We’ve posted the transcript for our recent webcast – “The Latest: Your Upcoming Proxy Disclosures” – in which Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn covered the waterfront of issues to consider as you prepare your upcoming proxy disclosures – with lots of attention to pay vs. performance. Check out the transcript for info on:
1. Pay vs. Performance Disclosures
2. Meeting Format
3. Clawbacks
4. Say-on-Pay Trends
5. Showing “Responsiveness” to Low Say-on-Pay Votes
6. CD&A Updates
7. CEO Pay Ratio Considerations
8. Perquisites Disclosure
9. Shareholder Proposals
10. ESG Metrics & Disclosures
11. Proxy Advisor & Investor Policy Updates
12. Status of Other Pay-Related & Human Capital Management Rulemaking
A few pay versus performance disclosures are starting to roll in! This is something that we’ve all been eagerly awaiting – and I send my condolences to those who have had to be brave and take the first leap. These are from smaller companies – we continue to await a large-cap example. Thanks to Aon’s Corporate Governance & ESG Advisory Group for alerting us!
– Praxis Precision Medicines Form 10-K (pg. 136) – It is unclear to me why the company included this disclosure in a Form 10-K – as this Goodwin FAQ points out, the SEC rules only require pay vs. performance disclosure in proxy & information statements; it isn’t required in Form 10-K even when other Item 402 disclosure is included. But I didn’t read this filing or the company’s filing history in-depth to understand whether there is a reason they might have wanted to go ahead with it here.
– Panbela Therapeutics Form S-1/A (pg. 72) – Seems to have missed some of the disclosure requirements, but has the distinction of being the first to report under the new rule.
When say-on-frequency votes roll around every sixth year, one of the questions that has been asked repeatedly in our “Q&A Forum” is what voting standard to apply. State law and governing documents typically state that all matters are governed by majority votes (with the exception of the election of directors, which at some companies is still determined by a plurality vote). But on this “multiple choice” ballot item, you may end up in a situation where none of the options receive majority approval.
Last week on TheCorporateCounsel.net, Dave pointed out that you don’t need to prescribe a particular standard in the proxy statement:
How do I determine which frequency “wins” the vote?
The Say-on-Frequency proposal is unusual because the issuer is not asking the shareholders to “approve” a specific proposal or resolution. Instead, shareholders are being to select one of three frequency options or abstain from voting. In footnote 121 of the adopting release from 2011, the Commission stated: “Because the shareholder vote on the frequency of voting on executive compensation is advisory, we do not believe that it is necessary to prescribe a standard for determining which frequency has been ‘adopted’ by the shareholders.”
Notwithstanding that disclosure leeway, as John shared in his response to Question #858 on our Form, when your board moves on to actually determine the frequency with which it will submit the say-on-pay resolution, the directors likely do need to consider which of the say-on-frequency options received a plurality vote. That’s because Glass Lewis has embedded the plurality concept into its policy on say-on-frequency. The proxy advisor says that it will recommend votes against all members of the comp committee if the board adopts a say-on-frequency other than the one approved by a plurality of the company’s stockholders.
As I blogged last fall, more than 90% of Russell 3000 companies conduct an annual say-on-pay vote – so this has become a largely irrelevant exercise, but we have to do it anyway.
Last week, ISS further updated its “Equity Compensation Plans” FAQs – to provide more info about their burn rate calculation. Question 15 now includes this additional color:
The VABR calculation values grants in each fiscal year separately, based on the applicable QDD date and associated QDD data in that fiscal year. In calculating grant valuations in a specific fiscal year, the “stock price” in the formula above (both in the numerator and the denominator) refers to the 200-day average stock price as of the applicable QDD date in that fiscal year. The option valuation inputs are similarly as of the applicable QDD date in that fiscal year.
This new document adds to the FAQs that John blogged about last month. The updated ISS FAQs document highlights all year-over-year changes. We’ll be posting it in our “Proxy Advisors” Practice Area.
Recently, the Corp Fin Staff issued a series of Compliance & Disclosure Interpretations to address some of the open questions on the Dodd-Frank clawback rules. Dave blogged last week on TheCorporateCounsel.net about each topic:
– Exchange Act Rule CDI 121H.01 – Dave wrote that, just in the nick of time, the Staff has clarified that “while the check boxes and other disclosure requirements will be in the rules and forms in 2023, we do not expect issuers to provide such disclosure until they are required to have a recovery policy under the applicable listing standard.”
Many interpret this CDI to mean that you are not required to mark the checkboxes, but you still need to put the text of them on the cover page – to match the new version of Form 10-K that’s posted on SEC.gov. However, there’s a concern among some practitioners that it could be misleading (particularly for the first checkbox) to put the text on the cover page and not mark the box if there had been a restatement. So, does the Staff want companies to put the text of both checkboxes on the cover page and include a note to say that it’s not applicable to this Form 10-K? Or not include them at all, despite the Form?
By the end of the Northwestern Pritzker School of Law’s Securities Regulation Institute last week, this issue earned its own name: “The Great Checkbox Debate of 2023.” Despite what some folks apparently heard or wanted to hear, Corp Fin Director Erik Gerding did not publicly give a response beyond what was in the CDI. We hope that the Staff is able to clear this up with further guidance – but as I blogged last week, they are not going to be making Enforcement referrals on foot-faults. This is a fleeting issue and it’s probably not worth getting too worked up about it.
– Exchange Act Rule CDIs 121H.02 and 121H.03 (as well as Exchange Act Forms CDIs 110.08 and 112.03) – As Dave blogged, these CDIs address how the term “named executive officer” is to be interpreted for foreign private issuers filing on Forms 20-F and 40-F, given that foreign private issuers do not provide disclosure under Item 402 of Regulation S-K, which includes the definition of “named executive officer.” This interpretation will come into play when a company completes the financial restatement that triggered the company’s clawback policy and needs to provide related disclosure about recovery of erroneously awarded compensation from NEOs.
– Exchange Act Rules CDI 121H.04 – This CDI says that the clawback rule is intended to apply broadly. Your Rule 10D-1-compliant clawback policy could reach compensation in compensation plans other than tax-qualified retirement plans – such as long term disability, life insurance, SERPs, or any other compensation that is based on the incentive-based compensation. See Dave’s blog for more detail.
As Dave blogged yesterday on TheCorporateCounsel.net, soon-to-be-official Corp Fin Director Erik Gerding said the Staff is planning to issue CDIs to clarify some of the common questions arising from the Commission’s pay versus performance disclosure rules. In his blog, Dave listed several topics that would be candidates for additional guidance.
One other point that was reiterated several times by Erik and Cicely LaMothe – who is the Acting Deputy Director of Corp Fin’s Disclosure Program – is that these forthcoming CDIs will cover the “first batch” of interpretive questions that the Staff is receiving. The Staff also recognizes that in this first year of disclosure, everyone is doing their best to figure things out – so Corp Fin won’t be playing “gotcha” on close calls.
There will be a review process for these filings – but the intent is not to be punitive, it will be to identify areas for improvement in Year 2. This will be an iterative process where the Staff will be looking for us to continue to improve disclosures in years to come.
John blogged last month about the striking performance benefits that appear to be associated with CEO pay cuts. Since that blog ran, we’ve received a few posts on our “Q&A Forum” about how to disclose voluntary pay reductions. Here’s one (#1,431):
If an NEO declines a portion of his salary for the most recent fiscal year, shouldn’t the full salary amount (which was determined by the Compensation Committee before his election to decline a portion) be reported in the SCT?
Wouldn’t the same be true for the value of cash incentive awards and equity awards which had been established/granted by the Compensation Committee prior to the NEO declining a portion of them? Does it matter if the payout on the awards (based on achievement of various metrics) had not yet been determined at the time he declined?
A member responded:
When this has come up in the past with a bonus, we included the full amount and explained in the footnote that the amount was declined.
John also chimed in:
That’s what I’ve seen as well. There’s usually some sort of discussion in the CD&A about what base salary the Comp Committee has approved if an NEO has declined a pay increase. See this Logitech proxy statement.
There will be a few disclosure examples to follow on this general topic as we move through this year and next year, including Intel and Apple. In the proxy statement that Apple recently filed, the company disclosed that Tim Cook had recommended a 40% reduction in his target total compensation for 2023, and what the compensation committee expects to do in future years. See this excerpt from page 11 (and this WSJ article):
Mr. Cook’s 2023 target total compensation is $49 million, a reduction of over 40% from his 2022 target total compensation. Taking into consideration Apple’s comparative size, scope, and performance, the Compensation Committee also intends to position Mr. Cook’s annual target compensation between the 80th and 90th percentiles relative to our primary peer group for future years.