With the compensation committee’s role expanding significantly and quickly in recent years, this NFP Compensation Consultants blog reminds us that pressure is also on corporate secretaries and HR teams to facilitate committee oversight of new focus areas, like HCM and DEI. That doesn’t mean to you need to reinvent the wheel, but a continued—and greater—focus on organization and communication is key.
The blog notes that committee calendars are the most effective tools to ensure that topics are addressed and sufficient time is dedicated to them. Evolving expectations of committees means these calendars will need to be refreshed more often. I’ve seen companies prepare two versions for different purposes: a granular version for management’s internal use and a color-coded, highly designed version to include in committee materials.
The post also highlights the importance of increased communication for committee members and HR. Often the corporate secretary has a key role in facilitating that communication. If your compensation committee agenda and materials are prepared by one department working in a silo, now is the time to improve your internal collaboration—among HR, legal and financial reporting.
For resources, including comprehensive guides and sample calendars, check out our “Compensation Committees” practice area on CompensationStandards.com.
The news has been chock full of corporate crises and mass layoffs this year, and there’s been no shortage of media reports criticizing high CEO pay in the wake of these events and calling out CEO pay increases staying ahead of inflation while median employee pay stagnates. This CNN article notes that sometimes – like Dire Straits said – it was just that the time was wrong. Hiring and compensation decisions, and even prior year performance, might be said and done before a crisis occurs. And in times of trouble, retention may be key.
On the other end of the spectrum, the article also notes that some large companies significantly reduced CEO pay earlier this year in light of macro trends. After recent layoffs, Zoom’s CEO announced that his salary was being reduced by 98% and he was forgoing his fiscal 2023 bonus. But pay cuts can be criticized as well, with Forbes recently highlighting stock price increases after pay cuts and layoffs, saying the salary and bonus cuts look “performative.” As highlighted by the Wall Street Journal, pay-versus-performance disclosure may make the impact of stock price fluctuations on CEO pay even more evident.
As Dave recently blogged on TheCorporateCounsel.net, in our current polycrisis environment, crisis management is critical. I hate to add to your list of everything, everywhere all at once, but the reasonableness and optics of CEO pay – always a hot topic – also need to be front and center for your compensation committee (and your PR and IR teams) in times of crisis.
Liz has blogged about the advance proxy voting disclosure initiatives of various institutional investors on our Proxy Season Blog on TheCorporateCounsel.net, including Neuberger Berman’s NB Votes initiative. As part of that initiative, now in its fourth year, NB recently announced that it’s voting against the directors of one company due to low share ownership levels and related company policies. Here’s an excerpt:
Regarding share ownership, we encouraged the company to make share ownership guidelines mandatory and increase ownership requirement for management and directors. Further, we have concerns regarding a notable lack of insider purchases during a period when the company shares are at a decade’s low. In our view, it is imperative for management and the board to maintain a significant equity ownership in the company not only to ensure alignment with shareholders’ interests, but also to signal to the market a renewed commitment to protecting and enhancing shareholder returns.
…Due to our concerns about the lack of share ownership at the board level we intend to oppose the election of all independent directors who do not meet the company’s current, voluntary guidelines.
Check out our “Stock Ownership Guidelines” Practice Area for checklists, sample guidelines and a monitoring chart to help you keep tabs on compliance by your officers and directors.
Liz recently blogged that the SEC designated a longer period for taking action on proposed listing standards to implement Dodd-Frank clawback rules. This left companies who haven’t yet adopted a compliant policy unsure whether to jump on this now using the listing rules proposed in February or whether some additional time may be forthcoming. This FW Cook blog clarifies that clawbacks should be on your summer to-do list. Here’s an excerpt:
An April 24, 2023 SEC release (see here: link), while somewhat ambiguous, could be read to suggest that the SEC would not take action before June 11, 2023, although leaving open the possibility of a later approval date.
Recent conversations between SEC staff and executive compensation practitioners suggest that the SEC is leaning toward treating June 11, 2023 as the date for final action (actually, June 9 since June 11 is a Sunday). While practitioners have strongly lobbied for the SEC to delay action until the absolute deadline of November 28, 2023, the SEC so far appears unpersuaded, at least in part because of procedural reasons referenced in the April 24, 2023 release.
Given the substantial chance the SEC will approve the listing standards no later than June 9, 2023, this means a new policy would have to be in place by August 8, 2023 (i.e., 60 days later). Even though drafting a compliant policy may be relatively straightforward, seeking Board/committee review and approval over the summer could be challenging from a practical perspective. There are many boards and committees that don’t meet in the June/August period, so waiting until the SEC has acted may result in the need for special unanticipated actions, either through special meetings or possibly unanimous written consents.
Dust off your flip flops and your employment agreements, equity plans, deferred compensation plans and existing clawback policies since, as Morgan Lewis describes in this alert, there’s a lot to consider. The good news is that we have more resources, including multiple models of a Dodd-Frank-compliant policy, in our “Clawbacks” Practice Area. Plus, we’ve extended our June 27th webcast “Proxy Season Post-Mortem: The Latest Compensation Disclosures” by an additional 30 minutes to bring you the latest on clawback policies from our expert panel: Mark Borges, Principal at Compensia and Editor of CompensationStandards.com, Dave Lynn, Partner at Morrison Foerster and Senior Editor of TheCorporateCounsel.net and CompensationStandards.com and Ron Mueller, Partner at Gibson Dunn & Crutcher LLP.
If you attend the live version of this 90-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.
Liz recently blogged that things were looking up for say-on-pay in 2023 after record failures in 2022. As this Pay Governance viewpoint notes, that is especially welcome news given some added complexities in 2023—namely, pay-versus-performance disclosures and significant decreases in TSR in 2022 for the first time since say-on-pay votes were first mandated.
The viewpoint compares say-on-pay failure rates and TSR performance at the S&P 500 and comes to a surprising conclusion: the increase in the say-on-pay failure rate occurred during a period when annual TSR levels were among the highest recorded since 2011. The article attributes this to:
– Greater scrutiny of pay practices by proxy advisors and institutional investors as we move deeper into the SOP era.
– Heightened attention over the past several years to the quantum of pay provided versus prior years without regard to absolute or relative performance.
With those trends likely to continue, does that mean final 2023 say-on-pay failure rates are likely to be worse than last year? After all, as the article notes, “TSR performance can change much more rapidly than pay can adjust.” The article points to a few factors working in favor of companies and compensation committees:
– S&P 500 TSR looks better with a longer lookback period
– The use of relative TSR by proxy advisors and institutional investors
– S&P 500 TSR is up in the first quarter of 2023
– Pay-versus-performance disclosures may help show the alignment of “compensation actually paid” with TSR (compared to total compensation in the summary compensation table)
Corp Fin Director Erik Gerding and Chief Counsel Michael P. Seaman joined the “Dialogue with the SEC Senior Staff” session on Friday at the ABA’s Business Law Section Spring Meeting. Reminding us that Corp Fin’s hard work doesn’t end with the rule adoption, Erik noted that once a rule is effective, lots of work goes into implementation – training folks in the disclosure review program, working through the comment process and deciding how to provide guidance. Erik then outlined the Staff’s plan for the review program for PVP disclosures, which the SEC is considering in two buckets:
– For issuers that omitted the disclosures – either entirely or in part – comments will be issued asking about the missing pieces. Take note: Erik called out that the Staff may ask those issuers to delay an annual meeting until the required disclosures are made!
– For issuers that provided the required disclosures, the Staff may issue comments at the end of proxy season that are prospective in nature, recognizing the complexity of the rules and the number of interpretive questions. The Staff may also consider providing more broadly applicable guidance.
Erik notes that the Staff doesn’t see the first season as establishing a settled practice and reserves the right, going forward, to make further comments as to how the rule should be interpreted. Liz previously blogged about commentary from the Staff earlier this year that the PVP comment process will be iterative and the Staff isn’t looking to be punitive for companies who presumably put in a good-faith effort to comply with the requirements, so that certainly seems consistent.
The Compensation Monitoring Contact Group (CMCG) of the FSB is tasked with monitoring the progress of financial institutions’ implementation of FSB’s Principles for Sound Compensation Practices and Implementation Standards. In its last report in November 2021, the CMCG observed an emerging trend that financial institutions are increasingly using non-financial measures in compensation programs and decided to examine this further in 2022, focusing on climate-related factors. The report on that study was released in April.
The study showed that there was a wide variety of quantitative and qualitative metrics used by financial institutions that addressed climate change in their compensation programs, including reductions in their own carbon footprint, growth of sustainable finance, improved climate-related leadership, training, innovation or disclosure, integration of ESG considerations into the decision-making process and external-based metrics such as ESG ratings and indices. On the last metric, there was a difference in opinion among participants as to whether it was advisable to use external ESG ratings:
Some participants noted that their firm uses external ESG ratings. Others that do not use them expressed caution that as financial institutions are at different stages of their journey and not targeting the same objectives, a financial institution’s relative position against peers does not always give a precise reflection of progress given different starting points. Instead, they felt that the core strategy is something which executives should be held accountable for and actual target relevant to the core strategy should be achieved instead of relative positions.
While metrics varied widely, the following challenges to incorporating climate change in compensation programs were nearly universally reported by participants:
– Data availability, reliability and analysis
– Difficulty in developing objectively measurable KPIs acceptable to all stakeholders
– The misalignment of long-term climate outcomes and annual compensation plans
– How to cascade climate targets beyond certain executives
– Regulatory and policy uncertainties
The survey concluded that financial institutions’ use of climate metrics in compensation is still at an early stage and, where used, the impact on total compensation remains modest.
During our recent webcast “The Top Compensation Consultants Speak,” Ira Kay described a Pay Governance study that used pay versus performance data of 50 S&P 500 companies that filed their proxies on or before March 10, 2023 to calculate the level of alignment of “compensation actually paid” with TSR, relative TSR, GAAP net income, and the company selected measure, which we subsequently blogged about. Now that more time has passed, Pay Governance has reviewed PVP disclosures of 160 S&P 500 companies that filed their annual proxies as of March 31, 2023 and has released a viewpoint with more takeaways for us. Here are the key findings from that data, the first of which confirms the conclusion in their prior study with this larger sample size:
– The new PVP disclosure is supportive of the current executive compensation framework used by most companies, as compensation outcomes are directionally aligned with shareholders’ interests. It also justifies their significant support for Say on Pay during the Say on Pay era these past 12 (going on 13) years.
– The fair value of the current year’s equity award has the greatest impact on the CAP absolute dollar amount.
– Higher performing companies (as measured by TSR) reported significantly higher CAP values than lower performing companies for each of the last three years (2020-2022).
– As explicitly expected by the SEC, CAP can be very volatile between years due to stock price changes and adjustments to expected performance outcomes.
– Changes in SCT total compensation, on the other hand, tend to move within a narrow range because the biggest drivers of the change relate to the current year’s annual incentive, a relatively small portion of total compensation, and changes in the grant date value of the current year’s equity awards, which are generally conservative.
Given these findings, the study concludes with thoughts for management and compensation committees:
In general, we do not believe companies should or will make program design changes to try to improve their PVP disclosure. However, we do recommend management and Compensation Committees consider the questions investors and other stakeholders might ask at the next shareholders’ meeting based on the new disclosure. These might include:
– Is the relationship of CAP and TSR sufficiently aligned?
– Are the relationships of CAP to the other financial performance measures included in the PVP table (GAAP net income and the company selected measure) sufficiently aligned, and if not, are the reasons explainable?
– Is the company’s TSR in line with its peers?
– Is the absolute quantum of CAP reasonable?
– Are the year-over-year changes in CAP driven by the company’s performance?
– Is the use of grant date fair values — as presented in the SCT and used as the primary pay-for-performance test by the proxy advisors, or the equity values as presented in the PVP disclosure — the best way to evaluate pay-for-performance? Or is some type of realizable/realized pay, that considers expected (realizable pay, similar to PVP disclosures) or actually realized pay outcomes, a better approach?