Yesterday, the SEC announced that it had proposed amendments to the rules governing disclosure of proxy voting by mutual funds and institutional investment managers. Among other things, the proposed rule would require all institutional investment managers who are required to file a Form 13F to disclose all of their say-on-pay votes annually on Form N-PX. Specifically, managers would have to disclose:
1. A description of say-on-pay matters that’s consistent with the description on the issuer’s form of proxy;
2. The voting item’s standardized classification (the proposal suggests standard identifiers for typical voting matters – e.g., Section 14A say-on-pay votes for executive compensation, Section 14A say-on-pay votes for frequency, Section 14A say-on-pay votes for extraordinary transaction executive compensation);
3. The number of shares voted and number of shares loaned and not recalled; and
4. How the shares were voted by the manager.
SEC Chair Gary Gensler hinted that this proposal would be coming at the CII meeting last week. If adopted, the rule would give issuers and investors more transparency into managers’ proxy voting decisions – and would finally complete the SEC’s Section 951 Dodd-Frank rulemaking mandates. The comment period will be open for 60 days after publication of the proposal in the Federal Register, which usually takes somewhere around 30 days. For coverage of the other fund voting disclosure part of the rule, see my Proxy Season Blog.
You can still register for our popular conferences – the “Proxy Disclosure & 18th Annual Executive Compensation Conferences” – to be held virtually Wednesday, October 13th – Friday, October 15th. We’ll be covering the changing expectations from investors and other stakeholders – with practical guidance on how to use the annual reporting season to your advantage. And new on the agenda, Dave Lynn will be interviewing the Director of the Division of Corporation Finance, Renee Jones!
For more details, check out the full agenda – 18 panels over 3 days. Our speakers are fantastic and this is truly a “can’t miss” event for anyone involved with proxy disclosures, corporate governance, and executive pay.
Conference attendees will not only get access to our unique & valuable course materials (coming soon) – we’ll also be making video archives and transcripts available after the conference, so that you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures and engagements. Plus, our live, interactive format gives you a chance to earn CLE credit and ask real-time questions.
Register today! As an added benefit to members, this year we are offering a discounted conference rate to those who have a paid subscription to any one of our sites.
I’ve blogged that it’s somewhat rare right now for companies to link executive pay to environmental metrics (we also cover it in this checklist). Now, the non-profit shareholder advocacy organization As You Sow has taken a close look at the proxy statements of 48 companies that are “large carbon emitters.” They posted their initial findings yesterday.
Although few companies clearly described an express link between greenhouse gas reductions and executive pay for 2020, As You Sow found four companies that described specific goals and a specific impact on pay. Here’s an excerpt:
AES – links 5% of annual incentive pay for “decarbonization” consistent with GHG reduction goals and identifies target; 5% for “strategic capital initiatives” citing a target ”$1B through clean energy or 3rd party Fluence EV [an energy storage joint venture] of $750M. “
Ameren – awards 10% of Performance Share Units in LTIP based on “pre-established goals related to the total MW tied to renewable generation and energy storage additions. This measure includes MW associated with new wind, solar, biomass, landfill gas and energy storage added to Ameren’s generation portfolio over the three-year period.”
Marathon Petroleum – assigns “greenhouse gas intensity” as a factor for 5% of annual incentive compensation (which is 17% of target CEO pay) = 0.85% of total pay.
Southern Company – ties 10% of CEO LTIP pay to achieving specific megawatt reductions each year, either by adding zero-carbon megawatts and by eliminating coal or gas steam megawatts, with specific targets set for each year. The 100% payout target is set based on the trajectory needed to meet Southern’s 2020 goal of a 50% GHG reduction by 2040. There is a 150% payout stretch goal, which is set about 60% higher than the target three-year net MW change goal, meaning that there is more challenging to reach the maximum payout for the 2020-2022 performance period. The threshold for 2020-2022 is set to the garget for the 2019-2021 goal, so there is no payout if the target for the 2019-2021 performance period is not reached.
In addition, As You Sow also found that several companies said that they’ve adopted new policies for future years. I blogged a few months ago that environmental metrics could pick up in the US as European trends spread across the Pond.
As You Sow also says that companies are adding metrics in response to shareholder pressure, including proposals that it has submitted. According to its recent proxy season review, the proponent currently seems to be more focused on climate-related proposals right now than on proposals related specifically to CEO pay. It wouldn’t be too surprising if in the coming year, they pursue more proposals that urge adding climate metrics in pay programs.
Semler Brossy recently published its third report in a series looking at ESG incentives. This one dives into trends in plan design. Here are the highlights:
• ESG metrics are most commonly incorporated as part of a scorecard (36%) or qualitative individual performance assessment (28%)
• ESG metrics are far more common in annual plans (57%) than long-term plans (less than 5%)
• As shareholders continue to push for longer-term sustainability goals, we expect increased prevalence of ESG metrics in long-term incentives
This memo from Compensation Advisory Partners looks at non-employee director compensation among the largest public companies. Here are the key takeaways for this year:
– Median Total Board Compensation remained flat versus prior year, and 75th percentile Total Board Compensation has remained flat for the past two years
– During the last year, there were the fewest increases to board cash and/or equity retainers of any year during the last decade, in reaction to the COVID-19 pandemic and related implications
– Shareholder-approved director pay limits that apply to both cash and equity-based compensation (i.e., that apply to total pay) became majority practice in 2020
The memo says that companies are now evaluating director pay levels in light of the pause on increases during 2020. Companies are still aware of COVID-related optics, but CAP predicts that boards will likely return to the normal cadence of director pay reviews & increases in 2022.
You can still register for our popular conferences – the “Proxy Disclosure & 18th Annual Executive Compensation Conferences” – to be held virtually Wednesday, October 13th – Friday, October 15th. We’ll be covering the changing expectations from investors and other stakeholders – with practical guidance on how to use the annual reporting season to your advantage.
For more details, check out the agenda – 17 panels over 3 days. Our speakers are fantastic and this is truly a “can’t miss” event for anyone involved with proxy disclosures, corporate governance, and executive pay.
Conference attendees will not only get access to our unique & valuable course materials (coming soon) – we’ll also be making video archives and transcripts available after the conference, so that you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures and engagements. Plus, our live, interactive format gives you a chance to earn CLE credit and ask real-time questions.
Register today! As an added benefit to members, this year we are offering a discounted conference rate to those who have a paid subscription to any one of our sites.
I’ve blogged a few times about “pay ratio” tax proposals – mostly at the state level. Although they haven’t really taken off, this CNBC article and other sources say that Democrats are currently revisiting the idea – along with a number of tax measures that could affect executive compensation.
It’s good to be aware of this in case the comp committee or an executive asks about it, but know that it’s all pretty speculative at this point as lawmakers try to gather support for the budget bill and social spending proposals. Ideas on the table include:
– Taxing stock buybacks, or treating them as taxable dividends to shareholders
– Reducing corporate deductions for executive compensation
ISS recently released its “Compensation 2021 Proxy Season Review.” The full report is available only to corporate & institutional subscribers – but here are the key takeaways:
– Say-on-pay support continued its downward trend, while the failure rate matched the record high. Since 2018, the median say-on-pay vote support has declined each year and remained below 96 percent in 2021. The percentage of companies with failed say-on-pay votes increased to 2.6 percent, up from 2.1 percent in 2020. This is tied with 2012 as the highest failure rate since mandated votes began.
– CEO pay levels again reached record levels, despite widespread salary freezes and reductions. Continuing CEOs in the S&P 500 as well as the Russell 3000 saw overall pay increases that were primarily due to larger long-term equity incentives. The median CEO pay package was at an all-time high in both indices, despite the fact that many companies froze or reduced base salaries in response to the pandemic.
– COVID-related issues dominated disclosures and pay decisions. Compensation committees grappled with the increasingly difficult task of implementing executive pay programs that account for new realities and shifting strategies. Many companies that elected to make adjustments to in-progress long-term incentives faced investor opposition, leading to a number of high-profile say-on-pay failures.
– The use of discretionary bonuses increased, in part due to the pandemic creating uncertainty around goal-setting. The prevalence of discretionary CEO bonuses increased in both the S&P 500 and non-S&P Russell 3000, as many compensation committees had difficulty setting goals amid the pandemic. Further to this, payouts of formal performance-based bonus programs decreased in both indices.
– Companies continue to emphasize performance-vesting equity incentives. Within the S&P 500, most companies continued to deliver the majority of the value of CEO equity awards in performance-vesting vehicles. The proportion of CEO equity awards as performance-vesting reached a new high of 58 percent.
– Companies are improving disclosure around non-employee director pay. Despite an increase in the number of instances of outlier director pay levels identified, with each year more companies are disclosing reasonable explanations. Approximately three-fourths of companies disclosed a sufficient rationale for high director pay, up from two-thirds of companies in the prior year.
This 16-page Sullivan & Cromwell memo gives a nice overview of voting results for say-on-pay and equity plan proposals through June 30th. The memo also gives tips for pay-related engagements as we head into 2022. Here’s an excerpt:
Companies should ensure that the appropriate personnel at institutional investors are involved in the engagement process. Larger institutional investors generally have both environmental, social, and governance (ESG) experts and investment professionals, all of whom may provide input into the voting process but may have differing views. Institutional ESG expertise is particularly important with respect to compensation programs as companies increasingly consider tying pay to ESG metrics and shareholders expect alignment between compensation and ESG outcomes.
Companies therefore should ensure that the appropriate company representatives are part of engagements and that materials are appropriately tailored. Institutional investors are likely to send representatives with a high degree of expertise and specialization, and generalized presentations may not suffice.
Board representation in discussions, especially on topics such as succession planning or executive compensation, may be appropriate but should be evaluated on a case-by-case basis, taking into account the engagement history, the purpose of the meeting, the experience of the relevant directors with direct shareholder engagement and Regulation FD (among other things), and the preferences of the investor with whom the company is engaging.
The memo also recaps ISS’s approach to say-on-pay recommendations, which is important to understand as the proxy advisor continues to influence voting outcomes:
[A]lthough pay-for-performance is just one factor in the overall compensation assessment, it remains the main determinant of ISS’s recommendation on the say-on-pay vote, as has been the case in recent years. This year, however, ISS has also increased its focus on compensation committee communication and responsiveness, ascribing high concern to twice the number of companies this year compared to 2020. This increased focus by ISS highlighted the importance of engagement by public companies with their shareholders on matters relating to compensation.
Of the 12 companies that received a high concern rating on compensation committee communication and responsiveness, four received a rating of low concern with respect to pay-for-performance (and another three received a low initial quantitative concern rating with respect to pay-for-performance). For five of these 12 companies, compensation committee communication and responsiveness was the only category in which the issuer received a high concern rating.