Insurance companies are facing a new accounting standard for “long-duration contracts” that will go into effect for fiscal years beginning after December 15th of next year. That may seem far off, but if you’re in that industry, you need to start preparing now for how it’ll affect your existing & future incentive awards. This Willis Towers Watson memo explains:
Among other changes, LDTI requires that assumptions used for calculating accounting values be updated annually (or more frequently) for all products, whereas current generally accepted accounting principles (GAAP) standards use “locked-in” assumptions throughout the life of a policy for many types of products. This change could drive increased volatility and complexity in financial measures commonly used in incentive plans (including income-based and return measures). Of particular importance for incentive planning, financial reporting for fiscal year 2023 and beyond will not be directly comparable to pre-2023 reporting, and any financial goals set prior to 2023 might not be relevant.
In the near term, companies might want to consider possible approaches to 2022 long-term incentive plan (LTIP) awards that address the challenges caused by the accounting changes. In-progress LTIP grants with performance periods carrying into fiscal year 2023 will also need to be cared for. More generally, companies will want to revalidate whether current incentive designs remain appropriate and whether measures, performance periods, goal setting, and use of adjustments or discretion need to be reconsidered.
The memo goes on to outline steps to take beginning this quarter, as well as in the medium- and longer-term timeframes. It recommends partnering closely with finance & HR and keeping executives & directors informed of the rule & potential incentive approaches before submitting changes for approval. As always, you’ll also want to have a robust change management & communications strategy so that people understand what’s happening and aren’t caught by surprise.
The annual “Corporate Governance & Executive Compensation Survey” of the 100 largest companies from Shearman & Sterling is out! Last year, I blogged about perquisites – and airplane use is covered again on pg. 64 of this year’s survey. In light of the SEC reopening the comment period on its “clawbacks” proposal, I was particularly interested in the benchmarking on existing clawback policies that begins on pg. 59. The survey says that 95 of the top 100 companies disclose that they have a financial-related clawback policy, and that clawback triggers include:
– Financial restatement (77) – and within that, 45 companies require fraud or misconduct related to the financial restatement and 32 do not
– Fraud or misconduct relating to financial statements (11) – these companies don’t require a restatement to trigger a clawback, but do require fraud or misconduct
– Materially inaccurate financials (8) – again, no restatement required
– Employee subject to the recoupment engaged in fraud or misconduct (52)
The survey also says that 14 of the companies expressly say that the clawback policy applies to former employees or executives, as well as current. Most companies (55) apply the policy to all executives, while a handful limit it to NEOs or Section 16 officers only. 23 companies apply the policy to all employees (or all participants in the plans subject to the policy). And, 79 out of the top 100 companies apply the policy to both cash & equity awards.
When it comes to non-financial related clawbacks, 79 companies maintain a “detrimental conduct” policy. Here are the most common triggers for that:
– General fraud or misconduct (45)
– Violation of restrictive covenants (non-competes, confidentiality, etc.) (24)
– Acts resulting in reputational, financial or other harm to the company (20)
– Violation of company policy (e.g., code of conduct) (19)
– Termination for “cause” or misconduct (16)
– Violation of law (e.g., embezzlement, theft & bribery) (14)
Late last week, ISS released 33 pages of proposed benchmark policy changes. Companies, investors and others can submit comments on the proposals until 5pm ET next Tuesday, November 16th, by emailing policy@issgovernance.com. ISS expects to release the final changes to its voting policies within the next month – and those will generally apply to meetings held on or after February 1st.
Dave Lynn blogged this morning about the other voting policy changes that are most likely to affect US companies if they come into effect. Those cover the topics of:
– Board gender diversity at smaller companies
– Unequal voting rights (including multi-class share structures)
– Board accountability for greenhouse gas emissions
– Say-on-climate proposals
Even though the policy survey results that ISS posted last month indicated some interest in ESG metrics in executive pay and a longer-term perspective on the pay-for-performance screen, ISS didn’t highlight any proposed changes to executive pay policies for US companies in these draft policies. That doesn’t mean that ISS won’t change any of its pay policies – just that it isn’t seeking comments on those topics as part of this “proposed policy” stage. In addition, ISS is proposing a few pay-related changes for other countries that are worth watching:
2. Continental Europe – proposing a policy that would take into account whether there is clear disclosure about limits to deviations from stated pay programs
3. Continental Europe, UK & Ireland – proposing to add language to clarify that the relevance and stringency of non-financial ESG metrics in compensation plans will be assessed similarly to financial metrics
Liz recently blogged about the SEC reopening the clawback policy comment period (on Day 3 of our recent conferences no less!) — as a reminder, the 2015 SEC clawback proposal would direct the stock exchanges to require listed companies to implement clawback policies. This Keith Bishop blog raises an interesting issue: can these stock exchange listing rules preempt state and employment labor laws? He notes in his original post that:
California law, for example, may prohibit incentive compensation pursuant to Section 221 of the Labor Code (“It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee.”).
We’ll need to see how this plays out in the courts. In the meantime, as companies review their clawback policies in anticipation of the new SEC rules, they should look to see whether there are any state law recoupment limitations that might make their policies moot. Given all of the different obstacles a company faces in defining and enforcing clawback policies, we may slowly see a rise in adoption of pay deferral policies.
Liz Gartland at Fenwick touched upon wage and hour law limitations and other clawback policy drafting tips during our Executive Compensation Conference too, and you can still access all of her great clawback policy talking points by accessing the video archive & transcript of that session. Register now for access if you missed the Conference – here’s an agenda of all the sessions you can learn from.
Public companies like peer benchmarking – benchmarking gives lots of great datapoints for compensation committees to use while setting executive pay. But benchmarking also leads to some interesting outcomes – Liz previously blogged on how variations in CEO pay have diminished, often for the CEO’s benefit as companies and boards try to beat the “median” pay. S&P Global argues that this benchmarking practice actually disadvantages female executives. Here are some interesting points from the S&P Global research report, which analyzed over 80,000 executives who held positions at Russell 3000 companies from 2006-2020:
– Compared to men, women in executive roles are more likely to receive compensation in a compressed range around the median of their peer group and are less likely to receive compensation outside this range. The practice of Gender-Based Compensation Management (GBCM) artificially addresses the gender pay gap by increasing the median woman’s compensation without providing women equal access to the full range of compensation. This work shows GBCM has exacerbated the ‘glass ceiling’ and, by extension, the gender disparity in compensation.
– Firms that have been defendants in federal court cases involving compensation disputes, discrimination, fraud, or other governance-related affairs exhibit more pronounced GBCM. This finding suggests GBCM is associated with poor governance.
– The percentage of women holding positions across the C-suite, board of directors, and executive positions grew from 15.4% to 19.2% from 2018 to 2020. While this progress is statistically meaningful, at this rate women have at least 1-2 more decades before they reach parity in their representation across senior roles. In positions where women’s progress has been slower, such as CEO, parity will likely take even longer.
As companies look to collecting employee data for pay equity analyses, they might want to be mindful of focusing less on the measured median pay metric and more on the ultimate goal of pay equity.
I blogged last week on TheCorporateCounsel.net that we have made two wonderful additions to our Editorial team – Emily Sacks-Wilner and Julie Gonzales. They both bring a wealth of experience. Emily will be making her blogging debut on this site tomorrow! Keep an eye on your inbox for her practical insights.
Late last week, Activision CEO Bobby Kotick sent all employees this email that was also posted as news on the company’s website. After detailing steps the company is taking to improve its working environment, Kotick says he’s asked the board to reduce his total compensation to the lowest level permitted by California law ($62,500) – until the board has determined that the company has achieved the gender-related goals and other commitments described in the message. Those include:
– Adopting a zero-tolerance harassment policy
– Increasing the percentage of women and non-binary people in the workforce by 50% within 5 or less years (to approximately one-third of employees) and investing $250 million over 10 years to accelerate opportunities for under-represented communities
– Waiving required arbitration of employee sexual harassment, unlawful discrimination, or related retaliation claims
– Continued pay equity reviews – to follow the high-level results of the most recent analysis, communicated in mid-October
– Providing quarterly progress updates from business units, franchise teams & functional leaders – along with a dedicated focus on gender hiring, diversity hiring and workplace progress in the annual report to shareholders and the company’s annual ESG report
No Form 8-K has been filed yet. That could be because the report is not yet due. Or, perhaps the company has not yet formalized any material amendments to Kotick’s pay arrangements. The email emphasizes that the reduction is not just to Kotick’s salary – it applies to all bonuses and equity grants as well.
This is a bold step and could be a roadmap for other CEOs who really want to “put their money where their mouth is” when it comes to ESG progress – but there were also unique & compelling circumstances here that may have made people more open to big action. Activision Blizzard has been tangled up with sexual harassment & discrimination claims since this summer – which led to an employee walkout in July, a securities class action lawsuit in August, an $18 million EEOC settlement announced in September (the second-largest the agency has ever negotiated), and ongoing California litigation (the company had attempted to pause that litigation, but a few days prior to this employee announcement, a Los Angeles court denied that request).
As Lynn blogged, the company also faced a very tight say-on-pay vote in June. Its CEO earned nearly $155 million in total compensation last year – largely due to pay-for-performance stock awards.
The email doesn’t get into the nitty gritty of how these gender diversity & related goals will be measured or what will happen if or when they’re achieved, but I would imagine there was outreach around that and the details will emerge through future SEC disclosures. At any rate, it’s a significant ESG & human capital commitment that may also resolve, for now, the pay package that some shareholders found problematic.