According to this analysis from ISS Corporate Solutions, total compensation rose by 23% for S&P 500 CEOs over the past 5 years – compared to only 1% for CEOs of FTSE 100 companies. Here’s more detail:
– Median S&P 500 CEO salary grew 15% vs. 10% for the FTSE 100
– Annual bonuses increased 22% among S&P 500 CEOs vs. 21% for FTSE 100 CEOs
– The most striking difference was long-term Incentive (LTI) pay, which grew 34% for the S&P 500 CEOs, while dropping by 3% at FTSE 100 companies.
The article goes on to note that LTIs constituted 71.4% of S&P 500 CEO pay in 2022 (based on granted pay value). If they’re working as intended, those incentives seem to have paid off not just for US CEOs, but also for shareholders of the US-listed companies:
While many factors may contribute to the growing pay disparity, S&P 500 companies have outperformed their FTSE 100 counterparts both in terms of market cap (value creation) and revenue growth. Median market cap and revenue among S&P 500 companies witnessed 52% and 40% growth, respectively, while among their FTSE 100 brethren, market-cap levels remained flat despite a 20% rise in revenue.
I blogged about this pay mix – and payoff – back in 2019. Since then, the appetite for high-risk, high-payout awards has only grown. Several companies have granted “moonshot” awards to take pay to new heights. LTIs haven’t caught on to the same extent in the UK. America: Go big or go home!
Earlier this year, we blogged about two enforcement actions involving compensation-related disclosure failures — one predominantly related to personal use of a corporate plane and one concerning both perks and related-party transaction disclosures. In light of these and other enforcement actions involving companies with inadequate compensation-related disclosure controls, this Bryan Cave blog suggests that companies review their existing disclosure controls and procedures in this area to make sure they address these areas:
– The use of corporate-owned or charter aircraft, including proper accounting for any personal use
– The identification, valuation, documentation and tracking of other perquisites
– The identification, documentation and tracking of related person transactions, including procedures to identify relevant covered persons, such as relatives of directors and executive officers and their respective businesses
– Training of staff in the scope, definition and valuation of perquisites and related person transactions
The blog also recommends the following, which I would argue are a “must have” given how difficult it can be to identify and track perquisites without these controls:
– Adding or expanding perquisite questions in annual D&O Questionnaires
– Coordinating with the Compensation Committee and HR department to establish and enforce policies and procedures for approving perquisites
– Coordinating with the HR or Executive Compensation departments to document and track perquisites
We have posted the transcript for our recent webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – in which Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze this season’s highlights & lowlights. They covered a ton of ground in a short amount of time, including the following topics:
– Say-on-Pay Results – Key 2023 Lessons Learned – Pay-versus-Performance Highlights – Developments in CD&A – Perquisites Disclosure – CEO Pay Ratio – Equity Compensation Plan Proposals – ESG Metrics – Pay-Related Shareholder Proposals – Human Capital Management – Proxy Advisors – Recent & Expected SEC Rulemaking – The Latest on Clawbacks
One of the themes of the webcast was to try to avoid mega grants or “moonshot” awards. As Dave noted, these awards have waxed and waned in popularity over the last dozen or so years, and some companies are dealing with the fallout of grants made in the 2020-2021 period. Here’s an excerpt from Dave’s comments on this topic:
These are basically larger-than-normal equity awards, and they incorporate within them stretch goals to try to incentivize recipients to basically “shoot for the moon” in terms of long-term growth and shareholder value. […] The stock price targets are high, because you’re trying to say, “If we just really hit it out of the park and increase shareholder value by such a huge factor, then the value that’s accorded to this “moonshot’ award is going to be justified.” The problem was when the stock prices declined considerably, it became so much less likely that you would ever hit these price targets that were set at much higher price levels.
You run into a whole bunch of problems, and particularly one of the things that the investor community and the proxy advisory firms look for is, whether you’ve committed to not make additional equity awards during the life of one of these “moonshot” awards. Then, when you’re stuck with this “moonshot” award that has no incentive value, what do you do? Do you go back on that promise, or do you try to come up with other ways of addressing the issue, and are those other ways going to be suitable in terms of pay-versus-performance? There is an accounting overhang for these awards because you are expensing them based on grant date fair value. Then this change of circumstances happens and you don’t get another bite at the apple for accounting purposes. There’s also an overhang issue that these awards create that sometimes has to be considered in how you describe them.
One aspect of these types of awards that is important to think about when you’re drafting the CD&A disclosure is that it’s not just investors that read proxy statements and the executive compensation disclosure. These awards can draw a lot of attention among employees of the company. We saw, at least in 2022, the “great resignation.” Even today, people who are laser-focused on their impressions of executive conduct and executive compensation may choose where they want to work based on these things. The way you justify or describe these types of extraordinary mega grants in the CD&A is something that you have to look at through the lens of those types of readers as well.
This WTW memo addresses the next steps — both for disclosure and compensation-setting — for companies with their first proxy season of PVP disclosures behind them. In the off-season, WTW recommends that companies:
– Review peer disclosures and any SEC comment letters to understand normative market practices.
– Collect and analyze readily available peer data.
– Understand how external observers will use and interpret PVP.
Here’s an excerpt on the compensation-setting piece:
WTW recommends that companies start to collect CAP data for compensation peer groups and understand how the information could fit into existing frameworks for assessing alignment of pay and performance.
Understanding how similar or dissimilar the findings are utilizing CAP when compared to current approaches of assessing pay and performance alignment will indicate whether these are a helpful supplement or potential replacement of existing analyses in the future.
Additionally, for any companies that might not have been performing pay for performance alignment tests with regularity, the new disclosures provide a much easier avenue for assessments than prior frameworks where compensation needed to be calculated by the NEO for each peer.
Liz recently blogged about a Semler Brossy memo that argues that, even in the post-PVP era of “compensation actually paid,” older, time-tested approaches to assessing the link between pay & performance — like more traditional realizable pay analyses — will continue to be important for boards and compensation committees. Compensation committees certainly won’t want to limit the data they reference now that CAP is available, but this WTW memo highlights some benefits of using CAP as well:
CAP, while arguably more complex to calculate for individual companies, will have several advantages in pay and performance analyses that use peer data:
– Ease of collection: Straightforward to collect from peer disclosures
– Comparability: Consistent calculation methodologies allow for comparability across companies
– Transparency: Shareholders and other external observers have access to the same underlying data
You know Tornetta v. Musk, but do you know the greatest “shareholder derivative lawsuit settlement ever as measured by dollar value” (maybe) of all? Over on the D&O Diary blog, Kevin LaCroix analyzes the settlement agreement in the shareholder derivative lawsuit that the Police and Fire Retirement System of Detroit filed against Tesla’s board in June 2020 alleging excessive director compensation. Here’s an excerpt from the blog with background on the claims and details of the settlement agreement, which remains subject to Delaware Chancery Court approval:
The lawsuit alleged that the board had paid themselves “outrageous” compensation in the form of directors pay, stock awards, stock options, and other benefits and bonuses. The complaint alleges that the board “granted themselves millions in excessive compensation and are poised to continue this unrelenting avarice into the indefinite future.” The complaint sought to have the board members disgorge “egregious” stock option awards, reforms to board compensation practices and a declaration that the defendants had breached their fiduciary duties to Tesla and its stockholders.
… The settlement provides that the director defendants will, jointly and severally, provide to Tesla the value of 3,130,406 stock options, using methods and valuations provided in the settlement stipulation. The director defendants will return the value of the options in one of three forms: cash; unrestricted common shares of Tesla stock; and unexercised Tesla options. The director defendants shall have the “sole discretion” in the ratio of returned cash, returned stock, and returned options, provided that the total value of the returned amounts equals the settlement option amount. The agreement specifies the method to be used in valuing the returned assets. Using these valuation methods, the value of the settlement is $735,266,505. As part of the settlement, the director defendants did not admit to any wrongdoing.
The director defendants also agreed to permanently forego options for 2021 and 2022 and will not receive any compensation for Tesla board service for 2021 and 2022. The current directors also agreed to forego any compensation for Tesla board service for 2023. The current board also agreed to adopt corporate governance reforms and the board’s compensation committee agreed to certain measures to ensure oversight and independence.
The blog goes on to discuss the settlement’s comparative size. Kevin LaCroix has been tracking derivative settlements, and the largest-by-dollar-value data point is based on his calculations and supported by a quote from plaintiffs’ counsel in the case. It’s also notable that the defendant directors agreed to return cash, stock and options that they were granted for board service.
I’m loving Meredith’s new podcast series, “The Pay & Proxy Podcast”! If you haven’t already checked it out, now is a great time to listen to the latest episode – which is a 23-minute interview with Skadden’s Ryne Posey about “Mistakes to Avoid When Transitioning CEOs.” Meredith & Ryne discuss:
1. Understanding and quantifying the compensation package that may be due to the current CEO
2. Considerations when structuring a compensation package for an incoming CEO
3. Covenants in the outgoing CEO’s employment agreement
4. Potential implications for “good reason” termination rights in the employment agreements of other executive officers
5. Important considerations for internal and external communications plans
I hope everyone is having a relaxing & carefree summer. Live it up, because – as Meredith blogged a few weeks ago on TheCorporateCounsel.net – things are gonna get real on the SEC rulemaking front this fall (or maybe even yet this summer! Who knows!). One of the items in the “proposed rule” stage that the Commission has been signaling may arrive sooner rather than later is “Human Capital Management Disclosure.” We expect the SEC to propose more prescriptive line-item disclosures than what is currently required under the principles-based rule that was modernized a few years ago.
There’s speculation that the proposal will require disaggregated financial reporting and/or tabular disclosure for human capital matters. That’s based in part on calls from the “Human Capital Management Coalition,” which submitted an SEC rulemaking petition last summer. A new 18-page overview from Schroders, CalPERS and the University of Oxford implies that investor interest in this info is still alive and well. Not only is this overview very thorough, but this press release also links to 5 separate reports that dive into the specific issues of measuring safety risks and other topics.
The report takes a stab at translating “human capital” into quantitative (and qualitative) measures that can guide investor engagements on productivity and profitability – i.e., info these investors want you to provide. It also characterizes the HCMC’s call for standardized reporting as being a more balanced approach than many of the other frameworks that are circulating on this topic. The report says that as it stands right now, The HCMC supports mandatory reporting of the following “foundational” disclosures:
1. how many workers (including employees and independent contractors) the company uses to accomplish its strategy;
2. total cost of the workforce, presented in a way that evidences a discernible through-line from the company’s audited financial reports to issuer disclosures;
3. turnover, including management’s actions to attract and retain workers and how changes in the ability to attract and retain workers affects the company’s performance and strategy; and
4. diversity data, including diversity by seniority, sufficient to understand the company’s efforts to access and develop new sources of human capital and any strengths or weaknesses in its ability to do so.
But wait, there’s more. Beyond the Human Capital Management Coalition, you might recall that last year the FASB moved forward with considering an income statement reporting requirement for employee compensation. This Journal of Accountancy article says that FASB tentatively approved that project earlier this year and might issue an exposure draft in July that elaborates and seeks comment on disaggregated line items. This summary from January shows an example of what it could look like.
We’ll be discussing what you need to do about “human capital management” oversight & disclosure at our upcoming “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which are coming up virtually September 20th – 22nd. Hear what you need to do about these disclosure initiatives (including the SEC’s proposal, if it’s issued by then), and how to balance the information demands with the new risks arising from the SCOTUS’s recent affirmative action decision.
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.
This 6-page memo from Compensation Advisory Partners CAP’s looks at pay practices for CFOs, based on 2022 compensation actions among 175 companies with median revenue of $13 billion. The memo also looks at how CFO compensation compares to CEO compensation. Here are a few key takeaways:
– Base Salary: More CFOs and CEOs received increases in 2022 compared to 2021, with the median increase above 2021 increases
– LTI Awards: LTI awards were up in 2022, though not by as much as in 2021, which may reflect continued strong economic conditions at the time of grants in early 2022
– Bonuses: Weaker financial performance in 2022, compared to strong performance in 2021, resulted in lower bonus payouts
– Pay Mix: The mix of equity vehicles remained roughly consistent with prior year practices, as companies have implemented plans emphasizing performance- and time-based stock, partially driven by proxy advisor pressure for long-term incentives to be comprised of at least 50% at-risk performance-based pay
– Total Direct Compensation: TDC increased in 2022, driven by higher salaries and long-term incentive awards. Median TDC increased approximately 5% for CFOs and and 2% for CEOs
CAP offers this summary & prediction:
2022 was a mixed performance year, with operating profit up approximately 7% at median while 2022 TSR at median was -9.2%. Actual bonus payouts declined from all-time highs in 2021, but still remain above target, generally reflecting financial performance improvement following a very strong performance year in 2021. Actual total direct compensation was up slightly though grew at a slower rate than we have seen on average. Target total compensation continues to grow incrementally each year, with higher salaries and target incentives awarded.
2023 continues to be a dynamic environment due to uncertainty around interest rates, equity market performance and global economic growth. For 2023, we expect to see pay changes in the single digits as Compensation Committees and management teams consider performance and retention when making their pay decisions.
With pay versus performance disclosures creating a shiny new number to analyze – “compensation actually paid” – lots of data folks are excitedly slicing & dicing the figures to find out “what these disclosures tell us.” But do the PvP disclosures really tell compensation committees – or shareholders – anything that they don’t already know using the sophisticated models that they’ve developed over the past decade?
This Semler Brossy memo says that at the very least, CAP won’t be a good substitute for holistic, time-tested approaches to assessing the link between pay & performance. Here’s the intro:
The commonly accepted view is that CAP directionally represents the change in equity holding power for an executive in a given year. However, CAP values are highly dependent on pay design, the timing of pay increases for an individual executive, stock price at the end of fiscal years, and other factors that are not immediately apparent when reviewing the disclosure. As a result, companies with similar total shareholder return (“TSR”) performance over a defined timeframe can have divergent PvP outcomes that can be difficult to reconcile without a deeper understanding of the CAP methodology’s idiosyncrasies.
The disclosure sheds light on specific elements of pay and performance but is not a substitute for time-tested approaches to assess a pay program’s efficacy and alignment with performance over a multi-year time horizon. Board compensation committees should continue to rely on more robust benchmarking and outcome-based analyses to assess pay programs. Competitive pay benchmarking, incentive goal rigor analyses, and more traditional realizable pay analyses provide a more exhaustive set of tools to calibrate and assess pay and performance.
The memo articulates 7 factors and 3 real-world case studies to illustrate that although CAP and the related PvP disclosures can be a helpful “back-of-the-envelope” snapshot of changes in executives’ equity holding power in a given year, the data isn’t all that valuable for assessing pay-for-performance.
HR leaders may have previously considered their value-add to be limited to their efforts to attract, motivate, and retain talent, while their other responsibilities — like external reporting — are important but secondary. This Equity Methods blog highlights that this mindset has been changing, and needs to change, given the increasing importance of non-financial data (especially in the proxy and sustainability report) to investors’ buy, sell, and ballot decisions.
The blog specifically highlights the importance placed on executive compensation data, pay equity and representation information and CD&A storytelling, but emphasizes that this list isn’t exclusive and investors rely on many other types of non-financial data. This data impacts the company and its equity value through say-on-pay votes, director elections, the growth of ESG funds, public and employee perception and the risk/cost of activism.
What does this mean for HR leaders? That companies need to enhance their processes and procedures around this data. Here are the suggestions from the blog:
1. Set up a system of controls. In keeping with how Sarbanes-Oxley mandated internal control procedures and an audit of the system of internal control over financial reporting, we suggest voluntarily implementing rigorous controls around all non-financial calculations taking place. This means procedure documents, control totals tests over the data, trending and fluxes to validate numerical reliability, and clear review responsibilities.
2. Leverage calculation best practices. While some non-financial calculations are black and white, others are laden with assumptions. Unfortunately, there are no rigorous standards governing calculation methodologies as we have in accounting via generally accepted accounting principles (GAAP). The limited materials made available by the Sustainability Accounting Standards Board and others do not, for example, prescribe specific approaches for complex topics.
Complex areas where we see significant divergence in methodologies include pay equity, employee engagement results, how to cut and stratify representation data, and advanced pay calculations like the new pay vs. performance disclosure in the proxy.
Our advice is to leverage your external vendors. For example, in addition to seeing a wide breadth of situations and using this experience to inform best practices, we also keep tabs of trends in litigation. Until a standard-setter gives us the equivalent of GAAP in the non-financial space, we think there’s value in monitoring what techniques do and don’t hold up in litigation.
3. Conduct at least two dry runs before going live on a new externally reported metric. In addition to working out process kinks, these dry runs also let you conduct the critical exercise of trending the results and performing root cause analysis on the variance drivers. Imagine disclosing a pay equity result that shows no gender pay gap and then a year later you disclose a 3% gap.
The first question everyone will ask is, “What changed and why?” Not only will you want readily available processes on the shelf to identify change drivers, you’ll also want some comfort that the methodology is durable and not overly sensitive to blips in the data. These offline dry runs are critical to gaining that comfort so you can begin disclosing externally.
4. Prepare and execute manager training. Once you begin disclosure, employees will see the information and have questions. These questions may be unexpected or nuanced in a way that the manager may simply not know how to reply.
We suggest drafting manager talking points and FAQs in advance of going live (internally or externally). The informational aids should address disclosures related to representation, pay equity, employee engagement, health and safety, or any other topic where an employee could express concerns or simply seek more detail.