The Advisors' Blog

This recent Wachtell Lipton memo is a good reference point if you need to quickly summarize the main executive compensation issues that companies & boards need to watch in the coming proxy season. Here are two key items:

Proxy Advisors. Last November, ISS added to its list of problematic pay practices that may result in a negative say-on-pay recommendation “severance payments made when the termination is not clearly disclosed as involuntary.” ISS has historically criticized payment of severance when ISS concludes (whether or not correctly) that the nature of a termination is not a severance qualifying event; the recent guidance raises the profile and significance of 8-K disclosure for NEO separations.

Last December, Glass Lewis revised the threshold for the minimum percentage of a long-term incentive grant that should be performance-based from 33% to 50%, and indicated that it will raise concerns with executive pay programs where less than half of an executive’s long-term incentive grant is subject to performance-based vesting conditions.

Other than the aforementioned items, neither ISS nor Glass Lewis issued any significant compensation-related policy updates for the 2023 proxy season, though both firms announced voting policy updates in a number of other key areas including board diversity. For a detailed discussion of these updates, see our December 6, 2022 memorandum, “ISS and Glass Lewis Issue Final 2023 U.S. Voting Policies.”

Equity Award Considerations in a Reduced Stock Price Environment. Many issuers experienced significant stock price declines in 2022, especially in the tech sector. These declines should be taken into account by compensation committees as they consider 2023 annual equity grants. A reduction in market value will result in awards covering a larger number of shares and may put pressure on individual and aggregate share limits under a company’s shareholder approved equity plan. If plan limits are insufficient to make ordinary course annual equity grants, companies may consider granting cash-settled awards outside of a shareholder-approved plan in the form of phantom equity or stock appreciation rights; however, cash-settled awards will result in variable, or “mark-to-market,” accounting. Companies seeking approval for new equity plans or new share reserves at their annual meetings may also need to re- calibrate the size of their requests to reflect the reduced value of shares.

– Liz Dunshee