I’ve blogged a few times about pay transparency laws, which are continuing to proliferate (see this Seyfarth memo about new requirements that go into effect in Washington beginning January 1st). This Aon memo gives an overview of the latest regulations – and recommends steps to prepare based on your company’s current bandwidth & resources. Here’s an excerpt:
First, think about the salary ranges themselves. Are ranges well established and ready to be shared both internally and externally? Some businesses already have established and well-maintained salary structures. In fact, 90 percent of companies surveyed by Aon said they at least have salary ranges in place.
– The quick fix: Spot check the market competitiveness for certain roles relative to your peer group.
– The better approach: Start with an updated job architecture to make sure you have jobs and people in the right roles in the first place, since that serves as the foundation of pay equity. You could also conduct an accelerated salary structure design initiative, which many total rewards teams are dropping everything to complete.
Next, consider existing employees’ positions in their salary ranges. Are they currently paid in a way your organization would be able to defend? When they ask to see the range of pay for their job, will it be easy to provide and explain where they are in the range — and why? Employee questions can quickly expose any real or perceived inequities.
– The quick fix: Take your prior pay equity analysis and come up with a list of employees who make significantly less than comparable peers. Once you identify those individuals, notify the manager and develop a plan for corrective actions.
– The better approach: Revisit your Pay Equity analysis with a focus on what it is you are paying for. Is it true that only fully proficient employees are paid above the midpoint? What else drives pay? Is it tenure or experience or education or reporting to the right manager?
Then, consider manager preparedness. How ready are managers to handle these tough questions from employees? Do all managers have a solid understanding of how the pay program works? Communication will be key.
– The quick fix: Provide managers with answers and talking points for tough questions and share your plan for tackling any pay equity issues.
– The better approach: Offer simulations and role play tough conversations to make sure your managers are answering difficult questions effectively. Ensure all people leaders are well educated on the process for setting and moving pay.
Finally, address the bigger philosophical question around transparency. Once companies comply with the laws in each jurisdiction, should they just treat everyone the same whether their state requires it or not? Or should organizations do the bare minimum as required?
– The quick fix: Ensure compliance with local pay transparency laws where necessary and develop plans in anticipation of further legislation.
– The better approach: Be a leader in the movement. Regardless of current requirements, take proactive measures: perform a pay equity analysis, identify existing gaps, revisit your job architecture and salary levels to improve your rewards programs, and implement continuing manager training. Even if your organization is not subject to specific pay transparency laws, lay the foundation for future disclosure and consider whether proactive disclosure makes sense for your business. For example, are your competitors disclosing salary ranges? Do leaders think it will be beneficial for talent acquisition efforts to have this level of pay transparency?
When the SEC adopted the new Dodd-Frank clawback rules back in October, I blogged about the two new checkboxes that the rules add to the Form 10-K cover page, and said:
Hopefully someone smarter than me will clarify, but it does not seem immediately clear from the release whether these checkboxes will be required for Form 10-Ks that are filed in 2023, after the SEC rule is effective but before companies have to make any other disclosure about policies.
Our members have continued to ask about this in our Q&A Forums over the past couple of months. It doesn’t make a lot of sense to require these checkboxes before the listing standards become effective and before the new clawback disclosures are required. To my knowledge, though, the Staff hasn’t come out with guidance to confirm that.
In the meantime, companies are trying to figure out how to handle the cover page in light of the rules being effective on January 27th. Please participate in this anonymous poll to share what you plan to do (and please email me if you’ve heard anything from the Staff!):
BlackRock Investment Stewardship is out with its its 2023 voting guidelines & Global Principles, which include sections on executive compensation. Here are a few things to note (also see this commentary from February):
– Goals, and the processes used to set these goals, should be clearly articulated and appropriately rigorous.
– BIS does not have a position on the use of sustainability-related criteria, but in our view, where companies choose to include them, they should be as rigorous as other financial or operational targets.
– Where compensation structures provide for a front-loaded award, we look for appropriate structures (including vesting and/or holding periods) that motivate sustained performance for shareholders over a number of years.
– When evaluating performance, we examine both executive teams’ efforts, as well as outcomes realized by shareholders. Payouts to executives should reflect both the executive’s contributions to the company’s ongoing success, as well as exogenous factors that impacted shareholder value.
– When evaluating special awards, we consider a variety of factors, including the magnitude and structure of the award, the scope of award recipients, the alignment of the grant with shareholder value, and the company’s historical use of such awards, in addition to other company-specific circumstances.
– Where executive compensation appears excessive relative to the performance of the company and/or compensation paid by peers, or where an equity compensation plan is not aligned with shareholders’ interests, we may vote against members of the compensation committee.
– In cases where there is a “Say on Pay” vote, BIS will respond to the proposal as informed by our evaluation of compensation practices at that particular company and in a manner that appropriately addresses the specific question posed to shareholders. Where we conclude that a company has failed to align pay with performance, we will vote against the management compensation proposal and relevant compensation committee members.
– BIS will generally support annual advisory votes on executive compensation.
One point that was made consistently at our fall conference and at our November “special session” on the pay vs. performance rules was that it will be much easier to use a line-of-business index for the TSR comparative disclosure, versus a “benchmarking” peer group. This blog from Infinite Equity shows just how cumbersome the disclosure can get when you have to manually re-balance the market weights and disclose year-over-year changes to a custom index.
This excerpt shares some pros & cons – check out the full blog for illustrative tables & calculations:
Given the additional calculations and complexities involved when creating a peer index some companies may be best served to select an in-line industry index based on the reasons laid out below:
– Rebalancing and weighting of peers is internally adjusted by the publishers of the index, i.e. no manual rebalancing
– If the peer group changes year over year the company does not need to track TSR performance against both the old and current index
In contrast selecting the CD&A peer group as the comparator group provides increased visibility and alignment with how executive compensation is determined, despite the additional rigor involved. However, ultimately it is up to the company to decide the approach that is best for them.
Yesterday, the SEC adopted amendments to “modernize” Rule 10b5-1 insider trading plans and related disclosures. Here’s the 2-page fact sheet and here’s John’s blog on TheCorporateCounsel.net about the primary aspects of the rule.
As contemplated by the proposal, the amendments also add a new subsection (x) to Item 402 of Regulation S-K, which creates new tabular disclosure requirements in Form 10-Ks, proxy & information statements for option awards that are granted close in time to the release of material nonpublic information. Item 402(x) also require narrative disclosure about related policies and procedures. Here’s more detail from the SEC’s adopting release:
– Narrative Disclosure: As proposed, the final rule will require companies to discuss their policies and practices on the timing of awards of stock options, SARs and/or similar option-like instruments in relation to the disclosure of material nonpublic information by the company.
– This includes how the board determines when to grant such awards (for example, whether such awards are granted on a predetermined schedule); whether, and if so, how, the board or compensation committee takes material nonpublic information into account when determining the timing and terms of an award, and whether the company has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation.
– Item 402(x)(1) does not require a company to adopt policies and practices on the timing of awards of stock options, SARs and/or similar option-like instruments if it has not already done so, or to modify any such existing policies.
– Tabular Disclosure: If, during the last completed fiscal year, stock options, SARs, and/or similar option-like instruments were awarded to an NEO within a period starting 4 business days before the filing of a periodic report on Form 10-Q or Form 10-K, or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information (including earnings information), and ending 1 business day after a triggering event, the company must provide the following information concerning each such award for the NEO on an aggregated basis in the tabular format set forth in the rule:
• The name of the NEO;
• The grant date of the award;
• The number of securities underlying the award;
• The per-share exercise price;
• The grant date fair value of each award computed using the same methodology as used for the registrant’s financial statements under generally accepted accounting principles; and
• The percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and one trading day following the disclosure of material nonpublic information.
– A Form 8-K reporting only the grant of a material new option award under Item 5.02(e) does not trigger the tabular disclosure.
– The new narrative and tabular disclosures will need to be tagged in Inline XBRL format.
– A registrant that is a smaller reporting company or emerging growth company may limit the disclosures in the table to its PEO, the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year, and up to two additional individuals who would have been the most highly compensated but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year.
The final rule shortens the time period during which an option or similar award would trigger the tabular disclosure – the SEC had proposed requiring disclosure for any grants made 14 days before MNPI was released, but reconsidered after reviewing comments on that point. That means things are a little easier than they could have been, but the new table and narrative will still require planning and thinking.
The final rules will become effective 60 days following publication of the adopting release in the Federal Register, which typically takes about a month. For the Section 16-related aspects of the rules, Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.
Companies will be required to comply with the new disclosure requirements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023. The final amendments defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies. That’s pretty convoluted, but for this equity award disclosure, I think it works out to all companies first providing it in the Form 10-K/proxy statement that’s filed in spring of 2025, for awards granted during 2024. Please correct me if I’m wrong! You can email me at liz@thecorporatecounsel.net.
Join us tomorrow at 2pm Eastern for the webcast, “SEC Clawback Rules: What To Do Now.” We’ll be hearing practical guidance from Cooley’s Ariane Andrade, Hunton Andrews Kurth’s Tony Eppert, Orrick’s JT Ho, Pay Governance’s Mike Kesner, and Kirkland’s Abigail Lane about what to do to prepare for the SEC’s new Dodd-Frank clawback rules that go into effect next month. Among other topics, this program will cover:
– Overview of rules
– Differences from existing requirements & practices
– Specific action items
– Compliance timeframe
– State law issues
– Interplay between ISS guidelines, institutional investor expectations and DOJ enforcement policies
– Enforcement of clawbacks
– Disclosure implications
We’re also continuing to post memos on this topic in our “Clawbacks” Practice Area. As a member of CompensationStandards.com, you get access to the live webcast, plus the on-demand archive & transcript, and all of the other resources on this topic – which we’ll be continuing to update as the compliance date nears.
FW Cook has released its Annual “Top 250 Report” – which examines the long-term incentive practices & trends of the 250 largest companies in the S&P 500. This year’s report also looks at how incentives have changed over a three- and six-year lookback period. This excerpt lays out the key findings for metrics & payout ranges:
While annual incentive plan design varies among companies and industries, practices are converging towards a balanced approach that incentivizes profitable growth and achievement of key non-financial measures. Common design features include:
• Two or three financial measures (70% prevalence; up from 58% in 2016).
• A profit metric (93% prevalence; up from 92% in 2016) with a weighting of 40% or more and at least one other financial metric that aligns with a company’s short-term priorities.
– Revenue is the most common secondary financial metric (57% prevalence; up from 46% in 2016), followed by cash flow (29% prevalence; up from 25% in 2016).
• A non-financial component (78% prevalence; up from 73% in 2016), with the use of standalone strategic measures or team-wide scorecards (58% prevalence; up from 42% in 2016) surpassing individual performance measurement (43% prevalence; up from 38% in 2016).
– The increase in use of strategic measures since 2016 is primarily driven by the heightened focus on Environmental, Social, and Governance (ESG) objectives and the resulting addition of ESG measures in annual incentive plans (72% of Top 250 companies in FW Cook’s 2022 Top 250 ESG Report).
• Payout ranges from 0% or 50% of target for threshold performance to 200% of target for maximum performance.
Severance policy proposals made a comeback during the 2022 proxy season and need to be on your radar for 2023. Over on the Proxy Season Blog on TheCorporateCounsel.net, I recently noted a new Glass Lewis voting policy on this topic. I’m pleased to follow up with more detail via this guest post from Orrick’s J.T. Ho and Bobby Bee:
We blogged back in August about a spike in a 14a-8 proposal that requests companies implement policies to seek shareholder approval of any executive pay packages providing for severance or termination payments exceeding 2.99 times the sum of base salary plus bonus. As discussed in that blog post, the activists define severance or termination payments as including not only cash payments but also the value of equity awards that accelerate upon a separation event. Despite proxy advisors’ historical support of such proposals, most companies faced with these proposals have been able to secure a shareholder vote rejecting it. In justifying their “no” vote recommendations, companies have pointed to existing practices or policies, which provide that they will seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executives’ salary and bonus, while providing for no such limit on equity acceleration benefits.
In a helpful position update, when Glass Lewis issued its 2023 voting guidelines for ESG Initiatives, it disclosed the following with respect to such proposals going forward (emphasis added):
“Retirement Benefits and Severance
We have updated our approach to proposals requesting that companies adopt a policy whereby shareholders must approve severance payments exceeding 2.99 times the amount of the executive’s base salary plus bonus. Although we are generally supportive of these policies, we have updated our guidelines to reflect that we may recommend shareholders vote against these proposals in instances where companies have adopted policies whereby they will seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executives’ salary and bonus.”
The revised approach by Glass Lewis is welcome news and further supports the position most companies have taken when faced with these shareholder proposals. As suggested in our earlier post, companies without existing severance limitation policies should consider, and may benefit from adopting and publicizing, a formal severance policy that requires shareholder approval for cash severance payments to 2.99 times the sum of base salary plus bonus. Such action may put companies in a better position to avoid receiving such a proposal and would also position them in line with the updated Glass Lewis recommendations.
Thanks to J.T. and Bobby for this analysis of the new policy! One note of caution: before you jump in, it is worth thinking through any unintended consequences that could result from policies that limit severance – at least so that you’re prepared for questions that others might pose. Also, see my blog last month for more detail on Glass Lewis’s overall policy guidelines, which accompany these ESG policies.
Companies that have existing elements that go above and beyond the SEC rules will likely maintain those. Shareholders will not want to see existing policies weakened to meet the minimums of the SEC rules. Additionally, institutional investors and proxy advisors increasingly expect to see “enhanced clawbacks” that extend beyond the rule; those expectations are unlikely to go away.
Since the 2015 SEC proposal, many companies have adopted clawback policies reflective of the original proposed SEC rules—for these companies, adhering to the rule will be a simpler matter of reviewing existing clauses and making minor modifications to reflect the final requirements. For instance, many companies that had maintained wide board discretion to determine whether and how to proceed with a clawback when a restatement occurred will need to eliminate board discretion except for narrow cases defined by the rules.
Check out the full memo for a chart that compares common practices for voluntary clawbacks to the final rule. In addition, join us next Thursday, December 15th at 2pm Eastern for our webcast, “SEC Clawback Rules: What To Do Now” – to hear practical guidance from Cooley’s Ariane Andrade, Hunton Andrews Kurth’s Tony Eppert, Orrick’s JT Ho, Pay Governance’s Mike Kesner, and Kirkland’s Abigail Lane about what you need to do in light of the final rules and the current enforcement environment.
We’ve posted the transcripts from our 3-part “Special Session: Tackling Your Pay Vs. Performance Disclosures.” If you registered for this Special Session, you now have immediate access to those transcripts, along with the on-demand video archive and the Model Disclosures that have been available since the event. Simply follow the “Access the Session Archives” link to find the videos and transcripts for each of the three segments:
– Tackling Your Pay Vs. Performance Disclosures: Navigating Interpretive Issues
– Tackling Your Pay vs. Performance Disclosures: Big Picture Impact
– Tackling Your Pay vs. Performance Disclosures: Key Learnings From Our Sample Disclosures (which includes as “course materials” the Model Disclosures prepared by Dave Lynn. . . also check out Dave’s “lessons learned” from this somewhat painful drafting effort)
We’ll be providing ongoing coverage of Staff interpretations, disclosure trends and investor reactions here on CompensationStandards.com, and in The Corporate Executive newsletter, as we head into proxy season. Mark January 19th at 2pm Eastern on your calendars – for our 90-minute webcast, “The Latest: Your Upcoming Proxy Disclosures” – where Morrison Foerster’s Dave Lynn, Compensia’s Mark Borges, Gibson Dunn’s Ron Mueller and Hogan Lovells’ Alan Dye will share the very latest guidance on these disclosures and other important items for the 2023 proxy season.