings so it can be helpful
– Meet with ISS and Glass Lewis
– Keep design features you believe are critical, don’t necessary cave and make all requested changes – the committee and management know more about linking metrics to long-term strategy than shareholders and proxy advisory firms but be prepared to explain why the committee didn’t make certain changes
– Take advantage of easy changes such as updating hedging/pledging policies or stock ownership policies – give yourself time to analyze and evaluate any significant plan design changes
– Polish your CD&A, make every attempt to write with clarity, provide an executive summary that includes ample charts and graphs and include a section discussing shareholder feedback received and changes you made based on the feedback
It was only a couple of months ago that Meridian’s Marc Ullman spoke on our “Top Compensation Consultants Speak” webcast. We were saddened to see the firm’s statement that he passed away on May 6th. Marc had a long-time career as an executive compensation consultant and had been with Meridian since 2013. In late 2020, he was elected to become only their third Managing Partner since the firm was established in 2010. Marc is remembered as a wonderful person both professionally and personally, with optimistic dreams for the future. His legacy continues through his wife and two children.
The last 5 years of say-on-pay data show that approval levels have gradually been dropping, according to this Equilar blog. Here’s the intro:
Marking its 10th anniversary this year, Say on Pay has been trumpeted as a critical voice for shareholders to rein in rising, outsized levels of executive compensation. Yet since the provision was enacted in 2011, median CEO pay has increased nearly every year while the percentage of companies that receive overwhelming approval on this measure has been consistently high. There’s been a question as to whether this non-binding vote actually works toward its intended purpose, and perhaps that it even has additional unintended consequences.
Looking at the Equilar 500 over the past five years, high Say on Pay approval ratings — over 90% — are widely common. However, starting in 2016, five years into the provision’s lifespan, the “rubber stamp” started to weaken, and “yes” votes in the 90%-94% approval range started to become much more common than those above 95%. While nearly half (48.4%) of all companies in the Equilar 500 received approval in the highest range in 2016, just 29.1% did in 2020. Meanwhile, the percentage of companies receiving approval in the 90%-94% range increased more than 15 percentage points in that time frame.
While most of the shift has been to the 90%-94% range, approximately three in 10 companies received lower than 90% approval, up from about 25% in 2016.
That seems to align with this King & Spalding blog (and the underlying Proxy Insight data), which says that as of about a month ago, ISS had recommended in favor of just 73% of say-on-pay resolutions, compared to 89% last year. Even two years ago, data was starting to show that nearly half of companies had received low say-on-pay support at some point since the advisory vote was enacted. I don’t know that companies or investors ever felt like say-on-pay was a “rubber stamp,” but the stats seem to show there’s more scrutiny as of late, as pay-for-performance and other expectations have evolved.
“Glass half-full” types can take heart that many of those companies were able to bounce back afterwards, and that low votes could have been caused by one-off circumstances. But lawyers & comp consultants are paid to spot risks, and a number of people are worried that what we’re seeing so far in 2021 could be a sign of things to come. Another big company reported a say-on-pay failure yesterday…
Semler Brossy’s latest say-on-pay recap (from last Thursday, May 13th) reports that the current failure rate is 3.3% for Russell 3000 companies – meaning 22 have failed so far in 2021. That’s down from the prior report – but well above the 1.9% failure rate at this time last year. For the S&P 500, the average vote result is 88.4%. ISS is recommending in favor of far fewer say-on-pay proposals this year.
Based on voting bulletins, it appears that a combination of factors are driving lower voting results:
1. Compensation committees exercising discretion to make payouts, without adequate transparency explaining how & why discretion was used
2. Misalignment between pay & performance
3. Mid-cycle adjustments to performance awards, which resulted in a windfall to executives
4. Inadequate response to prior-year say-on-pay failure
5. Large one-time awards
As You Sow has also been calling attention to increasing pay ratios at some companies. So far, that doesn’t seem to be directly impacting say-on-pay votes.
These votes remain very fact-specific and it’s difficult to draw general conclusions. But there’s at least one broadly applicable outcome of the low results: a lot of companies will face even more scrutiny next year. Comp committee members will be judged on “responsiveness” to investor concerns – while also still needing to keep executives happy enough to retain & incentivize them.
Time to act – register for our “Proxy Disclosure & Executive Pay Conferences” to be held virtually October 13th – 15th. Here are the agendas – 19 panels over 3 days. Our discounted early bird registration rate expires at midnight on May 31st.
Say-on-pay has been wild this year – BlackRock voted “against” more than twice as many pay packages during the first quarter as it did last year, and the failure rate is up. Our Conferences will help you as you navigate evolving pay & disclosure expectations and head into your next round of voting. As always, we have a fantastic speaker lineup – and our agenda is keyed in to the evolving ESG and say-on-pay expectations that you’re grappling with. Our live, interactive virtual format gives you a chance to earn CLE credit and ask real-time questions.
After the Conferences, we not only make the full video archive available for you to refer back to, but also the transcripts for each session—so you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures & engagements. Lastly, if you’re a member of any of our sites – TheCorporateCounsel.net, CompensationStandards.com, Section16.net or DealLawyers.com – you can take advantage of a discounted registration rate.
Early Bird Rates – Act by June 1st: SEC disclosure requirements are changing, and the expectations from investors & stakeholders are higher than ever before. At this three-day virtual conference, you’ll get practical guidance, direct from the experts, on how to use the annual reporting season to your advantage. Show that your board is taking the right steps on ESG and executive pay—and ensure that you’re complying with new SEC rules. Our special early bird rate expires at midnight on Monday, May 31st – register now to take advantage of the discount!
On Friday, ViacomCBS reported on a Form 8-K that the $120 million disputed severance payment to former CEO Leslie Moonves would revert in its entirety to the company. The determination came out of an arbitration proceeding, so it’s informative but doesn’t set a legal precedent that would apply to other companies facing this type of dispute.
Two and a half years ago, the company had announced that there were grounds to terminate Mr. Moonves’ employment for “cause” after #MeToo allegations came to light. Specifically, the company said that he’d engaged in:
[W]illful and material misfeasance, violation of Company policies and breach of his employment contract, as well as his willful failure to cooperate fully with the Company’s investigation.
Here are the employment agreement’s prongs of “cause” that the company appeared to be citing:
– your willful misfeasance having a material adverse effect on the Company
– your willful and material violation of any policy of the Company that is generally applicable to all employees or all officers of the Company (including, but not limited to, policies concerning insider trading or sexual harassment, Supplemental Code of Ethics for Senior Financial Officers, and Employer’s Business Conduct Statement), provided that such violation has a material adverse effect on the Company
– your willful failure to cooperate fully with a bona fide Company internal investigation or an investigation of the Company by regulatory or law enforcement authorities whether or not related to your employment with the Company (an “Investigation”), after being instructed by the Board to cooperate or your willful destruction of or knowing and intentional failure to preserve documents or other material known by you to be relevant to any Investigation;
– your willful and material breach of any of your material obligations hereunder
Although the company ultimately prevailed under this “cause” definition, the severance payment has been tied up in a trust since December 2018 due to a provision in Mr. Moonves’ 2018 separation agreement that said that any dispute related to the board’s determination was subject to binding arbitration. This $120 million was specifically set up as a “holdback” in the separation agreement rather than being paid out immediately.
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As comp committees are often tasked with human capital management oversight, for some this oversight can include matters relating to remote work arrangements and return to office plans. Pearl Meyer recently released results from a “Work from Home Policies and Practices Survey” including data points on, among other things, who’s working from home by employee level (including executives), how companies that shifted to remote work view their success, and future plans for office space.
This excerpt from a press release about the survey, discusses how companies are planning to handle compensation of employees that opt to work remotely from lower-cost geographic areas:
Bill Dixon, managing director at Pearl Meyer notes how some questioned whether companies would change geographic-based salary structures as a result of the shift to remote work. He said even with ‘some worker migration from high cost-of-living states to lower-cost markets, it appears that the number of companies considering changes to an individual’s salary as a result is fairly small.’
One third of survey respondents currently apply “geographic differentials” to their salary structure and of those, 20% are considering modifications to their current approach. When asked outright about reducing an individual’s cash compensation if they move to a lower-cost geographic area and work from home, just 4.3% said they would do so, while 56.5% said they would not, and the balance were uncertain or would decide on a case-by-case basis. Dixon said, ‘at this juncture, when companies are allowing—or encouraging—remote work and it is going well, it appears there is some hesitancy to disrupt the talent pool.’