Skadden is out with its annual checklist of matters to consider for the upcoming annual meeting & reporting season. It provides updates on proxy advisor policies, recent voting trends that could affect 2022 planning, and recommended steps. This year’s version is 48 pages long! As always, it has headings and navigation links to skip to what you need, and it’ll also be posted soon to our “Proxy Season” Practice Area.

Here are key items that the Skadden team recommends thinking about for executive compensation (also see my earlier blog):

1. Incorporate “lessons learned” from the 2021 say-on-pay votes and compensation disclosures and prepare for 2022 pay ratio disclosures

2. Consider trends & developments on employee, environmental, social & governance metrics in executive compensation

3. Evaluate Hart-Scott-Rodino Act implications in executive compensation

4. Note status of pending SEC rulemaking relating to clawback policies under Dodd-Frank

– Liz Dunshee

Yesterday, proxy advisor ISS published updated “FAQs” for pandemic-related pay adjustments. This 6-page document refines the FAQs originally published in October 2020, and explains how ISS will approach these issues beginning in the 2022 proxy season.

The new document notes that the upcoming proxy season will be the third year in which the pandemic has been in play (and the second year of executive pay proxy disclosure occurring under pandemic conditions). Many of the temporary base salary reductions have been lifted, and the “surprise element” of the pandemic is no longer applicable. So:

As in pre-pandemic years, any mid-year changes to metrics, performance targets and/or measurement periods, or programs that heavily emphasize discretionary or subjective criteria will generally be viewed negatively. This will be of particular focus for companies that exhibit a quantitative pay-for-performance misalignment.

However, in certain circumstances lower pre-set performance targets (as compared to 2020) and/or modest year-over-year increases in the weighting of subjective or discretionary factors may be viewed as reasonable for companies that continued to incur severe economic impacts and uncertainties as a result of the pandemic in 2021 (see question #5 below). As before, Companies should clearly explain target setting and any changes to the program, to allow investors to evaluate the compensation committee’s actions and rationale.

The FAQs discuss what disclosure would be useful if mid-year adjustments are made, and/or if incentive targets are lowered below prior-year levels due to pandemic issues. Regarding long-term incentives, the FAQs now say:

As before, changes to in-progress long-term incentive cycles will generally be viewed negatively, particularly for companies that exhibit a quantitative pay-for-performance misalignment. Modest alterations to go-forward cycles (i.e., awards granted for the cycle beginning in 2021) may be viewed as reasonable, particularly for companies that continue to incur severe negative impacts over a long-term period.

For example, some movement from quantitative to qualitative metrics or modest increases in the proportion of time-vesting awards. More drastic changes, such as shifts to predominantly time-vesting incentives or short-term measurement periods, would continue to be viewed negatively. Companies should clearly explain any changes to the program, to allow investors to evaluate the compensation committee’s actions and rationale.

The theme of these FAQs is that investors are expecting a return to traditional incentive structures. They want a strong link to performance and disfavor one-time awards. Deviations from that will be viewed negatively and should be accompanied by robust explanations. The FAQs also clarify that in 2022, ISS will return to its regular scoring thresholds for the Equity Plan Scorecard (it had raised the passing score for some companies in 2021).

– Liz Dunshee

Bruce Brumberg – who among other roles has blogged on this site and is the co-founder of myStockOptions.com – recently alerted me to his updated page on year-end planning for anyone who receives or is involved with equity compensation.

Bruce notes that multi-year tax planning is more important than ever (and while some individuals cannot be reined in, perhaps by helping your execs look ahead, you can avoid a situation in which they are liquidating a lot of holdings via a Twitter poll). Here are 4 tips that he highlights:

1. Understand tax rates, trigger points, and possible underwithholding

2. Consider time value of tax money on NQSO exercise; estimated taxes

3. Remember additional Medicare tax

4. Calculate AMT when deciding about ISO and NQSO exercises

Bruce also hosted this December 2nd webinar about financial & tax strategies, which is still available via replay.

– Liz Dunshee

Recently, Willis Towers Watson partnered with the World Economic Forum’s Climate Governance Initiative to publish this 34-page guidebook on whether & how to use executive compensation incentives as part of strategic climate transition plans. The guidebook looks at director & investor views, case studies, and pros & cons of environmental-based incentive compensation. It also offers a “design spectrum” (pg. 16) and principles to consider when selecting metrics (pg. 17).

The guidebook recommends a 6-step cycle for using executive pay to accomplish “net zero” goals:

1. Align climate priorities with business strategy. Incorporate clear organizational climate priorities into the fabric of the company’s enterprise risk and opportunities framework.

2. Climate goals tied to the net zero vision. Articulate a clear net zero vision by 2050 (or earlier) and set short-, medium- and long-term milestones toward the vision.

3. Select the right metrics. Considering company’s net zero vision/milestones and incentive design, determine the right climate metrics.

4. Fit-for-purpose incentive design. Reference market practice and the company’s own climate objectives to finalize the incentive design mechanism and formula.

5. Tell the story with disclosures. Design and metrics selection should be disclosed clearly, aligned with business strategy and other climate and ESG disclosures.

6. Evolve and learn over time. Review effectiveness and adjust design, metric(s) and goal(s) over time.

– Liz Dunshee

As this FW Cook blog highlights, a few unique dynamics are making it more challenging than usual to ensure that your compensation peer group remains accurate:

– Industry Consolidation.  With the gangbuster M&A dealmaking year, it’s no surprise that industry consolidation is flagged as adding difficulty to peer group selection.  FW Cook notes that companies can use “compensable factors” to help screen potential compensation reference companies – sample compensable factors include quantitative factors like margins and revenue growth, and qualitative factors like global sprawl or place in the business cycle.

– Uneven Impact of COVID-19 Pandemic on Companies.  We’ve previously blogged about executive pay being potentially impacted by the pandemic’s disparate impact on companies. FW Cook suggests a couple approaches a company can take: (1) delay making changes to peer groups until market conditions stabilize, (2) broaden the peer screening criteria, and (3) use supplemental measurement periods to help normalize for market disruption.

– Blurring of Industry Lines. As WSJ wrote a while back, everyone can be a “tech” company now, which adds to the confusion when choosing peer companies. FW Cook suggests potentially broadening the peer group to increase exposure to a company’s new end markets and segments (e.g., a brick-and-mortar retailer might include online retailers / ecommerce companies) or transitioning from using revenue to market capitalization.

As Liz previously blogged, the ISS window for peer groups closes this Friday, December 3rd. Even if you’re not submitting changes to the proxy advisor, it’s not too late to continue refining your peer group process.

– Emily Sacks-Wilner

ESG has been a hot topic all year for executive compensation – it’s been talked about so much that it feels like everyone is doing it, but it’s still quite uncommon in most industries. Here’s a breakdown from ISS on where the E&S metric usage stands now:

– The uptick in the use of E&S performance metrics in compensation observed over the last two years appears to be driven by societal developments like climate change awareness, #MeToo, BLM, and COVID-19

– Social metrics like worker safety dominate but the growth rate of environmental metrics is higher, signifying increased importance

– Safety metrics remain most common, although climate change and diversity-related metrics experienced the biggest upswings

– Diversity, CSR, and staff-relations metrics were used across all sectors in 2020

– The utility sector has the highest prevalence of E&S metrics, although the real estate sector and consumer staples experienced the biggest jumps of late

– E&S metrics are included in STIPs more often than LTIPs, with large cap companies leading the way

– Companies that include E&S metrics in executive compensation plans often choose to include more than one such metric

If you’re ready to take the leap, we previously covered the do’s and don’ts of tying ESG to executive pay during our Executive Compensation Conference. Contact info@ccrcorp.com now to register and gain access to these talking points if you missed the Conference – here’s an agenda of all the sessions you can learn from.

– Emily Sacks-Wilner