According to data from ISS Corporate Solutions, 14 S&P 500 companies had failed to receive majority support for say-on-pay as of June 1st – which compares to 12 companies failing during all of last year. This FW Cook blog says that the prior record for failures at big companies was 13, set back in 2012. With votes yet to occur at about a quarter of the S&P 500, a recent FT article predicts that we may see up to 20 failed votes this year -that’s not even counting companies outside the S&P 500. An even bigger group will feel the heat to show “responsiveness,” since ISS and Glass Lewis policies put the heat on boards for any say-on-pay votes that get less than 70% and 80% approval.
What’s causing the backlash? Lynn blogged last week that ISS may be wielding greater influence. The FW Cook blog also points to discretionary pandemic-related adjustments as contributing to the voting results this year.
Sometimes high-level benchmarking data is just what you need. One place to look for Russell 3000 executive compensation and governance trend data is Main Data Group’s interactive tracker. The firm updates the data daily and culls data from recent proxy statement, 10-K and 8-K filings.
Check it out, among other things, you’ll find that among Russell 3000 that have female NEOs, it’s most commonly 1-2 women. For executive compensation data, you can filter the information by sector and revenue category, and it includes data on CEO salary, pay ratio and stock ownership guidelines.
ESGauge, The Conference Board and Semler Brossy recently issued a director compensation report reviewing trends and developments at Russell 3000 and S&P 500 companies. The report covers a lot of ground and includes observations about a few things to watch as we move forward from the pandemic and 2020. Due to market volatility over the last year and focus on board diversity, the report says companies may need to find ways to keep their director compensation programs attractive to new slates of director candidates. Here’s an excerpt:
Recruiting a new breed of diverse directors with different experience and skills may require significant changes to director pay structures, including adjusting compensation levels upwards to make posts more attractive to in-demand talent. For directors who are not former CEOs, having pay in the form of equity that is likely locked up until retirement may not be much of an incentive to join a board, leading companies to seek new, creative solutions such as signing equity grants or different equity/cash ratios.
In the face of economic concerns, companies are reluctant to permanently increase compensation levels for newly recruited directors; therefore, they may favorably view the use of sign-on equity grants or the offer of a choice among compensation packages with different equity/cash mixes. Some directors, especially those who may not be coming to the board with a long career as a corporate executive, may benefit from these one-time grants and a somewhat higher portion of cash compensation. To avoid any negative attention from proxy advisors or shareholders’ concerns, boards should disclose such awards and explain their rationale, especially that they are non-recurring payments (if that is indeed the case).
Another item to watch includes committee compensation, which the report says could face a reshuffle as workloads change among committees due to the prevalence of ESG-related considerations. Also keep potential ceilings for director pay on the radar as the report says they could become more common.
Back in March, I blogged about a report summarizing say-on-pay vote outcomes over the past 10 years, along with data showing the potential impact of proxy advisor vote recommendations. A report from Willis Towers Watson provides 2021 vote trend data based on voting results from January 1 through May 14. The data appears to show a measurable impact from ISS vote recommendations and that the impact of an ISS “against” recommendation has strengthened compared to last year. Here are a few highlights:
Russell 3000 say-on-pay
– Average shareholder support: 90%
– ISS negative vote recommendation: 10%
– Difference in average support between an ISS “for” and “against” vote recommendation: 35%, which is up from 29% in 2020
– Rate of “high” ISS concerns related to pay-for-performance among proposals that received an ISS “against” recommendation: 73%
S&P 1500 equity plan voting results
– Average shareholder support: 91%
– ISS negative vote recommendations: 15%
– Difference in average support between an ISS “for” and “against” vote recommendation: 24%, which is up from 18% in 2020
Also, see Semler Brossy’s most recent report on Say-on-Pay vote results this year, it includes similar findings about the potential impact of ISS “against” vote recommendations.
Last summer, Liz blogged about suggestions to broaden the role of the compensation committee to focus on the company’s workforce as a whole. For a recent rendition of this concept, this Harvard Business Review article says there’s an opportunity to move to a model of having a “people committee.” The article notes that some companies, including JPMorgan Chase, Walmart, and Dupont, have expanded the mandate of the traditional compensation committee and moved toward a hybrid structure with something along the lines of a “compensation & management development committee.” But, the authors contend that for companies to cultivate a competitive advantage, a “people committee” can help them deliver a sustained advantage.
Your people committee is on the hook to ensure management delivers today’s employee strategy and tomorrow’s leadership bench. Think of it as an umbrella committee that helps you create an advantage by setting priorities, tracking progress, and driving accountability in the talent domain.
As a critical talent attraction and retention tool, compensation should remain a core responsibility of the new committee, ensuring SEC compliance and aligning leadership performance and potential with rewards and long-term incentives. But the people committee would reach beyond compensation in a number of areas to add differentiated value in three areas (the article provides additional commentary on each of these areas):
At least two well-known tech companies recently changed their equity plans so that awards fully vest in one year, according to this article. The accelerated approach is better for employees who may not want to be locked in for several years, but also allows companies to save expenses due to smaller awards and more control in light of changing valuations. This blog from Dan Walter gives more color on this and other “post-pandemic” developments:
Equity Compensation vesting schedules are changing to correct a well-known problem. I have discussed before that equity compensation vesting schedules have basically not changed in more than 25 years. Basically, 3 or 4 years for RSUs and stock options. We are not seeing companies use 6 and 7-year schedules to align with long-term goals. We are also seeing equity plans with 1 and 2-year schedules to reflect the “bonus” intent for those companies.
This Foley & Lardner blog explains how three typical deal structures – stock purchase, asset purchase, and carve-out – affect executive comp & employee benefits strategies. For each type of transaction, the chart shows:
1. Will the benefit plans & compensation arrangements come with the transaction?
2. Will employees and employment agreements come with the transaction?
3. What happens to the 401(k) plan?
4. What happens to non-qualified retirement plans?
5. What happens to equity awards?
6. Does the structure impact how/whether Code Section 280G (“golden parachute rules”) applies?
7. What happens to group health plans?
8. What about flexible spending accounts (FSAs)?
9. What about accrued vacation or bonus liabilities?
We continue to post resources in our “Sustainability Metrics” Practice Area that can help you navigate the best way to link ESG goals to executive pay. Caution and careful planning are key – especially since some people criticize ESG metrics as being a cover for under-performance on stock price.
The latest instructive memo comes from Aon – and among other things, it includes a framework to analyze whether your company is ready to add non-financial metrics to your executive pay plans. Here’s an excerpt:
Compensation committees currently determining when and how to design ESG-based incentives will need to focus more on impact and readiness of potential metrics and rely less on competitive practice compared to other areas of the executive compensation structure.
As the use of ESG metrics in compensation plans evolves, we expect this aspect of incentive design to take two to three years before there are truly competitive norms and a strong understanding of investor and investor advisor standards. For now, the decision on when to implement should be based on degree of readiness, the nature of the ESG metrics, and the size and time frame needed to cover the performance gap.
Aon looks at adding ESG metrics in terms of a spectrum of “readiness.” Companies that are further along on the “readiness spectrum” will be able to add multiple quantitative incentives, with greater weights, to the long-term plan – whereas companies that are closer to the “exploration” stage should focus on short-term plans and adding one metric at a time, likely qualitative in nature – or even just focus on disclosure of ESG progress for another year. Here are the indicators that show a company is pretty advanced in its readiness:
– Several key metrics have been identified and disclosed for more than a year. Quantitative understanding of success or failure known
– Metrics have a range of performance associated with them and clear timeframes
– Additional metrics have been explored and either added or eliminated from consideration
– Relative importance/priorities established
– Internal teams working on metric definitions and goals have initial findings and an on-going agenda
– Key milestones and timeframes to achieve goals are mapped for all multi-year goals
– Systems for assessing progress and reporting to leadership and the board have been tested
– Back or future testing completed
– Risk assessments completed and communicated to the board
We’ll be having a panel discussion about ESG in Executive Pay at our “Proxy Disclosure & Executive Compensation Conferences” – which will be held in an interactive virtual format October 13th – 15th. Here are the agendas. You’ll want to be part of this “can’t miss” event so that you can get the latest info as you head into the next proxy season. Register today!