Over the past few years, we’ve seen a growing interest in gender & racial pay equity audits, from companies incorporating ESG into their executive pay to proxy advisors to investors. For companies jumping into the fray to conduct a pay equity audit, here’s a new checklist on the nuts and bolts of pay equity data collection and interpretation by Mark Borges and J.T. Ho – check it out!

– Emily Sacks-Wilner

Liz blogged a couple of months ago about how investors are starting to assess pay ratios as part of the say-on-pay analysis. According to a recent study by a group of B-School profs (Alam, Ghosh, Ryan Jr. and Wang), the best way for companies to come out favorably on these types of voting policies is probably to make real changes to CEO and/or employee pay, versus taking steps that could be viewed as “gaming the calculation” of the median employee. The study analyzes these three questions:

(i) Do discretionary choices in the methods used to estimate the pay ratio allow firms to influence the reported pay ratio without making real changes to CEO or employee pay?

(ii) Do investors react differently to pay ratio disclosures based on the choice of method employed?

(iii) Do firms strategically use these discretionary choices when facing social pressure toward income equality?

The professors conclude that companies disclose lower pay ratios when using “more complex methods to identify the median employee” – and companies “headquartered in a state with stronger aversion toward income inequality” are more likely to choose these more complex methods, presumably in response to societal pressure. At the same time, the study shows that shareholders react negatively to those complex methods. That’s consistent with another study that Liz blogged about a couple years ago.

Compensation committees will need to stay aware of these perceptions and pressures. It will be a juggling act to set competitive executive compensation while also balancing pressure to minimize inequality. While the outcome of those decisions will vary by company, human capital oversight and potential increases to workforce compensation are shaping up to be hot topics for almost everyone again this year.

– Emily Sacks-Wilner

To kick off 2022, here’s a summary of Longnecker’s blog covering upcoming compensation strategies & emerging trends – for executives and the broader workforce:

– ESG: “As public pressure and changing cultural norms continue to evolve, ESG looks to stay as a new benchmark criteria for today’s business leaders. Specifically, institutional investors are holding company operations accountable for their effects on the environment and their surrounding communities. Surveys show that already, 45% of FTSE 100 companies incorporate ESG metrics in their executive pay programs.” ESG is a global phenomenon, and it’s also here to stay in the U.S. Get ready to see ESG metrics incorporated into companies’ incentive programs.

– Compensation Clawbacks: Liz recently blogged about McDonald’s successful clawback – and though there hasn’t been much new activity after the SEC comment period for the clawback proposals closed, companies should review their clawback policies and how the proposed rules might work with existing and upcoming incentive plans.

– Proxy Disclosures: Longnecker notes that “in addition to Human Capital Management, CEO Pay Ratio and other disclosures, Perquisite disclosures continue to be an enforcement priority for the SEC.” You can also check out our handy checklists on perks disclosure and other executive compensation disclosures as you start drafting.

– Flexibility & Remote Work: Longnecker suggests that “remote work options and flexibility are emerging trends that will continue to gain momentum in 2022 as employees place high value on these benefits.”  Flexibility may also promote employees’ mental health, which is another factor in human capital management.

– Variable Compensation to Reward Top Performers: Longnecker projects “an upward trend in variable pay strategies, especially at the employee level going into 2022” and flags that variable pay programs and spot awards are “proven methods to improve retention at both the employee and executive levels.”

– Mitigating Pressure on Compensation Budgets & Rising Wages: Longnecker notes that employers can mitigate the dual issues of struggling to fill open positions and raise base salaries by “retain[ing] current employees, offer[ing] learning and development programs to fill positions from within, tak[ing] a holistic approach to total rewards and look[ing] beyond compensation.”

– Emily Sacks-Wilner

As everyone plots out the agendas for upcoming board & committee meetings – and considers governance disclosure that will go in the proxy statement – a member recently posted this question to our “Q&A Forum” (#1390):

Does the compensation committee need to/should it approve personal security and/or other perks on an annual basis?

John Jenkins responded:

Yes, I think comp committee oversight of the nature of the perks that are provided to executives is essential and that committee approval of them on an annual basis is appropriate. After all, the perks a company provides are an element of executive comp. Stock exchange rules require the comp committee to approve CEO compensation and to recommend the compensation of compensation for other executive officers. Many charters go beyond that, and delegate responsibility for executive comp to the comp committee.

Perks are an investor hot button and an area that’s gotten a lot of attention from the SEC’s Division of Enforcement, and oversight from the comp committee is expected. Here’s what the CII had to say at the time the SEC adopted the revised comp disclosure rules:

“Company perquisites blur the line between personal and business expenses. The Council believes that executives, not companies, should be responsible for paying personal expenses—particularly those that average employees routinely shoulder, such as family and personal travel, financial planning, club memberships and other dues. The compensation committee should ensure that any perquisites are warranted and have a legitimate business purpose, and it should consider capping all perquisites at a de minimus level. Total perquisites should be described, disclosed and valued.”

I think that the general perquisites provided to the company’s executives need to be reviewed and approved by the compensation committee just like any other compensation plans or practices that apply to its executive officers.

– Liz Dunshee

The Canadians are sorry, but some of them have had enough of excessive CEO pay at US companies. As investors to the north and elsewhere begin to incorporate “fairness” concepts into their say-on-pay guidelines, this blog from NEI Investments – a Canadian investment manager focused on responsible investing – highlights several solutions that are on the table for those concerned about internal pay equity. Here are two excerpts, summarizing a recent roundtable discussion:

– The group acknowledged that integrating language related to pay disparity into voting guidelines is important as a way to determine how appropriate the ultimate amount awarded to executives is.

– Despite some limitations with the median worker pay ratio, participants said it makes an excellent jumping off point for corporate engagement. It can lead to questions such as: How do boards use the ratio to set CEO compensation? Does the company plan to set a target ratio, and how would they go about meeting that target? How do employees feel about pay, given the ratio?

The blog also notes that investors involved in these discussions may be taking a closer look at pay structures for both executives & other employees – including limiting CEO salary increases, reverting to an executive pay structure that is more heavily weighted towards salary, tying vesting of equity awards to worker satisfaction, and applying pressure on companies and the government to raise non-executives’ compensation. The initiatives here appear to be a long-term play, but one worth watching.

– Liz Dunshee

FW Cook has released its 49th Annual “Top 250 Report” – which examines the long-term incentive practices & trends of the 250 largest companies in the S&P 500. This excerpt lays out the key findings:

• Long-term incentive mix continues to be strongly oriented towards performance plans; on average, performance awards represent 58% of total long-term incentives.

• Total Shareholder Return continues to increase in prevalence – now used by 69% of companies vs. 56% in 2016 – and remains the most common performance metric among the Top 250 companies, with 95% of companies that use it measuring it on a relative basis (up from 86% in 2016).

• Beyond TSR, an increased number of companies evaluate financial metrics on a relative basis rather than on an absolute basis due to market volatility and to avoid the need for multi-year goal setting; more companies migrated towards use of broad or industry-relevant indices for comparisons to enhance sample size and reduce impact of volatility/M&A activity associated with a smaller sample size.

• Median threshold and maximum performance goals remain relatively constant from 2019, even with individual companies setting broader performance ranges in response to the COVID-19 pandemic. Based on available disclosure of FY21 goals, there is some early indication of companies setting wider performance ranges.

• An increasing number of companies measuring relative TSR performance set targets above median (29% in 2021 vs. 23% in 2019), which is likely in response to proxy advisory firms’ view that target earnout should require above-median performance.

– Liz Dunshee

While many folks were hard at work on year-end deadlines – or taking well-deserved breaks – there was a big development in the clawbacks space. McDonald’s announced via a Form 8-K and press release that its former CEO, Steve Easterbrook, had returned more than $105 million in equity awards & cash. As part of the settlement, Easterbrook also apologized to the company, the board and the broader McDonald’s community.

The company took the extraordinary step of suing Easterbrook in 2020 after an anonymous tip indicated that he may not have been truthful at the time of his 2019 termination about his relationships with employees. The tip prompted an internal investigation, and in some ways gave the board a “do-over” after it had determined that the original termination – which resulted from a consensual employee relationship against company policy – was not “for cause” but just a demonstration of “poor judgment.” As I blogged when the complainant was filed, the board said that it would not have approved a separation agreement characterizing Easterbrook’s termination as “without cause” if it had been aware of his dishonesty and additional conduct violations.

This isn’t the first time a former exec has had to pay back incentives – a recent example happened in 2020 when the SEC ordered Hertz’s former CEO to repay $2 million following a restatement. As this NYT article recaps, there have also been larger settlements, relating to options backdating & fraud. But this settlement is unique in that the misconduct is not directly tied to financial issues.

Last year at this time, Lynn blogged that shareholders were calling for resignations of the McDonald’s board chair and the compensation committee. All directors were re-elected, but in a move that may be aimed at appeasing some of the discontent around oversight of #MeToo issues, the company’s press release also reiterates previously announced mandatory training for both company-owned and franchised locations:

Recognizing its scale and resulting influence, McDonald’s will continue to promote safe and respectful workplaces. McDonald’s is implementing mandatory and industry-leading Global Brand Standards for safe, respectful and inclusive workplaces, which require all 39,000 McDonald’s restaurants to adhere to these new standards.

– Liz Dunshee