The Advisors' Blog

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.

– Meredith Ervine