Life sciences companies may want to leverage equity compensation for their physician advisors – but there are complicated healthcare fraud & abuse regulations abound. A recent Fenwick memo lays out several recommendations for life science companies who want to better structure such equity compensation programs, with a short excerpt below:
– Develop and establish, in advance, objective qualifications for physician advisors who may be compensated with equity, avoiding factors that take into consideration the expected volume or value of referrals or business generation (whether currently or in the future) that a specific physician or specialty of a physician can make on behalf of the company.
– Aggregate compensation, including awarded equity, to physician advisors should be at fair market value (FMV) and commercially reasonable for the services to be provided by the physician advisor. The company should develop and maintain reasonable internal documentation to support the FMV of the full arrangement that is refreshed periodically as the advisory arrangement gets renewed.
The memo also recommends that companies develop a healthcare compliance program that encompasses compliance with various laws, including the Federal Anti-Kickback Statute – especially as companies near the coverage & reimbursement stage for their products.
This FW Cook article says that an executive’s retirement may become rocky & unpleasant without proper planning. Crafting thoughtful provisions around equity treatment upon retirement can help pave the road for smoother transitions upon separation. Here’s an excerpt from the memo about the advantages that retirement equity award provisions can provide to companies and shareholders:
– Motivating long-term business decision-making through the retirement date
– Ensuring advance notice of retirements for smoother succession planning
– Avoiding requests for individual incentive program modifications by employees approaching retirement age
– Enabling consistency in treatment across all LTI recipients
– Allowing for restrictive covenants that include important shareholder protections
– Enhancing the competitiveness of the equity program in tight labor markets
– Guarding against the need for award modifications that may create say-on-pay pressure
FW Cook also suggests that it’s a win-win for both the company & senior executives if companies set up a formal policy for the treatment of executives’ long-term incentive awards upon retirement, since it allows boards to avoid one-off treatments towards some executives and not others. It also guards against compensation committees using their discretion to modify awards, which won’t be looked upon favorably by shareholders – and may also negatively impact internal pay equity issues.
For the first time in recent years, the largest subcategory of “executive compensation” shareholder proposals related to requests to submit severance agreements to a vote. That’s according to this Gibson Dunn memo – which recaps key “shareholder proposal” developments from the 2022 proxy season and said that the “severance” category weighed in at 44% of the larger executive compensation group of proposals. Overall, there were 36 shareholder proposals on executive compensation this season, down 27% from last year. Here’s more detail:
The majority of the severance-related proposals asked “that boards seek shareholder approval of any senior manager’s new or renewed pay package that provides for severance or termination payments with an estimated value exceeding a certain percentage of the executive’s base salary and bonus.” Many of these were submitted by the same proponent – John Chevedden & his associates.
This is a topic worth watching. The memo notes that as of June 1, 2022, these severance-related proposals had an average shareholder support of 46.9%, and four received majority support.
I blogged earlier this year about Mastercard expanding its ESG incentive structure to all employees. I wondered whether other companies would start to do this – especially in light of the evolving comp committee focus on “human capital” issues.
This recent 48-page report from PwC supports the notion that it’s early days on using ESG incentives below the senior management level, but says that Mastercard isn’t the only company that’s made the jump. The practice may become more widespread as companies continue to advance their ESG strategies – and it’s worth watching. Here’s an excerpt:
Most companies interviewed said that ESG metrics in pay only apply to the executive directors, executive committee, and their direct reports. This is either because the metrics only apply to the LTIP which already has a small eligible population, and/or because companies say there is insufficient line of sight and ability to influence results deeper in the organisation. The typical weighting is 10% to 20% in the annual and/or long-term incentive.
For the minority of companies interviewed that incorporate ESG metrics in pay across the wider workforce, it is typically in the annual incentive. Several companies commented that ESG-related objectives may still feature in an individual’s personal objectives across the wider workforce, and this may influence decisions on their own annual pay awards and/or bonus.
The report also notes that practices can vary by country and industry. Inclusion of ESG metrics is very low in the Netherlands, despite the strong focus on stakeholders there, due to general skepticism of “pay for performance.” I’ve blogged about that philosophy on a few occasions.
Pay decisions are complicated and rest on many factors. Sometimes boards need to depart from “best practices” to compete for talent or reward work on key initiatives, even if it could trigger “against” recommendations and votes under the standard policies of proxy advisors & investors. That might be fine to do for a year or two, but a longer-term pattern eats into director support – and advisors should make sure that boards are aware of that.
According to a recent Semler Brossy memo, a drop in support can come as soon as the next year. An Agenda report based on data from Farient Advisors shows that controversial decisions over a 3-year period can be even more problematic. Here are more details:
– Over the past five years, average Director election vote support at companies that received a Say on Pay vote below 50% in the prior year is six percentage points lower than at companies that received above 70% support.
– Average director support in the year after a 50-70% say-on-pay outcome was about 2% lower than at companies that received above 70% support.
– Where the say-on-pay resolution received less than 85% support for at least 3 years in a row, the companies were 7x more likely to have 3 or more directors receive below 90% support.
This comes at a time when say-on-pay support is declining for large companies – and this latest Semler Brossy SOP update flags a notable spike in S&P 500 failures this year, up to 4.5%. It’s not clear yet whether support will rise as companies catch up to the enhanced investor expectations that are driving this trend – or whether this trend will continue and possibly even shift to companies outside of the S&P 500. None of this changes the fact that directors need to do what they believe is best for the company – but it does up the ante for balancing interests and engaging with different stakeholders. Especially since low say-on-pay results can draw activist attention.
In a separate memo, Farient suggests these action steps:
– Recognizing that the demands of hot talent markets and the quest for good governance are on a collision course, compensation committees still need to consider balanced approaches, particularly to special awards. Rules of thumb include:
– Exclude CEOs from special award programs
– Require performance conditions for earning awards
– Keep awards at reasonable levels
– Be crystal clear as to the rationale for the awards
– State that such awards are intended to be a one-time or infrequent occurrence
– If the company receives a poor SOP vote, the compensation committee should consider how to cure the root causes of the vote and proactively engage with investors on planned changes
– The credo for boards and compensation committees should be “absolutely no surprises.” Investors hate surprises, including one-time mega grants, retention grants, excessive pay, and poor pay-for-performance outcomes. While not all actions can be telegraphed in advance, companies should proactively engage with investors and disclose key changes whenever possible (e.g., discuss anticipated changes with investors before final decisions are made, disclose forward-looking strategies and changes, rather than simply historical ones)
As reported by ESG Today, Hewlett Packard Enterprises is joining a growing group of companies in linking executive pay to climate initiatives. HPE’s sustainability report notes:
Achieving our net-zero commitment will require a complete business transformation for which every leader at HPE will be responsible. In 2022, we will launch a mandatory climate learning program to empower and enable all our executives to contribute toward our climate goals. In addition, as of 2022, climate metrics are linked directly to the compensation of our executive committee.
The accompanying press release says that the climate metrics are part of variable pay and will releate to management of carbon emissions across the value chain.
HPE had already incorporated DEI metrics into executive pay. We’ve blogged that DEI metrics are more common (but still tricky) – and highlighted considerations in implementing climate-related metrics. The new HPE climate metrics appear to tie in to the company’s commitment to reduce its global emissions footprint – including Scope 3 emissions.
The “climate incentive” train appears to be heading our way – and anyone who plans to jump aboard first needs to take foundational steps on socializing climate priorities, tracking data, and preparing for disclosure – especially where the full value chain is involved. We’ve just posted sample annotated climate disclosures for members of PracticalESG.com – based on the proposed rules that the SEC wants to adopt this fall – which will be key to this effort. We’ll be sharing practical step-by-step guidance this October at our “1st Annual Practical ESG Conference” – as well as our “Proxy Disclosure & Executive Compensation Conferences.” You can register online, email sales@ccrcorp.com, or call 1-800-737-1271. Members can also access lots of guidance in our “Sustainability Metrics” Practice Area.
For those who are newer to executive compensation, this blog from Global Shares gives a good overview of the terminology – and the drivers behind components of executive pay. Here’s an excerpt describing types of equity awards:
– Stock Options: Stock options provide an employee with the right to purchase a certain number of shares at an initially agreed price after vesting. (i.e. meeting some requirements – service-based or performance-based or both). Suitable for many companies – early stage, high growth startups and publicly traded companies – who want to issue equity broadly or with a group of selected employees.
– Restricted Stock Units: It is a grant of shares to an employee. He/she usually receives them for free but doesn’t fully own them until a vesting period has passed. Suitable for many established companies who want to offer equity broadly or with a group of selected employees without requiring payment upfront.
– Stock Appreciation Rights: It is an award based on the company stock value (They are not stock but are tied to stock performance). Holders receive a bonus in cash or an equivalent number of shares based on how much the stock value increases over a set period of time. Suitable for many companies who want to offer employees compensation without requiring employees’ upfront payment and issuing a large number of extra shares.
The blog goes on to discuss pros & cons of equity vs. cash compensation, differences in attitudes by country/gender/age, and how publicly held vs. privately held companies differ. Check out our “LTIPs & Annual Incentives” Practice Area for more guidance on structuring equity awards.
Liz previously blogged about how the concern about using ESG incentives to improperly reward executives may not be supported by current data. Another concern investors have had is whether using ESG metrics in executive compensation programs might incentivize companies to greenwash & not actually walk the walk. Here’s a study by Pawliczek, Carter and Zhong with some good news – the paper suggests that say-on-pay voting laws enable investors to demand better ESG performance, and positively impacts companies’ environmental policies. Below is an excerpt of the paper’s abstract:
Investors are increasingly demonstrating a preference for superior ESG performance among their portfolio firms. Concurrently, the use of ESG-related contracting metrics in executive compensation contracts has increased. We investigate these two related issues in the context of the adoption of Say-on-Pay (SOP) voting laws, which provide investors a direct voice about compensation and an additional avenue to express their preferences. Exploiting the staggered adoption of SOP laws around the world, we find that the use of ESG metrics in compensation contracts and ESG performance increase after SOP adoption. Notably, the improvements in ESG performance are concentrated in countries with greater increases in ESG contracting, suggesting that ESG contracting serves as a pathway to facilitate improvement in ESG performance. Additionally, improvements are concentrated among firms with sophisticated owners, in stakeholder countries, and those with CSR committees. Lastly, we show that the improvement in ESG performance contributes to the positive effect of SOP laws on shareholder value.
Investors want more transparency and accountability with ESG metrics & disclosures – and compensation committees increasingly need to consider whether and which ESG incentives are appropriate for their executive incentive programs. The spotlight on ESG metrics isn’t going away, and we’ll be covering this hot topic at our virtual “Proxy Disclosure & Executive Compensation Conferences.” Check out the agendas – 18 sessions over 3 days. Join us for expert insights October 12-14th! And tack on our “1st Annual Practical ESG Conference” for even more valuable information about ESG programs, risks & opportunities that could affect ESG metrics. The Conferences can be bundled together for a discounted rate. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
Over on the Proxy Season blog, Liz previously talked about all the nuggets from Georgeson’s annual proxy season review (which is available for download here). Here are some compensation-related highlights:
– Say-on-pay vote results for 2022 season YTD are witnessing a marginal decline in the average support for Russell 3000 companies, with approximately 90.2% of votes cast in favor (excluding abstentions), compared to 91% support in 2021. As we have been seeing in recent years, S&P 500 companies have garnered slightly lower support, with approximately 87.8% of votes cast in favor YTD, also down slightly from 2021 when they received 88.5% favorable support.
– 35 Russell 3000 companies have failed to receive majority support for their say-on-pay proposals so far in the 2022 season, with 27 failed votes occurring since January 1, 2022. Nearly one-third of these companies are in the S&P 500 index, with 12 failed votes in 2022 YTD and 9 since January 1, 2022…The sizable retention grant to the CEO, which is entirely time-based and also vests after a relatively short period of time, seems to have contributed to significant shareholder opposition.
– In assessing pay for performance alignment in 2022, a common concern for both shareholders and ISS seems to relate to goal rigor of incentive programs, as some companies have lowered targets following challenging business conditions due to the ongoing pandemic.
We’ve been tracking Say-on-Pay results closely for the past few months – and you can always look back to our “Say-on-Pay” Practice Area to re-experience the action. One other point of note from Georgeson’s report: there have been a number of new shareholder proposals (13 so far this year) “leveraging companies’ CEO pay ratio information” – these proposals are requesting that companies take workforce compensation into account when setting CEO pay. Of the three voted on prior to the report, support ranged from ~8-11%.
While these aren’t eye-popping support numbers, Liz previously flagged that universal proxy rules are going to be upon us soon – and the high pay ratio is itself a vulnerability for compensation committee members. We’ll be diving into the latest insights & best practices from top compensation consultants during our “19th Annual Executive Compensation Conference” – happening virtually on October 14th, with Semler Brossy’s Blair Jones, FW Cook’s Bindu Culas, Weil Gotshal’s Howard Dicker and Pay Governance’s Tara Tays. Here are the full agendas for the “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – 18 action-packed sessions over the course of 3 days – October 12-14th. Register today – sign up online, by email sales@ccrcorp.com or call 1-800-737-1271.
A member recently posted this new follow-up to a 2018 question in our “Q&A Forum” (#1259):
After a demotion that triggers a Form 8-K, would any changes in the individual’s compensation or duties be reportable? For example, if a CFO is demoted to a Director of Finance on 12/1/2021, that demotion would trigger a Form 8-K and her comp would be included in the 2022 Proxy. However, if she subsequently enters into a severance agreement on 12/1/2022, would that trigger an 8-K? Even though she isn’t an executive officer, she’s a NEO in the proxy, so would that require disclosure?
Another member responded:
Our position and understanding has been that an 8-K is triggered in this situation, under the bright-line test that it applies to anyone who was an NEO. Of course, it’s only if the change is material. I would view a severance agreement as very likely material to the extent that it’s providing benefits beyond what had previously been disclosed. If the change was just to lower a person’s salary to be in line with what other non-executives are earning, that may not be material.
Remember that our forum is a great place for folks new to executive pay disclosure & governance – as well as senior folks who need a “gut check.” It’s a great place to exchange ideas. Anyone who’s a member can post new threads or respond to other members’ topics – either with attribution or anonymously.