John blogged yesterday on TheCorporateCounsel.net that when it comes to updating your clawback policy, you may have less time than you think. Even though the SEC’s final Dodd-Frank clawback rule doesn’t require the listing standards to be adopted until November 28th of this year, the listing standards that were published in the Federal Register a couple of weeks ago say:
“[w]ithin 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days . . . the Commission will: (A) by order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved.”
John pointed to a recent Weil memo that acknowledges that the effective date for these policies could come months earlier than many companies are planning for. While it’s possible that the exchanges will amend their filings to provide for an effective date closer to what most companies had initially anticipated (January 2024), you can’t count on that at this point.
Thanks to our friends at Willkie, we’ve posted a sample form of clawback policy in our “Clawbacks” Practice Area that addresses the Dodd-Frank requirements and may be helpful to anyone who needs to accelerate compliance efforts. If you have a form that you are willing to share with the community, we would welcome more samples! You can email John at john@thecorporatecounsel.net, Meredith at mervine@ccrcorp.com or me at liz@thecorporatecounsel.net.
I shared a reminder last fall that many companies will need to include a “say-on-when” proposal in this year’s proxy statement. But we all make mistakes! Along with other “say-on-frequency” reminders, this Freshfields blog shares practical steps to take if you forgot to include the proposal, after you pick your stomach up off the floor:
If a company inadvertently omits the say-on-pay frequency proposal from the definitive proxy statement for its annual meeting, there may be a simple way to rectify the oversight so long as the meeting has not yet occurred. Assuming the company does not consider the addition of the say-on-pay frequency proposal a material change to the proxy statement, a company should be able to prepare a short proxy statement supplement and an amended proxy card, filed with the SEC as definitive additional soliciting materials, without the time and expense of a full proxy statement update. In addition to amending or supplementing proxy materials, a company should also be sure to update any electronic voting platforms or portals to include the previously omitted proposal. If the addition of a say-on-pay frequency proposal is considered a material revision, then the company will need to prepare a full amended proxy statement and proxy card.
One key question in evaluating options is timing:
– For a company that relies on the SEC’s “e-proxy” rules to avoid printing and mailing a full set of proxy materials to shareholders, are you already in the 40-day period before the annual meeting is scheduled to be held? If so, it will no longer be sufficient to file the amendment or supplement with the SEC and circulate a Notice of Internet Availability to shareholders. In such a situation, in order to avoid delaying or adjourning the meeting, the amendment or supplement must instead be printed and mailed, assuming there is sufficient time for the materials to be received by shareholders as discussed below. Otherwise, the company will need to set a new meeting date, which may also necessitate fixing a new record date and conducting another broker search.
– Is there sufficient time before the meeting to comply with the notice requirements under the company’s governing documents and the laws of its jurisdiction of organization? If there is not, there may be no choice but to set a new meeting date or adjourn the meeting, which may also necessitate fixing a new record date and conducting another broker search—themselves additional sources of delay.
– Was the company required to file a preliminary proxy statement due to the inclusion of “non-routine” proposals, such as a charter amendment? If a preliminary proxy statement was required, a company should consider whether the addition of the omitted proposal to the proxy statement would be considered a fundamental change in the proxy materials that would require another 10-day waiting period before amended definitive materials can be provided to shareholders pursuant to Rule 14a-6(a). Formal guidance on what constitutes a fundamental change is limited, and the determination for any company will depend on its specific facts and circumstances. However, because a say-on-pay frequency proposal would not itself have required a preliminary proxy statement to be filed and is advisory in nature, we believe there are often reasonable grounds to conclude that adding a say-on-pay frequency proposal would not constitute a fundamental change to a company’s proxy statement.
If a company chooses to file a proxy statement supplement, a few matters should be covered. In addition to providing the omitted say-on-pay frequency proposal and an amended form of proxy card, the supplement should also include an amended notice of annual meeting that includes the new proposal, instructions on how to vote and how to revoke or modify previously cast votes in light of the change, what happens to previously cast votes that are not revoked and disclosure about the effects of votes on the new proposal, such as the effect of abstentions and broker non-votes.
An inadvertently omitted say-on-pay frequency proposal can cause consternation, and fixing the issue requires a company to act quickly under pressure. Nevertheless, with thoughtful analysis and consultation with counsel, a company can often address a slip-up with minimal delay and expense.
3. Board Leadership Disclosures: Lessons From Corp Fin’s Sweep
4. Director Skills & Backgrounds: Why Your Disclosures Need a Refresh… & How To Do It
5. Proxy Fights: Practical Steps for UPC’s Sophomore Year
6. Proxy Disclosures: 12 Things You’ve Overlooked
7. Shareholder Proposals: Finding Success in a Challenging Environment
8. The Latest on Rule 14a-8 No-Action Relief
9. Political Spending: Practical Governance & Disclosure Steps for Fraught Times
10. Human Capital Management: Are You Ready for Detailed Disclosure?
11. Insider Trading & Buybacks: What You Need to Do Now
12. Cyber Risk Disclosures: Key Action Items
13. Climate Disclosures: Requirements & Risks
14. The SEC All-Stars: Executive Pay Nuggets
15. The Top Compensation Consultants Speak
16. Pay Versus Performance: What’s New for Year Two
17. Clawbacks: Key Action Items Now
18. ESG Metrics: Beyond the Basics
19. Navigating ISS & Glass Lewis
I’m very proud of the group of experienced speakers that we’ll be bringing together here – lots of former SEC Staff and other heavy hitters – it’s difficult to spotlight specific folks because everyone is so great! And (especially now that I’ve returned to private practice) I’m excited to get practical guidance as we head into another challenging proxy season & grapple with SEC rule changes, Delaware law issues, an unpredictable political environment, and more.
The Conferences are virtual, September 20th – 22nd. You can bundle registration with the “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271. Here’s a reminder of the benefits of attending:
– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?
– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.
– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.
According to the Compensation Advisory Partners memo that I blogged about a couple of weeks ago, early “pay versus performance” disclosures are averaging 4.3 pages – with at least one running to 7 pages. In an age where proxy statements keep getting lengthier, let’s also recognize the effort that goes in to keeping things brief.
Winning the “Brevity Award” – at least from what I’ve seen so far from larger companies – is IBM. The “Pay Versus Performance” section – on page 66 of their proxy – clocks in at 1.25 pages, mostly consisting of footnotes to the required table. Short & sweet!
Pay Governance recently released this viewpoint on alternatives to option repricings. While the article is focused on the biotech sector, in the current market, companies in many industries are grappling with this issue, and Glass Lewis expects an uptick in repricings in 2023. The viewpoints article points out that, while commonly considered, option exchange or repricing programs are seldom pursued. Between 2017 and 2022, only 29 biotech companies sought stockholder approval for an option exchange or repricing program.
The alert goes on to describe a number of alternatives that many companies considered or implemented in 2022 to re-engage employees while managing share usage and cash expenditures. The alternatives include:
– A CEO pool of RSUs for non-executive employees
– Increasing the mix of RSUs in annual equity grants
– Delivering larger annual equity awards to critical talent
– Granting special equity retention awards
– Granting inducement equity awards to newly hired employees
– Allowing employees to elect their mix of equity awards
– Dividing annual grants in two grant dates
– Shortening the vesting period or increasing the frequency of vesting
– Limiting equity eligible employees based on performance and criticality
– An option exchange or repricing
With respect to repricings, Liz recently blogged about the major issues that need to be considered and vetted, including tax and accounting considerations and tender offer rules.
The purview of compensation committees has expanded drastically in recent years, with an expectation that compensation committees oversee a myriad of topics under the umbrella of HCM—from pay equity to corporate culture and talent development. At the same time, the topics historically addressed by compensation committees are increasingly complex, with newly required disclosures and policies. This Compensation Committee Handbook from the Executive Compensation and Benefits Group at Skadden is intended to help compensation committee members better understand their responsibilities and arm them with the necessary information to discharge those responsibilities, including by explaining some key technical rules, deliberately written in a nontechnical manner. Here’s an excerpt describing the new content in the ninth edition:
We discuss the developments over the past year to executive and director compensation practices and related trends, particularly with respect to the SEC’s new clawback rule in connection with the Dodd-Frank Act (discussed principally in Chapter 2), new pay-versus-performance disclosure requirements (discussed principally in Chapter 4) and continued attention on environmental, social and governance (ESG) considerations (each discussed principally in Chapter 10).
For corporate secretaries of NYSE-listed companies, check out the illustrative compensation committee calendar in the appendix.
This Outten & Golden blog notes six key trends most likely to impact executive pay in 2023:
Increases in Base Compensation
Geographic Location/Remote Work
Retention-Based Compensation
P4P Requirements for Public Companies
Environmental, Social, and Governance (ESG) Prioritization, Integration, and Disclosure
Increased Pay Transparency Laws
Increased Executive Mobility and its effect on Executive Compensation
See the blog for more details on each trend.
I found the first one particularly interesting. In support of this trend, the blog cites Pearl Meyer survey data showing higher base pay increases and off-cycle adjustments to salaries in 2022 as well as further increases expected in 2023, and credits this phenomenon on executives’ preferences for upfront cash rather than deferred compensation or equity in light of market volatility.
On pay versus performance, the blog states:
These new disclosure requirements will undoubtedly impact executive compensation structures for NEOs and say-on-pay voting outcomes as shareholders obtain greater transparency about pay practices, pay and performance relationships, and special awards.
It’s still unclear how investors will use PVP disclosure, but I’ll hop on the bandwagon and hope that monthly vesting schedules are going the way of the dodo. I imagine many companies are reconsidering vesting schedules after going through the first year of equity adjustment calculations!
ISS recently posted updated FAQs on peer group selection methodology and the issuer submission process. As usual, ISS made our lives a little bit easier by highlighting any key changes compared to the FAQs applicable during last proxy season. In addition to a new question on externally managed issuers, ISS also added language to the question about publicly disclosing the updated peer group information submitted to ISS, as follows (emphasis added to highlight the new language):
ISS does not require that companies make any special public disclosure of their updated peer group information at the time it is submitted to ISS. We would expect, however, that this list of submitted companies matches the benchmarking peers that are disclosed in the upcoming proxy. ISS encourages issuers to disclose in the proxy the stock ticker for each peer alongside the peer company name to provide for greater certainty that ISS and investors are considering the correct peers.
If the peers submitted to ISS through this process are different from the peers disclosed in the upcoming proxy, ISS may apply additional scrutiny to this variance as part of its pay-for-performance analysis. If there is a significant unexplained discrepancy between submitted peers and those disclosed in the proxy, ISS may in its discretion remove a company from a future peer submission process.
The first change is an easy action item for companies: Add tickers to your proxy peer group disclosures if you don’t already have them. The second change may not be quite as simple. ISS submissions often don’t involve the same controls as proxy disclosures, and the folks charged with submitting an updated peer group to ISS may not have been in the room with the committee and comp consultant when the peer group was set.
Add the timing lag—by the time you’re submitting your peer group to ISS, you may be in the thick of reviewing peers for the next fiscal year or already have a new peer group—and I can imagine how this could get mixed up. So, double and triple check your peer group submissions to ISS lest you risk losing the ability to submit your peers in the future. That being said, I know some companies choose to opt out of the peer group submission process altogether, particularly when peers haven’t changed much—or at all—since last year’s proxy.
As Meredith noted last week, high-level DOJ folks recently announced a pilot program focused on corporate compensation & clawback policies. They’re part of sweeping policy changes at the Department that are aimed at encouraging voluntary disclosure of misconduct and holding the real “bad guys” accountable. Deputy AG Lisa Monaco previewed this policy in a big memo last fall. This Sidley memo highlights the new details that we’ve been waiting for:
1. Every corporate resolution involving the Criminal Division must include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system. Under this Program, resolving companies will need to revise their performance and bonus metrics to include compliance-related components. Companies might implement a system whereby executives and staff are required to forfeit their bonuses if they fail to meet certain compliance-related objectives.
2. The Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers. Notably, recognizing the reality of how difficult clawbacks can be, Monaco announced that companies that pursue clawbacks in good faith, but are unsuccessful, may still be eligible for a fine reduction.
We’re posting memos about the DOJ’s new program in our “Clawbacks” Practice Area and will be watching how it plays out in practice. The DOJ stance is something to keep in mind as you update your clawback policies in response to the new listing standards that will be finalized this year.
Yesterday, we “celebrated” Equal Pay Day – which represents how far into the current year US women who are working full-time and year-round must work to catch up to what their corresponding male colleagues earned the previous year. There are separate “Equal Pay Days” for different groups of underpaid workers. This NPR article says the gender pay gap of 82 cents hasn’t diminished much over the past 20 years even though women have been making inroads in education and entry-level professional positions. I guess that’s why Margo Price is so frustrated.
Shareholders appear to be less interested in this topic lately – but there may be more than meets the eye. Last week, Apple reported that it had secured shareholder support for every management proposal & recommendation at its annual meeting (also see this Bloomberg article). Falling well short of a majority, 33.8% of voting shareholders supported a proposal from Arjuna Capital that requested the company shift from disclosing median racial & gender pay gaps to statistically adjusted pay gaps. So far, this appears to be the only “pay equity” proposal going to a vote this season.
You might think that this means that “private ordering” for pay transparency & pay equity is receding, but that’s likely not the case. Two trends show that companies still can’t ignore this topic:
1. Investors have merely shifted their focus to the broader concept of racial equity & civil rights audits. I’ve blogged about these proposals on The Proxy Season Blog over on TheCorporateCounsel.net and we’ve also covered what companies should do on PracticalESG.com. These audits tend to also capture the concept of pay equity.
2. In addition to the ongoing push for civil rights audits, new state laws are coming into effect that require companies to publish salary ranges for job postings. That means that employees are getting more info than they’ve ever had before – and boards should keep the resulting “human capital” risk on the radar. Just check out this stunning Twitter thread from a UX writer who aired lots of “dirty laundry” for all to see.
We discussed the Compensation Committee’s role in human capital management – and how pay equity audits come into that – during our “Top Compensation Consultants Speak” webcast yesterday. You can check out the on-demand replay at your convenience – the edited transcript will be available in a few weeks. Also check out our “Gender & Racial Pay Equity” Practice Area for other practical resources on this topic, including a checklist.