Despite last week’s wild stock market fluctuations and all of the other factors pointing to a dampened year for IPOs, there are still plenty of companies that are looking to go public in 2022 (and plenty of SPACs that want to help them). Once a company’s governance structure is in place, this 7-page Pay Governance memo gives a good overview of what compensation committees of pre-public companies should do as they prepare for the big debut. Here’s the executive summary:
• Compensation program planning is a critical part of the comprehensive and time-consuming process necessary to transition from private to public ownership.
• There are several facets of the compensation program to consider through the transition, such as:
— Establishing/Updating a Compensation Philosophy
— Reviewing/Aligning Executive Pay Levels to Business Objectives and Competitive Practice
— Developing a Long-term Incentive (LTI) / Equity Program Strategy
— Reviewing/Establishing Severance and Change in Control Policies
• Advance planning, incremental decisions, and careful analysis of external and internal factors in each of the above areas can help.
As Liz noted last month, the SEC has been looking at whether to reopen the comment period on its 2015 pay-for-performance rule proposal. Yesterday, the SEC announced that it’s moving ahead with that – and John gives us the details over on TheCorporateCounsel.net blog today:
Yesterday, the SEC announced that it was reopening the comment period for the Dodd Frank-mandated pay-for-performance disclosure rules that the agency proposed way back in 2015. Here’s the 29-page reopening release & the 2-page fact sheet. This excerpt from the fact sheet summarizes the reasons for the SEC’s decision to reopen comments as well as some changes to the initial proposal that are being contemplated:
The Commission received numerous comment letters on the 2015 proposing release. In light of the regulatory and market developments since 2015, the Commission is providing the public the opportunity to submit additional comments on the 2015 proposal, and to address the additional requirements the Commission is considering in the reopening release issued today. These additional requirements include, among other things:
– Whether registrants should be required to disclose additional performance measures beyond total shareholder return;
– Whether, if required, pre-tax net income and net income would be useful additional financial measures;
– Whether registrants should be required to disclose the measure that in the registrant’s assessment represents the most important performance measure used by the registrant to link compensation actually paid during the fiscal year to company performance (which is called the “Company-Selected Measure”); and
– Whether registrants should also be required to disclose a tabular list of a registrant’s five most important performance measures used to determine compensation actually paid.
Commissioner Peirce issued a brief dissenting statement in which she contended that “the additional requirements raised in this release go well beyond the statutory mandate of Section 953(a), are not responsive to the comment file, and do not seem warranted in light of current executive compensation practices related to company performance.” Commissioner Lee weighed in with a supporting statement and Commissioner Crenshaw provided one as well.
The reopened comment period will expire 30 days after publication of the release in the Federal Register. However, the SEC hasn’t exactly been rocketing into print with its recent rule proposals – the 10b5-1 & buybacks proposals still haven’t been published – so it’s possible that the reopened comment period actually may be quite a bit longer than that.
CEO pay continues to be scrutinized by long-term investors, employees, activist investors, & the media. This Pay Governance memo gives us a sneak peek at where they think CEO pay is headed, after analyzing pay data – consisting of base salaries, actual bonuses (not target), and reported grant date fair value of long-term incentive awards – of S&P 500 companies with CEOs of 3+ years tenure. Here is an excerpt of their CEO pay projections:
– We expect 2021 overall CEO actual TDC [total direct compensation] to increase in the low- to mid-single digits due to stronger financial results than projected at the beginning of the year when bonus goals were set; there will be some variation with strong performing industries likely seeing increases in compensation.
– The Aggregate S&P 500 Index year-over-year revenue and operating income for 2021 are currently forecasted to increase by 16% and 37%, respectively (S&P Capital IQ).
– We expect median CEO target pay increases in early 2022 to be in the mid-single digits and possibly higher given very strong financial and TSR performance (S&P 500 was +29% in 2021); this increase will be primarily made by increases in LTI compensation.
– In certain high-growth industries (e.g., technology and biotechnology) and high-performing companies, CEO increases could be greater than 10% (primarily with larger LTI awards) because of a highly competitive labor market, while executives in slow-growth industries or heavily impacted companies might see no increases.
Liz previously blogged about the growing number of companies incorporating ESG metrics – and how ESG in executive compensation is likely here to stay. But ESG can mean a lot of things, and it’s difficult to know sometimes which “ESG” topic is being utilized in executive compensation. While metrics can (and should) vary by industry, one topic that seems to be employed across almost all sectors is DEI, according to an analysis last summer.
To get more granular, Teneo did a deep dive on how companies are specifically incorporating diversity, equity & inclusion metrics into executive compensation. Teneo looked at the largest 100 companies in the Fortune 500, as well as those that “publicized DEI compensation ties or that were otherwise publicly committed to improving DEI performance,” with all but one company in the US. Here are some of the highlights:
– Strong DEI incentive metrics align with the company’s long-term strategy. The most common metric is diverse representation among leadership.
– A Teneo study of S&P 500 companies found that over half of 2021 Sustainability Reports included at least one demographic target, with 42% of companies including both gender and racial/ethnicity goals. By setting goals, companies are treating DEI like any other business priority, ensuring accountability and tracking progress.
– Communicating exactly how much pay is at risk based on DEI performance creates accountability. The most common weighting for DEI metrics in the STI and LTI is 10%. Quantifying the impact on pay is considered more transparent from a shareholder perspective, and the pay affected is viewed as more strongly performance based.
– The most common weighting was 10% of the incentive payout for those that quantified the impact. However, the range of disclosed weightings varied from less than 5% of the bonus to determining 100% of the PSUs earned. There is no universally ideal weighting system, but investors and proxy advisors have questioned whether weighting DEI and other ESG-related metrics below a certain level is effective at holding executives accountable for performance.
– While most companies embedded diversity considerations in their annual incentive, 17% of companies in the study incorporated DEI metrics in long-term incentive (LTI) design, an emerging best practice.
Here’s BDO’s latest study examining director and select board compensation practices of 600 middle-market public companies. Data was collected from proxy statements filed between April 2020 and March 2021 – right in the thick of the pandemic. The study found that, based on Form 8-Ks filed between March – June 2020, 14% companies reduced board pay levels by 50% for an average of six months, but these were temporary reductions. BDO notes that at the end of the year, “retainers and fees were slightly above the prior year, which reflects the recognition that boards face an ever-changing array of complex challenges” – including navigating shareholder activism, tackling changing regulations and monitoring supply chain disruptions & other risks. Here are some of the other highlights:
– Director total compensation increased by 2.3% in fiscal year 2020 over fiscal year 2019
– Committee retainers and fees decreased 2.7%, continuing the trend to provide cash-based compensation through board fees rather than for individual committee work.
– Full-value stock awards continue to outpace stock options. Stock awards increased 2.5% over the prior year, whereas stock options decreased by 11.6%. Total equity compensation rose 2.2%
– For middle-market companies, industry membership is a critical consideration when benchmarking director compensation. Directors in the healthcare and life sciences and technology industries are the highest paid. On the other end of the continuum, financial services banking directors are paid one-quarter of the compensation received by those in the highest paying industries.
This Latham memo reminds us that companies need to furnish – by this upcoming Monday, January 31st – annual information statements to people who exercised ISOs or purchased ESPP shares during 2021. Companies also need to file an information return with the IRS in February or March, as applicable.
The memo explains what must be included in the returns and information statements, how to deliver the information statements to employees & former employees, exceptions to filings, possible penalties for noncompliance and more – and also provides links to the IRS forms.
We’ve posted the transcript for the recent webcast: “Compensation Committee Responsiveness – How to Regain High Say-on-Pay Support.” Aileen Boniface of Clermont Partners, Steve Day of Calfee, Halter & Griswold, Brad Goldberg of Cooley and Tara Tays of Pay Governance discussed what has been triggering low say-on-pay votes and how to recover. Among many useful nuggets from this program was this suggestion made by Brad:
Each company needs to figure out exactly why shareholders voted against the proposal. The best way to do that is to read the proxy advisor reports and start to engage with your key shareholders. Typically, people are going to start with the significant shareholders in the top 15 or 25, which is the best place to start. Once you identify what the issues were and who you’re going to reach out to, you need to form the team, and there’s questions there of who’s involved. Key outside participants often will be the comp consultant and companies will often look to a proxy solicitor to help with the effort as well. Another key thing to consider is who from management — and more importantly, who from the compensation committee — can attend these meetings. Are you confident that the directors in your compensation committee are going to have sufficient knowledge of the program and be able to present in a meaningful way?
Tara also noted:
When there are significant changes that need to be made to executive compensation programs to increase shareholder support with respect to say-on-pay, it’s important to ensure the appropriate due diligence is taken around what makes sense for the company and what’s going to allow the company to continue to motivate executives, especially in this time. There shouldn’t be any rash decisions made. It is going to take a couple of meetings to get to the right solution to make sure that they position the programs in the right direction going forward.
Don’t rush into it. Take the time that’s needed. Make sure that the appropriate research is done in terms of what peers are doing, in terms of what the company can do with respect to forecasting a certain performance metric that’s being changed, with respect to their incentive plan designs. Then, make sure that there’s a balanced approach taken in terms of what shareholders want to see, what institutions want to see, and what’s needed for the company in order to drive results in the future.
This proxy season, S&P 500 boards will be facing greater consequences for keeping workforce demographic info private. As Emily noted last week on our “Proxy Season Blog” on TheCorporateCounsel.net, State Street Global Advisors published new guidance on diversity disclosures & practices – as well as on human capital management disclosures & practices. When it comes to workforce diversity, SSGA expects all portfolio companies to publicly disclose:
– Goals: Describe the firm’s timebound and specific diversity goals (related to gender, race, and ethnicity, at minimum), what policies and programs are in place to meet these goals, and how they are measured, managed, and progressing.
– Workforce Metrics: Employee diversity by gender, race, and ethnicity (at minimum), in markets where it is legal to collect and disclose this information. We expect to see this information broken down by industry-relevant employment categories or levels of seniority, for all full-time employees. In the US, companies are expected to at least use the disclosure framework set forth by the United States Equal Employment Opportunity Commission’s EEO-1 Survey. Non-US companies are encouraged to disclose this information in alignment with SASB’s guidance and nationally appropriate frameworks, or guided by their own perspective as to the best way to describe the composition of their workforce.
If a company in the S&P 500 doesn’t disclose its EEO-1 report, the diversity guidance says that SSGA will vote against the chair of the Compensation Committee. Acceptable disclosures include the original EEO-1 report response or the exact content of the report translated into custom graphics. SSGA also encourages companies to consider providing other demographic info – e.g., LGBTQ+ and disabilities. The asset manager also underscored the increasing focus on workforce diversity by saying:
While our existing diversity voting policies are mainly focused on increasing diverse representations on boards, given our belief in the centrality of effective board governance and oversight, we intend to shift our focus to the workforce and executive levels in the coming years. Companies should prepare by ensuring they are recruiting, promoting, and retaining diverse talent at all levels of the organization.
Similar to the letter issued yesterday by BlackRock’s Larry Fink, SSGA also expects companies to disclose how the board oversees human capital-related risks & opportunities, HCM strategy – including pay strategies, specific info about how employee engagement is conducted (and acted upon), and inclusion efforts. If the stewardship team encounters HCM “laggards” who aren’t making progress through engagements, it will consider voting against relevant directors and/or supporting relevant shareholder proposals.
On the point of shareholder proposals, SSGA’s framework for analyzing requests on the topics of DEI reporting, racial & gender pay gaps, and racial equity/civil rights audits also looks at whether a company’s disclosure & oversight framework aligns with what’s in these guidance documents. SSGA will generally vote against proposals where companies are meeting SSGA’s expectations – as evidenced by public disclosure about oversight, strategies, goals, statistics, etc. It will abstain if the company has made a specific commitment on the topic, and it will support proposals at companies that haven’t disclosed a plan to address the applicable issues. Check out the guidance for more details and recommendations on how boards & executives can support DEI.
Tune in at 2pm Eastern tomorrow for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss all the latest issues to consider as you prepare your upcoming proxy disclosures – including say-on-pay trends, shareholder proposals, ESG metrics, clawbacks, director compensation disclosure, pay ratio considerations and more.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
Over the past couple of years, we’ve been tracking the trend of compensation committees expanding their scope of focus to cover the broad spectrum of human capital management issues, even beyond workforce compensation-related issues. Some compensation committees have even regrouped as “people committees.” If your compensation committee has also taken on shouldering human capital management responsibilities, this KPMG memo lists 6 issues that should make it into the compensation committee agenda this year. Here’s a short excerpt:
1. Review Incentives: Ensure that executive & employee compensation plans are aligned with current strategy (which may have changed over the past 2 years) and focused on key drivers of performance
2. Review Benefits: Balance all components of total rewards, including benefits that support worker health & well-being and allow desired work-life balance
3. Consider HCM Metrics: Recognize the role of the compensation committee in the board’s oversight of ESG – be ready to discuss how these issues were considered in plan design, and take stock of which HCM metrics are important to the company and therefore monitored by the comp committee to hold management accountable (in many cases, these metrics will each warrant their own agenda item for the comp committee)
4. Briefing on Shareholder Voting Trends: Understand investors’ and other stakeholders’ expectations for compensation and HCM and be prepared to enhance proxy disclosures, particularly around ESG metrics
5. Corporate Governance: Reconsider compensation committee composition, charter and operations in light of changing responsibilities
6. Revisit Director Pay & Clawbacks: Revisit the structure & level of director pay, and prepare for SEC rulemaking on clawback policies