Emily blogged last fall that women execs are getting stuck at the median due to pay benchmarking practices. Morningstar is now out with data showing that the pandemic also widened the gender pay gap in the C-suite – a reversal of the narrowing that occurred from 2015 – 2019. A big reason for the disparity is that the largest equity grants have been going to men – another issue that Emily & the NASPP recently noted. Here are a few key takeaways from data expert Jackie Cook and her Morningstar team:
– Female C-suite pay as a percentage of pay earned by their male counterparts reached a record low for the nine-year period since 2012. On average in 2020, women with C-suite positions earned only $0.75 for every $1.00 earned by men at the top of the corporate ladder, down from $0.88 for every dollar in 2018. Median female pay for NEOs was 81% that of pay for male NEOs in 2020.
– Overall, S&P 500 C-suite pay rose by 24% from 2012 to 2020. However, this increase breaks down to a 27% increase for men in the C-suite, compared with 10% for women.
– While women made incremental inroads into corporate America’s C-suites, they’ll have to wait until at least 2060 to reach parity at the present rate of progress. The number of women holding NEO positions at S&P 500 companies increased by only 6 percentage points over the most recent nine years for which data is available (to 14% in 2020, up from 8% in 2012).
– Just over half of S&P 500 C-suites (56%) had at least one female NEO in 2020, up from one third (34%) in 2012. However, C-suites have been slow to advance a second female executive, as only 16% of C-suites had two or more female NEOs in 2020, up from 7% in 2012. And at the very top, progress is even slower: The number of woman-headed S&P 500 companies inched up to 5.5% from 4.3%.
The article notes that a shareholder resolution about internal pay equity received 40% support at Microsoft last fall – and a similar resolution is going to a vote at Apple this Friday.
We’ve posted the transcript for our recent webcast: “The Latest – Your Upcoming Proxy Disclosures.” Topics covered in this wide-ranging program by Compensia’s Mark Borges, Hogan Lovells’ Alan Dye, MoFo’s Dave Lynn and Gibson Dunn’s Ron Mueller include:
– Virtual annual meetings
– Say-on-pay trends
– Lingering pandemic-related issues
– Disclosures around performance-based compensation, ESG and perquisites
– Shareholder proposals
– Clawbacks, director compensation and CEO pay ratio considerations
I previously blogged about some stats around DEI metrics for the 100 largest companies in the Fortune 500 & those that were publicly committed to improving DEI performance. If you’re looking for more stats for benchmarking purposes, here are some survey results from Pearl Meyer that analyzed, among 421 total respondents, 111 companies in the financial industry and how they track & utilize DEI in executive compensation. Highlighted below are some of the findings:
– Close to 30% of financial institutions in the survey reported that DE&I are included in annual incentive plans with a smaller percentage (14%) including in long-term incentive plans.
– Over 85% of financial industry respondents report that they feel little, no pressure or are neutral about putting DE&I measures in incentive plans, while all industry response was closer to 75% in those categories.
– For those financial institutions that do not include DE&I in incentive plans, 43% believed “DE&I is an expectation for our executives and it does not need to be further reinforced through incentive plans.”
– The financial industry utilizes ESG scorecards at a lower percentage than all industry respondents; included now at 27% vs 44% and with 46% of financial industry respondents reporting that they have not and do not plan to utilize ESG scorecards to discuss DE&I metrics.
Compensation is still a big wrench in the employee retention toolkit – and we’ve previously blogged about companies projecting workforce base salary increases given the context of high inflation and labor shortages. With the backdrop of shareholders increasingly pushing for gender and racial pay equity audits, companies may want to plan for a pay equity audit so those planned base salary increases don’t inadvertently widen unequal pay disparities.
Payscale recently released its 2022 Compensation Best Practices Report (download required), which collected responses from 5,578 respondents between November 2021 to January 2022 – and here’s what they’re saying about pay equity initiatives: “Two thirds of respondents reported that pay equity is a planned or current initiative at their organization. This is a 20 percent increase compared to 2021. As in previous years, we also see a clear difference in commitment to pay equity analysis between top performing organizations (67 percent) and non-top performing ones (58 percent).”
As always, you can check out our “Internal Pay Equity” Practice Area on CompensationStandards.com for best practices on conducting pay equity audits.
Compensation Advisory Partners released a new “CEO Pay Ratio Tracker” that is sortable by revenue & market cap and shows data by sector. We’ve blogged a couple of times about tools like this – and we also post them in our “Pay Ratio” Practice Area. They’re all helpful, but this one is nice if you’re looking for something simple & clean.
Total shareholder return is one of the most prevalent metrics in long-term incentive plans. Now, a newer way of incorporating TSR is starting to gain traction. This blog from MyLogIQ gives details on an emerging practice that Lynn identified back in 2020. Here’s an excerpt:
Rather than weighting TSR to determine a payout on a portion of an award, e.g. linking 33.3% of total potential shares to TSR performance, TSR performance instead determines a final adjustment to the value of the award, e.g. -25% for poorer results and +25% for superior ones. Utilizing the CompanyIQ® platform, MyLogIQ found that the proportion of R3000 companies that used a TSR modifier grew by two percentage points per year from 2018, when 8% leveraged a TSR modifier, to 2020 when that figure was 12%.
TSR performance is typically measured relative to a performance peer group, which can be a designated custom group of performance peers selected by the board or a stock index such as the S&P 500. For example, a board can target 50th percentile (pctl) TSR performance within a group rather than an absolute TSR goal. In 2018, 72% of R3000 TSR modifier metrics were relative. In 2020, 80% of metrics were rTSR.
The blog says that the modifier is typically a 25% or 20% adjustment – which can be positive or negative based on achievement of threshold, target (typically no adjustment) or maximum performance hurdles. However, one downside of this approach still being somewhat new & unique is that some equity award software may not fully accommodate it. That means that tracking awards and expense calculations could get complicated.
We’ve notedonseveraloccasions that there’s been an uptick in the number of companies that consider progress on DEI, health & safety, emissions, or other non-financial metrics when calculating executive incentives. As companies continue to sort out whether & how to add ESG metrics to executive pay plans, one important consideration is determining who these metrics apply to. A recent Deloitte report suggests that CFOs might be slipping under the radar – despite their involvement in ESG strategies. Here are a few takeaways:
– The CFO’s role in ESG typically includes tracking & reporting progress in line with regulatory & investor expectations, demonstrating ROI of purpose, and embedding purpose in investment criteria (this 16-page report takes an even deeper dive into the CFO’s role in driving sustainability)
– While 45% of CEOs surveyed have compensation tied to “purpose-related” goals, only 6% of CFOs said the same – the lowest of any roles among the C-suite, despite reporting above-average “purpose impact” on their role
– Smaller companies (less than $1 billion annual revenue) are more likely to have purpose impact C-suite roles, but compensation is less likely to tie to purpose priorities
This Forbes article from Bruce Brumberg – Editor-in-Chief & Co-Founder of MyStockOptions.com – notes that some big tech companies are changing their stock grant practices to stay attractive in the midst of the Great Resignation. Here are some of the examples he cites:
– Amazon – raising the cap on employee base pay, making stock grants when employees are promoted instead of waiting until the next annual grant cycle, considering a shift to monthly vesting (from backend-loaded), and allowing longer leaves of absence before pausing RSU vesting (and vesting will now continue during parental and medical leave).
– Apple – high-performers receiving out-of-cycle RSU grants as a retention incentive (which didn’t go over well with everyone), CEO received a new performance-based RSU grant on his 10-year anniversary based on TSR.
– Alphabet – four senior execs received new stock awards that were split between time-based and performance-based RSUs, shift to front-loaded vesting for employee RSU grants.
Bruce predicts that more companies will be examining vesting schedules and possibly making them more favorable to employees and executives. He also points out that concerns are resurfacing about underwater stock options and reduced value of previously granted RSUs. Companies may be beefing up new grants to make up for that.
I previously blogged about how companies are looking to increase workforce compensation due to inflation & talent wars. But of course, compensation committees also need to look at inflation in the context of setting executive pay. An NACD blog flags that merit budgets/salary increases and incentive plan goal-setting may be two specific areas that compensation committees need to consider in this inflationary economy. Here’s a short excerpt of the issues:
-Because the current environment is challenged by inflation, as well as ongoing pandemic and labor difficulties, some management teams might see an increase to the merit budget for the broad workforce as perhaps one of the easier decisions to make this year. It’s a different story, however, for executives. Boards have generally been more willing to increase incentive opportunities than to provide executives with significant salary increases. This is due to the bias toward performance-based compensation and can be seen in the evolution of executives’ pay mix over the past 40 years. However, incentive plans can be perceived as riskier during inflationary times—to say nothing of the other risks looming—and so higher incentive opportunities may be less valued right now than smaller salary increases.
– [A]t the board level, we need to at least understand the subtleties [of inflationary effects and price changes through the company’s supply chain] to develop a feel for whether any changes might be warranted to, for example, thresholds, maximums, or gatekeeper measures in any existing or future incentive plan. This is important when determining and explaining any non-GAAP (generally accepted accounting principles) or judgmental adjustments to payouts… A complicating factor for directors approving annual goals is that inflation generally results in higher earnings growth than we normally see….If demand stays strong as inflation increases, you may see companies overachieve during the early days of a cycle. Then, the opposite occurs as inflation cools, and taking earnings expectations back down to pre-inflation ranges becomes similarly difficult, especially for investors.
The blog then recommends that compensation committees consider providing potential year-end adjustments for actual vs. projected budget assumptions, or increasing the range from threshold to maximum.
I’ve previously blogged about benchmarking pay practices being detrimental to female executives. But we’re also still tackling gender pay gaps in the workplace, including with respect to equity compensation – and the inequity may potentially be coming from pay negotiation skills and managerial discretion. Barbara Baksa refers to a WSJ analysis in her NASPP blog, which found that in 2018, the average value of company stock held by men was almost 4x that of women, at $104,902 and $26,361, respectively. In addition, the inequity seems to start up front, as women receive 15-30% fewer equity grants (based on a study examining a tech startup and a large pubco).
As companies get more and more calls for pay equity audits in proxy seasons, it’s a good time for compensation committees to get familiar with how exactly companies are managing the equity grant process to root out unfair biases. And as Barbara notes, “employees who are paid less [in cash] can’t contribute as much to the company ESPP or retirement plans as their higher paid colleagues” – and they may also not be able to exercise as many stock options either – so that may affect both your workforce makeup during the hiring stage and pay inequity during the employee lifecycle.