Although early returns from the pay versus performance disclosures show that – at many companies – there is alignment between executive compensation outcomes and shareholder interests, a new Pay Governance study cautions that “compensation actually paid” is not a perfect tool for measuring the correlation between pay & performance. That validates what many folks expected.
Pay Governance looked at how CAP stacked up to “total compensation” from the Summary Compensation Table and the concept of “realizable pay” that is often used internally as a factor in determining compensation amounts, but may not be publicly disclosed. Here are the key takeaways:
– There is no perfect solution for evaluating pay for performance.
– Summary Compensation Table (SCT) compensation values are not useful when measuring pay for performance but serve a valuable corporate governance purpose, primarily by showing Board/Compensation Committee intent when providing various compensation programs.
– The new CAP disclosure provides a better understanding of pay for performance than SCT compensation, but the results can be distorted by the inclusion of certain mandated items such as equity awards granted prior to the performance measurement period.
– Realizable Pay generally provides a more rigorous approach to matching the time period for compensation with the performance underlying such awards.
The Pay Governance team suggests that Realizable Pay can provide Compensation Committees with more robust insights when evaluating pay for performance than tools based on the SCT or PVP methodologies and should be a consideration in addressing this important corporate governance issue. They note:
While only 10% of S&P 500 companies expressly disclosed the use of some type of RP model to evaluate compensation outcomes with company performance, it is likely many more are using RP as part of their annual Compensation Committee process but do not disclose its use in public filings. And still others may decide to explore such RP analyses to eliminate many of the distortions included in the SCT and PVP/CAP disclosures when evaluating the alignment of pay and performance.
My personal hope is that if investors and proxy advisors begin to incorporate pay versus performance data into their models, they will not reduce it to a one-size-fits-all measurement tool. Correlations can vary based on the stage of the company.
Make sure to mark your calendars for our webcast – “Pay Vs. Performance: Lessons From Season 1” – which is coming up on Tuesday, June 13th from 2-3pm Eastern Time. Join Weil’s Howard Dicker, Freshfields’ Nicole Foster, Aon’s Daniel Kapinos, and Mercer’s Carol Silverman for practical insights into Year 1 challenges & trends, and predictions for longer-term impacts of this new disclosure framework.
We’ve got a terrific lineup of speakers who will be delivering practical takeaways & action items – essential info for all of us who are grappling with the SEC’s ambitious regulatory agenda. Here’s the 3-day, action-packed agenda for both Conferences, which are bundled together (here’s the agenda specifically for the Executive Compensation Conference). Make yourself look good by getting insights direct from the experts! And for the lawyers out there, get CLE credit while you’re at it!
The Conferences are virtual, September 20th – 22nd. You can also add registration for our “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.
We’re kicking off a new podcast series here on CompensationStandards.com! For our first episode, K&L Gates partner Ali Nardali joins me to discuss clawbacks—since all signs point to the need to “short list” this action item and we suspect many companies haven’t had much bandwidth to focus on the exchange listing rules yet with proxy season in full swing. Ali shares a lot of practice pointers in this short, 17-minute podcast, and we cover the following topics:
– Overview of the new clawback requirements
– Types of compensation covered—and not covered—by a Dodd-Frank clawback policy
– Whether compensation clawed back is on a pre- or post-tax basis
– The time period covered in the event of a financial restatement
– Whether companies can indemnify or insure their officers against a clawback
– Common issues, complications and considerations, including:
Going beyond Dodd-Frank’s requirements
Having one policy or two
Considerations for compensation program design
To better understand how companies are handling some of these considerations, we’re also running a short, anonymous survey on clawback policies. Please take a moment to participate!
For future episodes of this new podcast series, the idea is to focus on topics of interest to the members of this site, including executive and director pay trends, compensation governance and disclosure considerations. Like our other podcasts, we hope to talk to folks—in the compensation space—willing to spend 15 minutes sharing a little bit about themselves, their work, or topics they find interesting. If you have something you’d like to talk about, please feel free to reach out to me via email at mervine@ccrcorp.com.
So far in 2023, say-on-pay results seem to be improving from 2022 despite decreases in TSR. WTW recently reported on updated say-on-pay results at Russell 3000 companies, and the data continues to confirm the early positive trends:
On the one hand, 2023 say-on-pay outcomes appear to be holding fairly steady. Average say-on-pay support continues to trend around 90%, with negative recommendations from proxy adviser Institutional Shareholder Services (ISS) having a 20 to 30 percentage point downward impact on outcomes.
However, as shown in Figure 1 below, the rate of ISS “no” recommendations for say-on-pay and the overall failure rate has dropped considerably so far in 2023. The 1% failure rate is derived from six failed votes observed to date, which is markedly below the 13 and 22 failed votes observed at a similar time in the proxy season in 2022 and 2021, respectively.
. . . Pay-for-performance disconnects remain the primary issue most investors and their advisers cite when voting against say-on-pay resolutions and pay outcomes are likely driving some of the reduced opposition for say-on-pay this year.
That being said, WTW notes:
It will be interesting to see if the early trend of less say-on-pay opposition continues to play out in the 2023 proxy season. Historically, WTW has tracked a reversion to the mean when all outcomes are ultimately tallied.
ISS Corporate Solutions recently released a paper “TSR: Measuring Performance in a Tough Market” (available for download) that analyzed relative TSR metrics across the S&P 500. Below is an excerpt from the summary with key takeaways:
– As of the end of last year, 54 percent of companies in our analysis have a relative TSR performance that’s equal to or greater than the median of their performance peer group
– In the year through December 2022, 40 percent of companies maintained the same relative positioning
– Median TSR for all the groups was up as of the end of March 2023 after a general stock price recovery from the lows of 2022
– Although stock prices have generally fallen across the board as a result of the recent market turmoil, relative TSR metrics have remained resilient and have delivered on their promise of helping incentivize executives to outperform their peers in challenging and uncertain times
The full paper goes on to suggest action items when planning incentive awards using relative TSR, including carefully selecting and frequently reviewing your peer group, considering relative TSR in the context of other financial and strategic objectives to avoid duplication and this tip on how to incorporate shareholder-friendly provisions:
Companies should consider shareholder-friendly provisions in their award designs to mitigate concerns. These could include:
– Capping award payouts at Target if the absolute TSR of the company is negative over the period in question. The cap would apply even if the company outperformed its peer group.
– Increasing the target goal level to the 55th or 60th percentile of the performance peer group to reflect true outperformance for target payouts.
– Considering absolute stock price targets based on historical market performance, or get-back-to-even targets, to mitigate shareholder losses during down periods.
In case you missed it, the Wall Street Journal ran a big write-up on CEO comp last week based on the numbers reported as “Compensation Actually Paid” under the new pay-versus-performance rules. It’s always interesting to see how new disclosures land, how they’re taken in, analyzed and reported on by the media and, therefore, how they’re widely understood.
The article highlights that the “new method” takes into account changing stock prices. But I think companies and compensation committees hoped that it would be evident from their disclosure — and many included language to this effect — that Compensation Actually Paid isn’t actually reflective of take-home pay and, like the Summary Compensation Table total, still only provides a “moment-in-time snapshot.”
In any event, this is a must-read for those interested in how their retail holders likely view PVP disclosures. Also, check out the table with CEO pay data for the S&P 500, which includes the Summary Compensation Table total, Compensation Actually Paid and median employee pay and graphically depicts pay versus industry pay and performance versus industry performance.
For almost four years now (!), I’ve been teaming up with Vontier’s Courtney Kamlet for a “Women Governance Trailblazers” podcast series – where we interview women in the corporate governance field about their career paths & emerging substantive trends. We’ve had many awesome guests! For our latest 17-minute episode, we spoke with Kelly Malafis, who is a Founding Partner at Compensation Advisory Partners. Our discussion included:
1. The biggest changes that Kelly has seen in executive compensation since founding CAP in 2009.
2. Key trends she’s seeing in executive compensation – and how she’s advising clients to address them.
3. The impact on executive compensation of trends in ESG and an enhanced regulatory environment.
Median CEO total direct compensation was up 4% in 2022 among a select number of companies surveyed by Compensation Advisory Partners, according to a recent memo. CAP looked at 50 companies with fiscal years ending between August & October, finding that long-term incentive awards were driving the modest increase – at a time when financial performance was up, but stock market declines pushed down total shareholder return. Here are more details:
– Performance: 2022 financial performance – as measured by revenue, pre-tax income, and earnings per share (EPS) – was strong, with median revenue (+11.8%), pre-tax income (+10.0%), and EPS (+8.9%) all up, though modest compared to 2021. One-year total shareholder return, or TSR, was down year-over-year (-16.4%).
– CEO Pay: Median CEO total direct compensation increased +4% year over year, driven by a 15% increase in the grant-date value of long-term incentives (LTI). While median bonus payout was down -8% from last year, 2021 was a year of high payouts.
– Annual Incentive Payout: Overall, 2022 median bonus payout for CEOs was above target (119% of target). While this is lower than 2021 (when median payout was 149% of target), two-thirds of companies in this study had a payout at or above target, reflecting continued strong financial performance. Payout for the CEO was generally in line with the corporate payout factor (i.e., the percentage at which the annual incentive funds based on company performance) as companies were less likely to make discretionary adjustments (up or down) to CEO pay.
– Say on Pay Results: For the third year in a row, median say on pay support was 95%. We saw a sharp increase year over year in the number of companies receiving 80% or higher support (98% this year vs. 88% last year).
Investors seem to be evaluating equity plan proposals with a more critical eye this year, based on early proxy season results. In its latest update on voting outcomes, Semler Brossy notes:
Average vote support for equity proposals thus far in the proxy season (88.4%) is 300 basis points below the average vote support observed at this time last year, driven by two failed equity proposals early this proxy season. By comparison, no more than three proposals failed in a single year over the last five years.
A recent SGP write-up takes a closer look at why this might be happening – and suggests that companies may need to put extra effort into engagement if a plan proposal is currently on the ballot…or expected for next year. Here’s an excerpt:
Across the market, declining share prices over the past year created dilution and share availability issues, causing companies to rethink equity practices and potentially creatively manage equity burn rates (shift to cash? Lower grant sizes? Change mix of awards?). For many companies, creative considerations were not possible – which potentially has put more companies in a precarious situation: needing shares to replenish their equity plan, but bumping into the dilution and plan cost thresholds of proxy advisors and large investors. In the coming months, many companies will need to strategically engage with their shareholders to win support for their equity plans.
WHAT TO WATCH: Although very few equity plans each year fail to receive majority support, there have already been two failures in the first three months of 2023. Given the challenging market conditions of the past year, large grants to executives have been increasingly costly and highly dilutive. Will this be the year that investors push back?
SGP’s memo also touches on other executive pay-related trends that are coming to the fore this proxy season – lower director support due to executive pay concerns, importance of say-on-pay engagements, and whether pay vs. performance disclosures are creating more questions than answers.
If the Financial Times is diving into your perks disclosure, it’s usually not a good sign. But that’s not the case for this recent analysis of personal pizza reimbursements for Domino’s execs. Read on if you enjoy a cheesy perks story.
Here’s the deep dish: the Domino’s NEOs have been enjoying several thousand dollars worth of delicious products each year. According to this year’s proxy statement, the CEO received more than $7k of food payments in 2022!
The FT takes a stab at tallying the menu items that could possibly total up to these figures – and for the economics geeks out there, it speculates on the behavioral patterns that drive the spending. Are execs regularly feasting on the company’s most expensive option – a large (14”) hand-tossed MeatZZa with premium chicken, bacon, Philly steak, salami, pineapple and shredded parmesan asiago, which retails for $30? Since that pie clocks in at 3,920 calories, I was relieved to see that the company also covers an annual comprehensive physical.
The FT “defies readers to claim they learned anything useful in this piece” – but I did learn a thing or two! First, it had never occurred to me to measure pizza consumption on a square footage basis. Plus, as far as I know, nobody is sharpening their pitchforks over this cheesy situation…yet…which is a rare feat for any perk. However, while the article is full of great infographics, I’ve got to quibble over the lack of pie charts.