Meredith blogged last week that we are starting to see more large-cap pay versus performance disclosures “in the wild” – in response to the SEC rules adopted last August. This memo from Compensation Advisory Partners summarizes early trends for S&P 500 disclosures. Here are some highlights:
– Comparator Group for TSR: Most companies are using an industry index rather than a custom benchmarking peer group.
– Company-Selected Measure: So far, 96% of companies selected a financial measure while one company selected relative TSR. Of the companies that selected a financial measure, the vast majority defined this measure as adjusted or non-GAAP.
– Tabular List of Most Important Measures: The number of measures in the tabular list was 4 at median and 4.6 on average. Disclosure of only financial measures was far more prevalent than disclosure of financial and non-financial measures. Among the companies that disclosed non-financial measures, the measures were typically operational and ESG measures or a combination of operational and ESG objectives.
– Explanation of Relationships Between Compensation & Performance: Some companies just displayed the graphs and did not make any statements to comment on or to explain the relationships. In instances where companies added narrative to the graphs, comments related to items such as the pay and performance alignment, an explanation based on stock price or other performance, and an explanation of the metrics used in incentive plans (versus the requirement to disclose Net Income).
– Summary Compensation Table Vs. Compensation Actually Paid: The relationship between SCT reported numbers and Compensation Actually Paid varied significantly by year…When PEO Compensation Actually Paid and SCT values for all three years are summed, the ratio tends to align to company 3-year TSR performance. While relationships by company vary, on balance there is alignment, likely because the majority of PEO compensation is delivered in stock-based compensation.
– Location of Pay Vs. Performance Disclosure: None of the companies in our sample included their PvP disclosure in the CD&A. The vast majority included the disclosure following the already required tables and often near the CEO Pay Ratio disclosure, another Dodd-Frank disclosure requirement. The placement of the new PvP disclosure reinforces the view that the required analysis of the new rules were not part of the compensation decision-making process of the compensation committee. We do not expect the PvP outcomes to become a primary factor in analyzing future compensation decisions but it will likely be part of the discussion going forward.
– Length of Disclosure: Disclosures among early filers spanned 3 to 7 pages, with a median of 4 pages and average of 4.3 pages. Since this is the first year of required disclosure, most companies focused on complying with the requirements and minimizing additional voluntary disclosure. The longer disclosures were often the disclosures with the most detailed footnotes and charts reconciling the Compensation Actually Paid calculations.
Thanks again to the CAP team for these early takeaways – see the full memo for more detail, as well as our “Pay-for-Performance” Practice Area. We’ll be sharing more analysis and guidance on newly required pay vs. performance disclosures at our “Top Compensation Consultants Speak” webcast this afternoon – join us at 2pm Eastern!
Tune in at 2pm Eastern tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest areas of focus for compensation committees, including early trends in pay vs. performance disclosures & say-on-pay.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
As Liz and Dave blogged, the exchanges have posted initial rule filings to implement listing standards under the SEC’s Dodd-Frank clawback rule. On March 7, the SEC published notices to solicit comments on both the NYSE and Nasdaq proposed rules. Comments will be due 21 days from publication of the notices in the Federal Register.
Since NYSE and Nasdaq posted their rule filings, memos have been rolling in on the proposals, which we’re posting in our “Clawbacks” Practice Area. Especially for our law firm members who need to be well-versed on both proposals—and know how they differ—this Davis Polk memo provides a handy chart with a side-by-side comparison of the terms. They both closely conform to the SEC’s requirements, but as Dave noted, as usual, the process differs a bit in the case of a company that does not comply. Here’s an excerpt from the memo:
What happens if a company does not comply?
If the NYSE determines that a company has not clawed back erroneously awarded compensation, as required by its policy, reasonably promptly after such obligation is incurred, trading in all listed securities of the company would be immediately suspended and the NYSE would immediately commence delisting procedures. The NYSE will determine whether the steps a company is taking constitute compliance with its clawback policy.
If a company fails to adopt its required clawback policy by the Effective Date, the company would be required to notify the NYSE in writing within five days. The NYSE will then promptly send written notification to the company of certain procedures, including contacting the NYSE to discuss the status of the policy and issuing a press release disclosing the occurrence of the delinquency.
If a company does not adopt a compliant clawback policy, disclose the policy as required or comply with the policy’s clawback provisions, then it will be subject to delisting.
Nasdaq will determine whether the steps a company is taking constitute compliance with its clawback policy. The company’s obligation to claw back compensation reasonably promptly will be assessed on a holistic basis with respect to each accounting restatement prepared by the company. Nasdaq will consider whether the company is pursuing an appropriate balance of cost and speed in determining the appropriate means to seek recovery, and whether the company is securing recovery through means that are appropriate based on the particular facts and circumstances of each executive officer who owes a recoverable amount.
A noncompliant company is required to submit to Nasdaq Staff a plan to regain compliance, and the administrative process for such deficiencies will follow the established pattern used for similar corporate governance deficiencies and would allow Nasdaq Staff to provide the issuer up to 180 days to cure the deficiency; thereafter, Nasdaq Staff will be required to issue a delisting letter.
There was another regulatory development on clawbacks recently—this time from the DOJ. Here’s a summary of the DOJ’s announcement from Freshfields:
On the heels of the issuance of the Proposed Exchange Rules, last week, Deputy Attorney General Lisa Monaco and Assistant Attorney General Kenneth Polite announced the launch of a three-year DOJ pilot program on compensation incentives and clawbacks. Under the “first-ever” program, the DOJ will (1) require corporate criminal resolutions to include a directive that companies implement a compensation system that promotes compliance, and (2) reward companies that attempt in good faith to claw back payments to law-breaking executives and employees—even if those efforts are unsuccessful. Monaco said in making the announcement: “[The DOJ’s] goal is simple: to shift the burden of corporate crime away from shareholders who frequently play no role in the misconduct and onto those who are directly responsible.”
We’ve now posted the links for early-bird registration for our “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences.” The conferences will be fully-virtual from September 20th to 22nd. We’ve also posted a preview of the topics & speakers. This is a milestone year (two decades!), and the practical guidance our panelists share is more important than ever as we face an incredibly active SEC and a challenging economic, political and well…everything…environment.
Here’s what Liz shared on TheCorporateCounsel.net on why this is a can’t miss event:
We’re particularly excited about the fact that Corp Fin Director Erik Gerding will be sitting down with our very own Dave Lynn for an interview about his latest views on Corp Fin priorities & expectations.
This interview in itself is a compelling reason to be there. But if you (or your boss) need more convincing, consider these benefits (feel free to pass these along to whomever approves your budgeting requests):
– 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.
– There’s an “early bird” rate!! We understand budgets are very tight and that more cuts could be coming. If you sign up now, you get the best price. This helps us plan ahead, and helps you save money. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271.
In February, Liz blogged about some pay versus performance disclosures starting to roll in. Those were from smaller companies and—maybe most notably—none of those early disclosures were in a proxy statement. We were anxiously awaiting filings by larger-cap companies. I’m happy to share that a simple EDGAR word search results in quite a few filings since late February.
Personally, I am most interested to see how “real life” examples deal with updated equity award valuation assumptions and the timing of accrued dividends and how much companies provide a narrative explanation if there is a disconnect between compensation actually paid (CAP) and the performance metrics in the PVP table. Check these out to see how they handled whatever disclosure topics you’re struggling with:
There are quite a few other large- and mid-cap examples available on EDGAR now too. Hat tip to our Editorial colleague & Fenwick team member Emily Sacks-Wilner, who continues to provide key updates to us all!
This Skadden post on the Columbia Law School Blue Sky Blog highlights a number of disclosure questions that remain after the SEC’s recent CDIs. Hopefully, some of the early filers have disclosed their approaches to these questions, where relevant, through the copious use of footnotes, so we can all see whether a consensus emerges on these topics.
Curious how these are disclosures are being received by investors and the media? It’s probably still too early for many takeaways, but the WSJ reported on some of the above filings—and others—over the weekend.
I searched this blog for entries about perks, and no fewer than 29 had “perk” and 11 had “enforcement” in the title. In my book, that’s already 29 reasons to beef up your perks disclosure controls and procedures. But the SEC keeps focusing on them, so we keep blogging about them!
It should surprise no one that the latest enforcement action involves a private plane, personal security and travel expenses for the spouses of executives. This time, the private plane was owned by the executive, and there’s a related-party transaction element.
Specifically, the SEC announced it settled charges against a global transportation company and its former CEO for failing to disclose $320,000 in perks. Further, with respect to the related-party transaction, the proxy disclosed that the company chartered the former CEO’s plane from an independent management company and that it paid $3 million for those charters. However, the company failed to include that the CEO received $1.6 million of that amount, and therefore did not disclose the approximate dollar value of the CEO’s interest in the transaction.
To settle the charges, the company and CEO agreed to pay $1 million and $100,000, respectively, in civil penalties.
We recently announced on TheCorporateCounsel.net that Meredith Ervine has joined our editorial team. She brings a wealth of experience – here’s her bio – and here are a few words from Meredith herself.
Meredith has hit the ground running and we’re so excited to have her on board. I’m particularly excited to share that she will be making her blogging debut on this site next week! Feel free to contact her any time at mervine@ccrcorp.com. Welcome, Meredith!
This one slipped by me! Last week, Glass Lewis published commentary that suggests the proxy advisor will be on the lookout for option repricing practices as part of say-on-pay and other votes this season. Here’s an excerpt:
The spring of 2022 already saw the start of a decline from the market’s 2021 peaks, due to a convergence of macroeconomic shocks and rising inflation and interest rates. However, last year’s shareholder voting results (and voting agenda) were on a lag — due to the retrospective nature of typical “say-on-pay” votes, in most cases shareholders were expressing an opinion on pay for surging 2021 performance.
In 2023, investors will generally be looking back on the first protracted downturn in a decade. In some cases, repricing may be one of the factors they will need to consider – whether voting directly on a repricing proposal, or in considering say on pay votes (or even the re-election of specific directors) where boards with the requisite authority unilaterally repriced or exchanged options in 2022.
On page 65 of its voting policies, Glass Lewis explains why it is generally opposed to option repricings – regardless of how they are accomplished. However, they may be more forgiving when macroeconomic conditions cause dramatic declines in equity value, versus company-specific issues. Glass Lewis may support a repricing or option exchange program if:
• Officers and board members cannot participate in the program; and
• The exchange is value-neutral or value-creative to shareholders using very conservative assumptions.
In its evaluation of the program, the proxy advisor also considers these features:
• The vesting requirements on exchanged or repriced options are extended beyond one year;
• Shares reserved for options that are reacquired in an option exchange will permanently retire (i.e., will not be available for future grants) so as to prevent additional shareholder dilution in the future; and
• Management and the board make a cogent case for needing to motivate and retain existing employees, such as being in a competitive employment market.