As Dave noted in our recent webcast “Managing the New Buyback Disclosure Rules” on TheCorporateCounsel.net, one of the common criticisms of share repurchases is that they allow executives to manage per-share earnings metrics to achieve objectives under compensation programs. This recent article by Pay Governance analyzes repurchase and incentive compensation data and provides the following key takeaways:
– While most S&P 500 companies conducting buybacks in 2018–2021 did not adjust performance goals or incentive awards to account for the lower share count post-buyback, those conducting the largest buybacks tend to adjust goals or incentive awards to offset for the impact.
– Although the use of per share metrics is common in incentive plans, most of these companies balance per share metrics with other performance categories, reducing the impact buybacks have on incentive payouts.
– Shareholder returns for companies in our sample conducting buybacks are similar to returns for non-buyback companies, thus dispelling the notion that companies conduct buybacks to inflate stock prices to the benefit of management.
– The majority of activist share repurchase demands are successful.
These findings seem reassuring for anyone concerned about the incentives of — or benefits to — corporate insiders when implementing buyback programs but highlight that the board needs to consider the buyback’s expected impact on the company’s executive compensation, decide whether to adjust goals or awards and appropriately document its deliberations. We cover this and many more considerations for buyback programs in our “Stock Repurchases” Practice Area on TheCorporateCounsel.net.
Given the no-fault nature of the clawback requirement, the inclusion of “little r” restatements and the need to clawback pre-tax dollars, one commonly-asked question about the Dodd-Frank clawback rule is whether it’s possible for companies to protect executives against the risk of a clawback through insurance or indemnification. As described in this Aon alert, both are prohibited, which has caused companies to consider their insurance policies. Here’s an excerpt from the alert that addresses how the clawback rule will impact D&O insurance coverage going forward:
The SEC rule is a no-fault policy and does not evaluate misconduct. It explicitly prohibits a public company from not only indemnifying officers in the event the clawback rule is invoked, but also from paying or reimbursing the premium for any such insurance policy on behalf of the executive officers. Any existing insurance coverage that provides indemnity for the return of erroneously awarded compensation in an actual compensation clawback event will no longer be available once the final exchange rules go into effect.
Most market standard Side A Difference-in-Conditions (A/DIC) policies include coverage for “facilitation costs” or costs and expenses associated with the return of amounts incurred or required to be paid pursuant to Section 954 of the Dodd-Frank Act. We expect that Side A/DIC policies and insurers will continue to provide this coverage going forward.
As Ali Nardali of K&L Gates highlighted in a recent podcast, it seems likely that a robust insurance market will develop here, but executives will have to pay their own premiums.
For our second episode of the Pay & Proxy Podcast, Ani Huang, the CEO of the Center On Executive Compensation, a division of HR Policy Association, joins me to discuss the Center’s recently released guide on selecting and evaluating an independent compensation consultant. In this 14-minute podcast, Ani covers the following topics:
– Reasons companies initiate an RFP for a compensation consultant
– Policies regarding evaluating a compensation consultant and running an RFP
– Best practices for the evaluation and RFP process
– Criteria to consider when judging an independent compensation consultant
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at mervine@ccrcorp.com.
FW Cook recently released its analysis of the pay vs. performance disclosures filed by the 403 S&P 500 companies that filed proxy statements containing that disclosure through June 1, 2023. Here are some of the highlights:
– The top three most common financial performance measures that companies chose as their Company Selected Measure (CSM) were profit (56%), revenue (17%), and returns (12%)
– A majority of companies included profit (88%), TSR (55%), and revenue (51%) in their Tabular List and only 21% of companies included non-financial performance measures
– Most companies (76%) used their 10-K published industry or line-of-business index as their total shareholder return (TSR) peer group
– Despite three financial performance measures being the minimum requirement, most companies included additional financial performance measures
– Most companies (91%) used graphs/charts as the clear description requirement, and the remaining 9% used a narrative only description
The report also notes that, as expected, the vast majority of companies included their PVP disclosure near the end of the proxy statement, usually following the pay ratio disclosure. Only four companies chose to include the disclosure before the Summary Compensation Table.
We have posted the transcript for our recent webcast – “Pay Vs. Performance: Lessons From Season 1” – in which Weil’s Howard Dicker, Freshfields’ Nicole Foster, Aon’s Daniel Kapinos & Mercer’s Carol Silverman shared their insights on these topics:
– Challenges in the First Year & Approaches to Interpretive Questions
– Common Mistakes & Misconceptions
– Most Frequently Used Company-Selected Measures
– Most Frequently Used Company-Selected Measures
– Use & Placement of Supplemental Disclosures
– Recommendations for Shareholder Engagements & Voting Impact
– Longer-Term Impacts on Compensation Programs & Disclosures
Here’s an excerpt from Howard Dicker’s comments on the use and placement of supplemental disclosures:
Now, the PvP rule itself is very clear, that if a company adds more measures to the table (for example, in addition to the CSM), each additional measure must be accompanied by a clear description of the relationship between CAP and such measure across the fiscal years.
What is not in the rule, but is abundantly clear in the SEC’s adopting release, is that any supplemental measures of compensation or financial performance and other supplemental disclosures provided by companies must satisfy three conditions: 1) it must be clearly identified as supplemental; 2) it must not be misleading; and 3) it must not be presented with greater prominence than the required PvP disclosure.
According to the SEC, for example, a company could use a heading in the table indicating that the disclosure is supplemental, or include language in the text of the filing stating that the disclosure is supplemental. The proxy statement of Equinix is an example of a company clearly labeling its supplemental disclosures as supplemental.
Now, I know that the surveys are saying that very few companies use supplemental disclosure; however, based on my own non-scientific sampling, I’m seeing more supplemental disclosures than I expected but I’m not always seeing them labeled as supplemental.