Last week, the Department of Labor announced that it had entered into a settlement with LinkedIn to resolve allegations of systemic gender-based pay discrimination. LinkedIn denied the allegations. Here’s more detail from the DOL’s press release:
A routine Office of Federal Contract Compliance Programs’ compliance evaluation found that – from March 1, 2015, through March 1, 2017 – LinkedIn failed to comply with Executive Order 11246. Specifically, OFCCP alleged that the employer did not provide equal pay to the affected female workers in positions in its Engineering and Marketing job family groups in San Francisco, and its Engineering and Product job family groups in Sunnyvale.
Under the terms of the agreement, LinkedIn will do the following:
– Pay $1.8 million in back wages and interest to the affected workers.
– Conduct a staff training program to ensure compliance with LinkedIn’s non-discrimination obligations.
– Evaluate – for the next 3 years – whether the company’s compensation is gender-neutral and make salary adjustments if not. LinkedIn will also revise its compensation policies and practices and agreed to monitoring and reporting to ensure compliance with federal contract obligations.
The 3-year commitment to evaluate salaries and report on compliance is a meaningful undertaking that most companies would prefer to avoid, even if the dollar value of this settlement doesn’t create much of a ripple in relation to LinkedIn’s $10+ billion revenue. The conciliation agreement says that the agency found “statistically and practically significant pay disparities in annual base salary based on gender after controlling for legitimate explanatory factors.” While the Executive Order at issue in these allegations is keyed toward federal contractors, that’s a broad group of companies – and this settlement may put gender pay equity back in the spotlight with stakeholders at other companies, too.
It’s important to be proactive here – before someone else forces your hand. We’ve been covering this issue for years and have a great collection of resources in our “Gender & Racial Pay Equity” Practice Area that can help you advise your comp committee and reduce risk. Make sure to check out the transcript from our webcast, “Pay Equity: What Compensation Committees Need to Know” – for practical info about conducting audits, remediation strategies, disclosure issues, board oversight, and shareholder expectations.
Emily blogged last month that CEO pay is back on the rise. A new ISS Corporate Solutions whitepaper (available for download) says that the rebound is widening the gap between CEOs and CFOs, who are often the second highest paid NEO. Interestingly, while the gap is increasing on a dollar-by-dollar basis, the ratio of CEO to CFO pay has remained constant over the past decade. One has to wonder whether this is the only thing in the world that has been the same since 2012.
– The gap between CEO and CFO pay widened substantially between fiscal 2020 and 2021 in each of the four indices examined
– CFOs were the second highest paid Named Executive Officer after CEOs at 37% of the companies in the Russell 3000 in 2020
– The analysis of median CEO pay as a multiple of median CFO pay by industry shows a marked level of volatility
– CEO pay tends to be a higher multiple of CFO pay at larger companies. For example, the CEO pay multiple in the S&P 500 is around 3.0 over the whole 10-year period examined; it is relatively close to that for much of the period in the S&P 400. By contrast, it is around 2.6 in the S&P 600 and around 2.2 in the Russell 3000 excluding the S&P 1500. In contrast to the dollar differences in pay, which have increased over the period, CEO pay as a multiple of CFO pay has remained fairly constant.
Check out this updated “Compensation Committee Handbook” from Skadden Arps – written in a non-technical style that is easily understood. This year’s edition is 126 pages long. Here’s an excerpt that explains some of the updates:
The duties imposed on compensation committees of publicly traded companies have evolved and grown over time. This eighth edition of the Compensation Committee Handbook from the lawyers of the Executive Compensation and benefits group at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates is intended to help compensation committee members understand and comply with the duties imposed upon them. We have also undertaken to describe in some detail the concepts underlying a variety of areas within the bailiwick of compensation committees (for instance, the types of equity awards that are commonly granted and their respective tax treatment) and to provide our perspective on some of the many decisions that compensation committees must make (for instance, the pros and cons of hiring a compensation consultant and the factors that go into that hiring decision).
We discuss the developments over the past year to executive and director compensation practices and related trends, particularly with respect to the SEC’s proposed clawback rule in connection with the Dodd-Frank Act (discussed principally in Chapter 2), executive compensation in the continuing era of COVID-19, and increased attention on environmental, social and governance (ESG) considerations (each discussed principally in Chapter 10).
This comprehensive guide is posted along with checklists, sample charters and memos about evolving comp committee responsibilities in our “Compensation Committees” Practice Area.
In addition, at our “19th Annual Executive Compensation Conference” – coming up virtually on October 14th – we have a session devoted to “The Evolving Compensation Committee” that will deliver practical guidance to make sure your directors aren’t opening themselves up to vulnerability. This Conference is paired with our “Proxy Disclosure Conference” on October 12th-13th. These Conferences are bundled together in order to provide you with meaningful and practical info about proxy season issues that affect executive pay decisions & disclosures, in a fast-moving and entertaining format. Here are the agendas – 17 sessions over three days. Sign up now to take advantage of the “Early Bird” rate, which expires June 10th! You can register online or by emailing sales@ccrcorp.com, or by calling 1-800-737-1271.
As companies emphasize the importance of human capital management in their periodic filings, shareholder proponents are seeing if that lines up with a company’s pay practices. Shareholder proponents submitted a proposal relating to the feasibility of increasing tipped workers’ wages at Dine Brands Global and Denny’s. The shareholder resolution for Dine Brands reads:
RESOLVED: that shareholders of Dine Brands Global (“Dine”) request that the board of directors analyze and publicly report on the feasibility of increasing tipped workers’ starting wage to a full minimum wage, per state and federal levels, with tips on top to address worker retention issues and economic inequities.
The supporting statement highlights Dine’s ESG strategy as including “the goal of empowering team members by “investing in employees” and “attracting and retaining diverse talent”” – and underscores a concern that the “misalignment between Dine’s stated goals in its annual reporting and the payment of a subminimum wage creates significant reputational and financial risk.”
While these tipped worker wage proposals are specific to certain industries, the supporting statement speaks to a bigger issue – companies need to shape the narrative on how their human capital management approaches fit in with the rest of their ESG messaging. “Human capital management” can be broken down into a plethora of discrete topics ranging from DEI, to worker safety, to workforce compensation – and you’ll want to make sure your approach to one HCM issue won’t clash with your ESG efforts elsewhere. Visit our “Human Capital Management” Practice Area to make sure you’re kept up to date on companies’ latest HCM priorities – and how their HCM and ESG disclosures are evolving with it.
Last week, the Delaware Court of Chancery granted in part, and denied in part, a motion to dismiss a derivative suit with two breach of fiduciary duty claims, an unjust enrichment claim, and a corporate waste claim. In Knight v. Miller et. al., the plaintiff, Robin Knight, challenged option awards granted to Universal Health Services, Inc.’s directors and officers by its compensation committee at the outset of the Covid-19 pandemic. The defendants (comprised of UHS and various UHS directors & officers) moved to dismiss, generally on the “basis of a fair process and a fair price.”
As background, the compensation committee met on March 18, 2020 (prior to market open) and granted option awards with the strike price equal to the closing price that day – which happened to be the same day that UHS stock hit $67.69 a share, the lowest closing price since September 2013. The stock rebounded to $100.13 per share on March 30, 2020, after various phases of federal Covid-19 relief legislation was announced and enacted. Notably, the compensation committee meeting in question was scheduled at least 6+ months in advance, and the defendants stated that since 2014, the option grants were normally made in March meetings (except for once in April).
Zoning in on the fiduciary duty claims, the plaintiff pled that (1) the compensation committee breached their fiduciary duty in granting these March 2020 awards to the directors and officers, and (2) all defendants breached their fiduciary duties for accepting these March 2020 awards.
Breaking down the claims further by categories of defendants, the Court allowed the breach of fiduciary duty claim against the compensation committee for granting awards to directors (excluding the controlling defendants) to move forward. Since the act of directors fixing their own compensation is intrinsically self-interested (even if allowed by the DGCL), this was subject to an entire fairness standard of review. The Court said (with footnotes removed):
The Complaint pleads the following, implying lack of entire fairness: first, that the Compensation Committee disregarded certain considerations related to the emergence of the COVID-19 pandemic; second, that the Company’s peers even in its self-selected peer group received significantly less compensation; third, that the Company, speaking through its CFO, considered the Company stock a “buy” even at a price over $20 in excess of the strike price established for the March 2020 Awards; fourth, that at least one analyst identified a year-end price target for the Company of $127, using a model that purported to incorporate the effects of COVID-19; and finally, that Alan Miller was “actively lobbying” the federal government via his activities with FAH, and therefore “knew or had reason to know of the timing and extent of federal grants,” including relief that UHS might reasonably expect to receive. These facts are sufficient to raise a reasonably conceivable inference of an unfair transaction at the plaintiff-friendly pleading stage. This finding does not preclude the Compensation Committee Defendants from establishing that the March 2020 Awards were in fact entirely fair.
The Court also allowed the breach of fiduciary duty claim against the compensation committee for granting awards to controlling defendants to move forward. Although neither of the controlling defendants were seated on the compensation committee, they were directors & controlling stockholders who received a non-ratable benefit – so entire fairness standard applied. However, for the breach of fiduciary duty claim against the compensation committee for granting awards to the executive officers, the Court applied the business judgment rule & granted the motion to dismiss.
As to the fiduciary duty claim against all of the defendants for accepting the equity awards, the Court concluded that “what is required is a defendant’s knowingly wrongful acceptance of compensation, and that the standard must be bad faith. That is, there must be a sufficient pleading of scienter to support a bad faith claim, which serves as a claim based on breach of the duty of loyalty.” The Court didn’t find enough in the record to sustain even a claim that the compensation committee acted in bad faith when making the grants, let alone that the defendants accepted the grants in bad faith – and granted the motion to dismiss.
The Court also granted the motion to dismiss the corporate waste claim, but allowed the unjust enrichment claim to move forward.
Here are some of the latest stats from Willis Towers Watson on say-on-pay votes at Russell 3000 companies & equity plan votes at S&P 1500 companies, as of April 19, 2022:
– 4 failed say-on-pay votes at Russell 3000 companies (pushing the failure rate to 3% compared to 2.1% at our last check-in)
– 9% ISS negative say-on-pay vote recommendations (down from 12% in 2021)
– 69% rate of “high” ISS concerns re: pay-for-performance among proposals that ultimately received a negative ISS vote recommendation (down from 77% in 2021)
– 91% average support (and no failures) for S&P 1500 equity plans
– 3% ISS negative equity plan recommendations (down from 13% in 2021)
While we’re seeing some surprises on the environmental & social shareholder proposals that went to a vote this season, it looks like it’s less of a rollercoaster ride on the say-on-pay front so far (or have I jinxed it now?). As we face the second half of the 2022 proxy season, we’ll keep posting updated stats in our “Say-on-Pay” Practice Area.
In late March, S&P Dow Jones Indices and MSCI Inc. announced changes to the Global Industry Classification Standard (“GICS”) structure, which will go into effect next year and shake up the codes for various companies, including those in retail, data processing, bank, REIT and transport industries. A new FW Cook blog covers the main changes to the GICS classifications. This excerpt explains the potential impacts to certain ISS assessments:
– Say on Pay: peer group construction used to measure relative CEO pay and performance under ISS’ CEO pay-for-performance test, which is a key factor in ISS’ vote recommendation for Say on Pay.
– Non-Employee Director Compensation: industry sector used to identify “excessive” non-employee director pay levels, which may affect ISS’ vote recommendations for director elections.
– Equity Plan Scorecard (EPSC): industry grouping used for shareholder value transfer and burn rate comparisons in ISS’ review of equity stock plan proposals.
– QualityScore: industry grouping used in ISS’ QualityScore model, which monitors governance-related risk across four pillars: Audit & Risk Oversight, Board Structure, Compensation and Shareholder Rights.
These GICS changes will go into effect after close of business on March 17, 2023 – but given that the months are just flying by, 2023 will be upon us soon. We’ll stay tuned to see whether any ISS FAQs come out to address these upcoming changes. Visit our “Peer Groups” Practice Area for more info.