It has been a difficult hiring market for employers over the past several months, and this is equally true for executive talent. Meridian notes that traditional retention approaches are obsolete, and lists several tasks that may help your company get ahead of the curve on retaining and recruiting executive talent today – below are some of the highlights:
– Structure effective packages for new hires and promotions. Our experience suggests that companies often overpay outside hires to attract the candidate, and underpay internal promotions because the increases are large enough that it is not necessary to come all the way up to the market median. It also is common to focus on the individual packages rather than on broader internal pay relationships and equitability. All of this needs to be avoided.
– Leverage long-term incentives to increase real pay delivery for outperformance. A strong business strategy that provides opportunity for compelling real, earned pay from equity is one of today’s keys to attracting and retaining talent. This is apparent from the growing prevalence of executives leaving secure, long-term employers for startups and IPOs. They see the potential upside leverage as more than offsetting the potential downside risk.
Companies need to review the structure of their long-term incentives in response, especially where there is heavy reliance on restricted stock and performance shares designed to regularly payout in the target range. Such reviews should recognize that there are two ways to enhance potential pay delivery for high performance without increasing the grant value. The first is structuring performance shares with higher maximum payout opportunities than the standard 200% of target shares, with steeper performance curves for outperforming and underperforming against financial (i.e., non-market-based) metrics. The second is setting high-risk goals for relative and/or absolute total shareholder return (i.e., market-based) metrics. This shifts the GAAP valuation of shares/units being granted from face value to Monte Carlo value. Under the Monte Model, the higher the performance risk, the lower the grant value per share and the more shares that can be granted and subsequently earned at a multiple for above-target performance.
– Refine peer groups. Where executive talent-market competition extends to growth companies and successful recent IPOs, these companies should be in the peer groups, if not to directly benchmark executive pay levels, then at least to know their pay practices. For example, it is common sense that established financial services companies should be looking at fintech, and Big Pharma should be looking at drug discovery companies. The fact that there may be exceptions to the standard revenue-size and market- cap thresholds in peer-group selection criteria should not be the determining factor.
I previously blogged about how it may generally be easier to implement diversity, equity & inclusion metrics compared to climate metrics. This Semler Brossy article points out that while nearly 30% of the S&P 500 companies used a DE&I metric in their executive incentive plans last year, these metrics shouldn’t be seen as a quick fix to a hard problem. Excerpted below are some of the common pitfalls companies need to be cognizant of with DE&I metrics:
– Boards may be tempted to focus on the diversity aspect of DE&I, which is the easiest to measure. However, the “E” and “I” are just as critical. Representation of women and minorities may increase, but without a culture of inclusion, companies risk tokenizing groups or gamifying quotas.
– Incentives have limited real estate. Beyond DE&I, other strategic priorities can get crowded out of incentive design if not considered holistically. Rank ordering priorities can help. Some companies may find that other tools effectively reinforce DE&I, such as performance management systems, promotions, and terminations.
– Acquiring an organization with a less diverse population could harm progress toward DE&I goals, yet the deal might still be in the company’s strategic interest. Boards should include allowable adjustments in incentives to anticipate these challenges or design their plans to maintain the legacy business goals separately until the next performance cycle begins.
– Meanwhile, every country has a different mix of ethnicities and legacies. International boards may decide to measure gender globally but race and ethnicity only in the United States. Alternatively, the board could allow each region to set its own goals.
Ngozi previously blogged on PracticalESG.com on steps companies can take to ensure that their DE&I efforts aren’t just performative gestures. While incentives are a powerful tool, it’s just one part of the equation – it’s critical for boards to learn what companies are doing to push the needle on a more diverse and inclusive culture. If you’re a PracticalESG.com member, you can find the replay of our “Using Diversity, Equity & Inclusion Data: Goal-Setting & Reporting” workshop – our panelists talk about the tangible behaviors and practices needed to drive inclusion & what information boards should get to properly monitor DE&I progress.
If you aren’t already a member of PracticalESG.com, sign up online or by emailing sales@ccrcorp.com or calling 800-737-1271. Our “100 Day Promise” allows you to try a subscription at no risk for 100 days – within that time, you may cancel for any reason and receive a full refund!
Last year, I blogged about Pearl Meyer’s quick poll on how workforce base salaries might climb higher in light of record inflation & high turnover rates. In May, Pearl Meyer conducted another quick poll with 337 companies to see whether those expectations were implemented – and it looks like 70% of the companies’ salary increases were higher in 2022 compared to 2021. Of those 70% with higher salary increases, the primary factor driving the increases were retention concerns (at 44%) followed by the higher cost of living and rising inflation (30%). Here is an excerpt of the key findings:
– After more than two decades of very flat total base salary increases hovering in the low 3% range, 2022 increases were 4.8% for all employee groups combined. Moreover, total increases were over 4% for two-thirds of survey participants, and over 6% for a quarter of organizations.
– Results indicate that organizations responded to this perfect storm of record inflation, high turnover rates, and a shortage of labor by providing more generous increases as a tool to attract and retain talent.
– This very timely survey reports that about one-third of organizations are considering or planning to provide mid-year salary increases in 2022. Historically, mid-year increases have been rarely used so this will be an interesting trend to watch. Most companies are giving thoughtful consideration to mid-year increases and are providing them to key employees, targeted job families, and top performers rather than granting increases across the board.
ISS announced last week that their peer group submission window will be open from 9 am ET on Tuesday, July 5th until 8 pm ET on Friday, July 15th, for companies that have annual meetings slated to be held between September 16, 2022 and January 31, 2023. Here is an excerpt:
As part of ISS’ peer group construction process, on a semi-annual basis, corporations are requested to submit changes they have made to their self-selected peer groups for their next proxy disclosure. ISS considers companies’ self-selected peer groups as an important input as part of its own peer group construction methodology…
Submissions should reflect peer companies used (or to be used) by the submitting company for pay-setting for the fiscal year ending prior to the company’s next upcoming annual meeting.
Companies who haven’t made any changes to their previously disclosed peer groups, or don’t want to provide this information in advance, aren’t required to participate. For those not participating, ISS will use the peers from the company’s last proxy filing for its peer group construction process.
John blogged this morning on TheCorporateCounsel.net about the SEC’s newly published Reg Flex Agenda for Spring 2022. Even though the Reg Flex Agenda isn’t binding in any way, it reflects the Chair’s rulemaking priorities and can give insight into timeframes for proposals & final rules. Here are the compensation committee & executive pay-related items:
It’s often also interesting to see what doesn’t make it onto the agenda. The potential rulemaking on bank bonuses that I blogged about last December appears to have dropped off, and the 2020 proposal to modernize Rule 701 has been withdrawn. With 53 rules on Chair Gensler’s priority list, he has to draw the line somewhere…
With so many important rules & proposals scheduled to land this fall, you don’t want to miss our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – to get practical guidance on what you need to do to comply with the new requirements. We have sessions dedicated to clawbacks, pay-for-performance, human capital management, and the deluge of other new developments. Here’s the full agenda for the Conferences – 18 sessions over 3 days. Register today – sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
The Asset Management Association of China wants to limit pay for senior staff at financial institutions, according to meetings reported by Bloomberg but denied by Chinese authorities. The directive aligns with similar guidelines issued by the China Securities Regulatory Association last month as part of China’s push toward “common prosperity.” The rules would apply to both local & foreign banks – including Credit Suisse, Goldman Sachs, JPMorgan and UBS. Here’s more detail from Bloomberg and the FT about what the rules would do:
– Require 40% of bonus payments to be deferred for three or more years
– 20% of bonuses must be invested in financial products issued by their own companies
– Bonuses can’t be directly linked to revenue from underwriting deals
– Clawbacks for violating regulations or causing excessive risk exposure
The guidelines are ostensibly intended to reduce risk-taking behavior that short-term bonuses may encourage – and reduce excessive pay. Although some investors and responsible pay advocates may agree with the spirit of these restrictions, in practice they reflect the increasingly chilly relationship between the West and in China. They’re yet another example of the complexities that global companies are facing right now – and why their boards are so busy. Banks’ dreams to profit from the world’s second-largest economy have been hampered by Covid shutdowns, restrictions on stock sales of China-based companies, and other regulatory hurdles.
It isn’t clear from the face of the regulations whether they will directly impact executives or pay practices outside of China, but the compensation committees of subject banks will likely need to evaluate the organization-wide impact. If they make big changes in response, that could have an even broader market impact.
The enthusiasm of 3 million pandemic-era retail holders was not enough for AMC to win say-on-pay support at this year’s annual meeting. The company’s Form 8-K reports that the advisory vote received support from 36% of holders present & entitled to vote at the meeting.
That abysmal showing was down from a lukewarm 60% in favor last year. Bloomberg reported that a lack of disclosure & actions around “responsiveness” to last year’s vote led both ISS & Glass Lewis to recommend against this year’s resolution. The proxy statement suggests that AMC was putting most of its “responsiveness” eggs in the retail basket, with this disclosure about “Consideration of Say-on-Pay Results”:
Over the course of the year we have worked to increase engagement with our stockholders including through the AMC Investor Connect initiative focused on our large base of retail investors and the inclusion of stockholder questions in our quarterly earnings calls. We have considered last year’s voting result and our compensation policies and decisions continue to be focused on financial performance and aligning the interests of executives with the interests of stockholders.
ISS also recommended against the Silverback himself, AMC CEO Adam Aron, who last year at this time was being hailed as “the CEO for the meme-stock generation” as he catered to the whims of retail holders who at that time made up 80% of the company’s shareholder base. He was re-elected this year with the support of about 86% of voting shareholders (although AMC uses a plurality standard for its classified director elections, so it was very unlikely he would have been voted out).
It’s always important to keep close tabs on changes to the shareholder base, and it’s not clear whether AMC’s retail base diminished since last year. It may have, since the proxy says that BlackRock & Vanguard now collectively own about 17% of outstanding shares. But one thing is apparent: investors are reluctant to support a $19 million compensation package when the stock has dropped nearly 60% since January. Free popcorn and a pantsless interview are unique (and in some ways successful?) engagement efforts, but they don’t deliver votes for pay.
It will be interesting to see whether the board reforms pay this year in response to the vote. Director support will be on the line. The company’s classified board structure and plurality voting standard offer protection against a control contest, but an activist could still take aim with other takeover tools.
With the end of the 2022 proxy season approaching, we’re revisiting this say-on-pay tracker from Farient Advisors, which allows you to search say-on-pay results by year, stock index, industry group and specific companies. For the Russell 3000, 87.97% of companies have received over 80% support on their say-on-pay proposal.
If you’re one of the companies with lower say-on-pay support this year, you’ll want to think about revving up your engagement efforts soon – starting outreach early will also help you plan for a spruced-up engagement disclosure next year. See our treatise chapter on “Say-on-Pay Solicitation Strategies” for a breakdown of next steps.
We’ve heard in a previous webcast that compensation committees are feeling the pressure to incorporate ESG-related metrics into incentive plans, due in part to increasing investor expectations. Since ESG is a broad category, compensation committees do have some breathing room to find ESG-related metrics that drive the business forward. This Pearl Meyer memo points out that climate-related metrics can be thornier to implement (vs. DEI metrics, for example), since climate-related issues may be intrinsically tied to how the company conducts its business. As a first step, the memo lays out several key questions compensation committees should be asking when considering climate-based incentive metrics, with a few excerpted below:
– What is the company’s culture and its strategic priorities?
– Are these goals critical to business success and value creation?
– Is it possible to set specific goals and make progress on the proposed metrics?
– What are the assurance processes? Can results be audited?
You should also check out the pay-related communication topics heat map on pg. 6 – it highlights which compensation topics are higher priorities for various stakeholders, so your company can prepare specific messaging to address concerns across different stakeholder groups. As you sort through which metrics would work best for your company, keep also in mind that the larger institutional investors and proxy advisors generally have a perspective on what they want to see with respect to ESG-related metrics (for example, see our previous blogs about BlackRock and Glass Lewis).
You can also join us at our “1st Annual Practical ESG Conference” – virtually on October 11th – where we’ll have a session on “ESG Hot Topics: Forewarned is Forearmed” – with Sourcemap’s Leo Bonanni, BlackRock’s Michelle Edkins, Latham’s Sarah Fortt and S-Factor’s Bonnie Lyn de Bartok. And at our “Proxy Disclosure Conference,” our agenda includes a session on “The Evolving Compensation Committee” – with Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, American Water’s Jeffrey Taylor and Pay Governance’s Tara Tays. These Conferences can be bundled together for a discounted rate – and will help get your compensation committee situated on how to best handle pressing ESG-related executive compensation matters. We’ve also extended the “Early Bird” rate! Register before this Friday, June 17th, to get the best rate. You can sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
For companies who grant equity awards to UK employees (including by way of US employee stock purchase plans), the deadline for HM Revenue & Custom’s year-end reporting requirements will be midnight (UK time) on July 6, 2022. This Cooley memo states that by that deadline, companies must have:
– registered to use the service;
– registered each plan or arrangement;
– self-certified any UK tax-advantaged plans; and
– reported each share award grant and share acquisition related to a share award that occurred during the relevant reporting period.
The memo also explains what returns to file depending on the plan/arrangement, possible penalties for noncompliance and more.