Pay ratio is coming full circle. Remember when the rule went into effect and everyone was really worried that their company would be canceled (or whatever the word was for that in 2017)? And then most companies just provided the basics of what Item 402(u) requires and nobody paid much attention. Seemed like kind of a nothingburger. For a minute.
Here’s part of a letter that Carl Icahn sent to Kroger on Tuesday:
Even in a hard-nosed capitalistic system like ours, it is obscene that a CEO makes 900 times what workers earn. It is truly difficult to point to anything comparable, even when considering the grave injustices in the early days of the Industrial Revolution. At Kroger, amazingly, it will take an average worker 20 years to make what the CEO earns in one week. In my 40 years of being an activist, I have never seen anything like this.
Yes, you read that right. Billionaire Carl Icahn is taking issue with the pay gap between a company’s CEO and its median employee. And he wants to put 2 directors on Kroger’s board to help solve the problem! (He owns 100 shares of Kroger stock, by the way.)
While I have previously blogged that pay ratio is becoming a factor in say-on-pay…which can lead to lower director support and potentially catch the attention of activists, this is much more direct! Carl Icahn isn’t waiting around for low say-on-pay votes to tip him off to vulnerable directors. He’s just finding the high pay ratio. That’s the vulnerability.
While this might seem like a very odd-duck scenario, keep in mind that the SEC’s universal proxy rules go into effect later this year and will make it much easier for concerned shareholders to try to nominate dissidents to your board. If the pandemic didn’t already spur compensation committees to take a close look at wage inequality when setting CEO pay, maybe proxy contests will. Better to give your directors a heads up now versus when activists are at the gate.
Stay tuned for an announcement soon about our October “Proxy Disclosure & Executive Compensation” Conferences…and more. We’ll be discussing what boards and their advisors should be doing to protect themselves from this type of situation – and you won’t want to miss it. Hat tip to one of our speakers, Georgeson’s Hannah Orowitz, for alerting me to this proxy contest.
Approximately 35% of AmerisourceBergen shareholders recently voted in favor of a policy that would prohibit the exclusion of legal & compliance costs from financial performance metrics used to determine executive pay, according to the company’s Form 8-K. The policy was requested via a Teamsters shareholder proposal (pg. 87) – which took issue in particular with excluding $6.6 billion of opioid-related expenses. According to a CII write-up, the level of support surpassed a majority when looking only at shareholders not affiliated with the 20% stake in the company held by Walgreens.
While the magnitude of this adjustment is large, the proposal shows that shareholders haven’t lost track of the issue of non-GAAP adjustments that tend to ensure higher payouts. This topic is also reappearing in connection with the re-opened comment period for the SEC’s proposed pay-for-performance disclosure rule – as Emily recently noted.
To mark Equal Pay Day earlier this month, Arjuna Capital & Proxy Impact issued their 5th annual “Racial & Gender Pay Scorecard” – which shows that 7 companies now earn an “A” grade out of the 57 surveyed. That’s up from 5 last year. The companies that appear in the scorecard have all at one point received shareholder proposals to improve their public pay equity disclosures. Over the past 7 years, 143 proposals have been filed at more than 80 companies, according to a press release from Arjuna.
This was a hot topic during our “Top Compensation Consultants Speak” webcast last week. Panelists noted that many companies have reported strong “pay equity” performance (equal pay for similar job levels). Now, investors and regulators are pushing toward the next frontier – “unadjusted pay gap” disclosure – which compares median pay without regard to job level and may be indicative of barriers to advancement. The unadjusted pay gap remains less transparent and persistently large – and was exacerbated by the pandemic.
On the scorecard, “F” grades are awarded to companies that don’t disclose quantitative racial & gender pay gaps. 24 companies fall in that category. Another 9 companies received lower scores than the prior year because they had previously committed to report information and, according to Arjuna, haven’t followed through. 13 companies improved their scores year-over-year. The Scorecard grades companies across 5 categories, looking at performance within industry sectors as well as across all sectors:
1. Racial Pay Gap
2. Gender Pay Gap
3. UK Pay Gap
4. Coverage
5. Commitment
Here’s how the scores are calculated:
The Racial & Gender Pay Scorecard assesses companies’ pay equity data against best-practice pay equity reporting standards, which consist of two important elements: (1) unadjusted median pay gaps, assessing how jobs are distributed by race and gender and which groups hold the high-paying jobs, and (2) statistically adjusted gaps, assessing pay between minorities and non-minorities, men and women, performing similar roles. While statistically adjusted gaps provide one piece of the story, median pay gaps are a tougher and more revealing standard. Median pay gaps show, quite literally, how the company assigns value to its employees through the roles they inhabit and the pay they receive.
It’s worth flipping through the 29-page report because it summarizes recent regulations on this topic, as well as investor initiatives & outcomes (I blogged a couple of weeks ago about a notable approval). Also check out this Orrick page that shows pay equity & pay transparency laws by state and tracks how companies have responded to pay equity shareholder proposals.
As workforce issues continue to take the spotlight, visit our “Gender & Racial Pay Equity” Practice Area on this site for a library of resources to tackle this evolving challenge. We’re also covering the broader topic of advancing diversity, equity & inclusion on our brand new site, PracticalESG.com. Check out Ngozi’s blog yesterday about helping women overcome imposter syndrome in the workplace – and register today for our upcoming free DEI workshop series.
Emily blogged a few weeks ago about restrictions out of Russia that broadly prohibit transactions that transfer equity from companies in an “unfriendly country” (e.g., the US) to Russian residents. This new Orrick memo provides an update:
On March 18, 2022, the Russian Central Bank clarified that the restrictions imposed under Decree No. 81 (see our earlier alert below) do not apply if a Russian resident acquires shares from a company of an “unfriendly” country, as long as:
– the shares are held by a foreign entity outside of Russia;
– the money used to acquire those shares was already in a foreign bank account; and
– such funds and accounts have been previously disclosed to the Russian tax authorities in accordance with Russian law.
However, despite the above clarifications that seem to loosen the prior rules, we still urge caution and would not recommend proceeding with any share transactions, including the issuance of shares upon RSU vesting. See further details below. It is also important to note that Russian residents are still prohibited from remitting funds abroad to acquire shares of a US company.
The memo goes on to explain that the Central Bank’s clarification doesn’t specifically address RSUs, and there’s still a lot of uncertainty around “permitted payments.” The Orrick team recommends that companies continue to formally suspend any outstanding stock awards to Russian residents for the time being. ESPPs are also dicey.
There are lots of considerations at play when setting executive compensation programs at public companies – you want to be able to retain and motivate your executives without making your shareholders and proxy advisors balk. On the flip side, we normally think private company compensation is a bit more unfettered – private company compensation committees have a bit more breathing room when it comes to creative pay packages.
Below is an excerpt from a blog post from Bill Reilly at Pearl Meyer, where he discusses that despite that freedom, private company compensation committees are taking a page out of the public compensation committee playbooks.
– Goals and Metrics. As public companies begin to incorporate more qualitative, nonfinancial incentive metrics (often focused on environmental, social, and governance issues) into executive pay plans, private companies are gradually increasing their focus on long-term incentive awards. This is bringing private company pay practices more in line with the public companies that are competing for the same talent.
According to the survey, 100 percent of public company respondents said their organizations provide senior executives with a long-term incentive opportunity. Private, for-profit companies aren’t far behind at 76 percent. In fact, private, for-profit organizations were twice as likely as public companies—30 percent of respondents versus 15 percent, respectively—to have recently increased (or be planning to increase) long-term incentive participation levels.
– Structure and Governance. To further improve their executive pay programs’ effectiveness, private companies are increasingly adopting broader market corporate governance practices. These include having formal, documented compensation philosophies, adopting clawback policies, using tally sheets, and having oversight from a truly independent compensation committee with a charter that clearly outlines its role and authority.
Tune in at 2pm Eastern tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest areas of focus for compensation committees, especially given today’s environment & the committees’ expanding ESG-related responsibilities. You’ll also get a preview of how 2022 proxy season is shaping up!
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.
Willis Towers Watson recently published its annual analysis of director pay levels and practices among S&P 500 companies, based on proxy statements filed in 2021. The director compensation practices seem relatively consistent to last year’s, and you can see industry sector comparisons on pg. 14 of the memo. Below is an excerpt of the specific key findings for compensation committees’ benchmarking purposes:
– The median value of most individual cash components remained the same, while the median value of total annual cash compensation increased from $107,500 to $110,000 (2%). The median value of annual stock compensation increased 3%. Overall, total direct compensation went up just 1%, a similar increase to the prior year.
– Pay mix for non-employee board members remained divided 60% in equity and 40% in cash.
– The prevalence of board meeting fees declined by one percentage point, while the prevalence of committee per-meeting fees declined by two percentage points. The median value of committee per-meeting fees increased from $1,500 to $2,000 (33%), putting it in line with the median board meeting fees value.
– Equity compensation continues to be the most prominent part of the director pay package. The number of companies granting common stock decreased one percentage point (to 14%), while the number of companies granting restricted stock increased one percentage point (to 67%). The median value of stock options increased 3% for stock options (from $86,424 to $89,167), deferred and phantom stock (from $160,000 to $165,047), and restricted stock (from $165,000 to $170,043).
– One-time initial stock grant prevalence increased one percentage point, as value at the median increased 9% from $156,000 to $170,000.
Last year, we saw an uptick in say-on-pay failures early on, with the overall 2021 failure rate landing at 2.8% (vs. 2.3% in 2020). When companies fail a say-on-pay vote (or fall below the 70-80% approval threshold that the major proxy advisors use for triggering a close look at “responsiveness”), they’ll want to engage with their shareholders and, in the subsequent year, disclose what they’ve done to address concerns that drove the say-on-pay failure.
General Electric is one such company, where approximately 58% of the shareholders voted against GE’s say-on-pay proposal in 2021. Their response is in the news:
Last week, WSJ reported that, to address shareholder concerns, General Electric’s CEO, Lawrence Culp, would get his potential compensation cut by roughly $10 million in 2022. GE’s Form 8-K disclosed that Culp’s employment agreement was amended to reduce his 2022 annual equity incentive grant from $15 million down to $5 – a 67% annual equity reduction.
Looking at the “Shareholder Engagement on the 2021 Say-on-Pay Vote” section in GE’s proxy statement, GE had a busy engagement year – with 50+ meetings to engage with shareholders representing 53% of their outstanding common stock and 76% of common stock held by institutional investors. The shareholder concerns largely revolved around the 2020 retention grant. To respond, the GE board reduced Culp’s annual equity incentive grant for 2022 and stated that they don’t “intend to enter into a similar modification of the CEO’s employment agreement again in the future.”
We’ll stay tuned to see if GE has done enough to bounce back from its low vote in 2021. And in the meantime, we’re likely in for continued scrutiny on high executive pay, especially as the issue of “fairness” enters into the conversation. Tune into our webcast on Thursday of this week, “The Top Compensation Consultants Speak,” where we’ll discuss early returns from proxy season and what issues companies should be preparing for!
Companies have been dipping their toes in the “ESG metrics” pool for at least a decade now. As I’ve noted this week, we’re now reaching a fork in the road. Some investors want all portfolio companies to incorporate ESG targets into executive pay plans, and many boards have determined that it’s appropriate to incentivize non-financial performance in some way. Other people are raising concerns that ESG metrics distort executive behavior and will never be adequately transparent.
This is a very company-specific determination and there are various ways to approach it – e.g., modifiers. Yet, there are some commonalities. If a company does include ESG metrics in pay plans, investors are looking for specific, measurable targets that track to strategic initiatives, and thorough disclosure of performance and payout decisions. Expectations are more sophisticated than they were even 5 years ago, when “ESG” was less defined and often discretionary.
In that vein, DEI metrics are now one of the most common topics to incorporate into pay plans, as Emily observed earlier this year. But as DEI goals continue to evolve, the metrics must keep pace. Is your company measuring the right data points to accomplish its strategic DEI goals?
If you’re looking to navigate this pressing topic, or if you’re tackling any aspect of equity audits, we have an excellent DEI workshop series set for this spring. Not only do we have a fantastic lineup of content and speakers, this event is FREE to attend! Here’s more detail:
– April 13 – “Collecting Diversity, Equity & Inclusion Data: What to Measure & Why”: DEI work that is not data-driven likely won’t be made an organizational priority, have clear direction, or have an adequate process for measuring progress. Learn what data points to measure to provide business-relevant insights on diversity, equity and inclusion. Register here to secure your spot for session 1.
– May 4 – “Understanding & Using Equity Audits & Civil Rights Audits”: Companies are facing growing calls from shareholders and other stakeholders to conduct equity & civil rights audits. As I blogged earlier this week, a high-profile “pay equity” proposal recently garnered majority approval, as did a proposal for a racial equity audit at another high-profile company, which Emily blogged about on TheCorporateCounsel.net. These outcomes may be a bellwether of things to come. Now is the time to understand and prepare for an audit, so that your board and your company are equipped to respond to this emerging trend. Register here to secure your spot for session 2.
– May 25 – “Using Diversity, Equity & Inclusion Data: Goal-Setting & Reporting”: You have the data, how do you use it? This session will explore practical ways to use DEI data to set goals and report on progress. You will leave this session with steps you can take right away to set more targeted goals and report out on what your leaders need to know to buy-into and champion the DEI strategy. Register here to secure your spot for session 3.
Each of the above sessions will run from 2:00 – 3:30pm Eastern. You can sign up for all 3, or whichever ones fit your schedule. After the live event, the sessions will also be available on-demand to members of PracticalESG.com (if you aren’t yet a member, email sales@ccrcorp.com). RSVP now to take part in this valuable series!
As I wrote yesterday a growing number of commentators are taking issue with the concept of using ESG metrics in executive pay plans. They say the risks outweigh the benefits, and that there are better ways to encourage sustainable, long-term performance.
Yet, those red flags aren’t deterring some investors. Particularly in Europe, asset managers & owners continue to urge companies to add non-financial targets to pay programs. To counter the shortcomings of discretionary ESG factors, the investors typically want these metrics to be measurable, transparent and linked to publicly disclosed E&S pledges. This Proxy Insight article recaps new policies by a couple of Europe-based institutions. Here’s an excerpt:
AllianzGI updated its 2022 proxy voting policy on February 22, revealing that the $743 billion asset manager will vote against European large-cap companies that fail to include ESG key performance indicators (KPIs) in their executive compensation structures.
Harlan Zimmerman, senior partner at Cevian Capital, similarly said in an interview it was “critical” that executive compensation is used to incentivize companies to accelerate engagement with climate change.
AllianzGI supported 23.8% of advisory “say on pay” proposals internationally in 2021, compared to 24.3% in 2019 and 23.5% in 2020, Proxy Insight Online data reveal.
Both AllianzGI and Cevian want companies to break down their climate goals into short-term targets and provide evidence of progress being tied to executive compensation awards.
A number of companies are responding to these investor preferences by tying pay to ESG goals. UBS – which is headquartered in Switzerland and a foreign issuer here – is one of the latest. In the GRI-aligned sustainability report that it recently published, it shared details (pg. 33) of a new compensation scorecard that includes quantitative & qualitative ESG metrics. The company’s compensation plan also includes group metrics based on climate & people goals that are tied to corporate strategic initiatives.
Although the jury is out on whether ESG metrics will deliver the right kind of progress on corporate environmental & social goals, it’s worth keeping an eye on European ESG trends & practices – because they often make their way to the US.