The Advisors' Blog

Late last week, Glass Lewis issued its 2023 policy guidelines for the US and certain other markets – which apply for annual meetings held after January 1st. The biggest change on the executive compensation front is that you may see more “concerns” raised in the coming year for LTI programs, even if they don’t result in negative recommendations. Here’s more detail:

Long-Term Incentives: We revised our threshold for the minimum percentage of the long-term incentive grant that should be performance-based from 33% to 50%, in line with market trends. Beginning in 2023, Glass Lewis will raise concerns in our analysis with executive pay programs that provide less than half of an executive’s long-term incentive awards that are subject to performance-based vesting conditions. As with past year, we may refrain from a negative recommendation in the absence of other significant issues with the program’s design or operation, but a negative trajectory in the allocation amount may lead to an unfavorable recommendation.

In addition, Glass Lewis has made several clarifying amendments that compensation committees should know about – including a couple related to the SEC’s final pay vs. performance and Dodd-Frank clawback rules:

Compensation Committee Performance: We have clarified our approach when certain outsized awards (so called “mega-grants”) have been granted and the awards present concerns such as excessive quantum, lack of sufficient performance conditions, and/or are excessively dilutive, among others. We will generally recommend against the chair of the compensation committee when such outsized awards have been granted and include any of the aforementioned concerns.

Say-on-Pay Responsiveness: With regard to our discussion of company responsiveness, we have clarified that we will also scrutinize high levels of disinterested shareholders when assessing the support levels for previous years’ say-on-pay votes. When evaluating a company’s response to low support levels, we also expanded our discussion of what we consider robust disclosure, including discussion of rationale for not implementing change to pay decisions that drove low support and intentions going forward.

One-Time Awards: We have expanded our discussion regarding what we consider reasonable disclosure in terms of one-time awards. Specifically, we have included that we expect discussion surrounding the determination of quantum and structure for such awards.

Grants of Front-Loaded Awards: Adding to our discussion relating to front-loaded awards, we have included language touching on the topic of the rise in the use of “mega-grants”. Furthermore, we expanded on our concerns regarding the increased restraint placed upon the board to respond to unforeseen factors when front-loaded awards are used. Finally, we provided clarification surrounding situations where front-loaded awards are intended to cover only the time-based or performance-based portion of an executive’s long-term incentive awards.

Pay for Performance: We included mention of the new pay versus performance disclosure requirements announced by the U.S. Securities and Exchange Commission (SEC) in August of 2022. In our revised discussion of our Pay-for-Performance methodology, we have made clear that the methodology is not impacted by new rules. There is no change to the methodology for the 2023 Proxy Season. However, we note that the disclosure requirements from the new rule may be reviewed in our evaluation of executive pay programs on a qualitative basis.

Short- & Long-Term Incentives: We have added new discussion to codify our views on certain exercise of compensation committee discretion on incentive payouts. Glass Lewis recognizes the importance of the compensation committee’s judicious and responsible exercise of discretion over incentive pay outcomes to account for significant events that would otherwise be excluded from performance results of selected metrics of incentive programs. We believe that companies should provide thorough discussion of how such events were considered in the committee’s decisions to exercise discretion or refrain from applying discretion over incentive pay outcomes.

Recoupment Provisions: We have revised our discussion on clawback policies to reflect new regulatory developments for exchange-listed companies. On October 26, 2022, the U.S. Securities and Exchange Commission (SEC) approved final rules regarding clawback policies based on which the national exchanges are to create new listing requirements. During period between the announcement of the final rules and the effective date of listing requirements, Glass Lewis will continue to raise concerns for companies that maintain clawback policies that only meet the requirements set forth by Section 304 of the Sarbanes-Oxley Act. However, disclosure from such companies of early effort to meet the standards of the final rules may help to mitigate concerns.

These are just a portion of the updates. I blogged about other key changes this morning on the Proxy Season Blog, over on TheCorporateCounsel.net. Lawrence will be taking a deeper dive into ESG-related topics on the PracticalESG.com blog (which you can subscribe to for free).

– Liz Dunshee