As Meredith blogged about earlier this year, the use of relative TSR remains a popular method for awarding exec comp and not just for tech companies. Willis Tower Watson found in its latest LTI Policies and Practices Survey Report that TSR is the predominant performance metric in long-term incentive (LTI) awards.
Last week, WTW published an article concluding that, for TSR-based LTI awards, “[t]here almost always is a fair value premium over the underlying stock price for each target unit granted, and it often can be significant.” This is important for compensation accounting and disclosure purposes. WTW looked into why those premiums exist and ran a simulation to test whether the Monte Carlo method used to value the awards is working appropriately. Here’s what they concluded:
As relative TSR prevalence in LTI award designs continues, valuation questions and skepticism inevitably will continue among companies and executives. This analysis supports the theory that valuation premiums for TSR-based awards are appropriate. The Monte Carlo method is working as intended to capture the true value of these award designs. If your organization is concerned about the level of valuation premium, consider exploring plan design alternatives to evaluate the tradeoff between a plan’s potential value and the associated accounting value.
Fair warning: This article gets deep into the math around fair value premiums. Despite being a (super cool) former high school mathlete, I found it rather hard to follow in a quick read and was thankful for the TL;DR of “The Monte Carlo Method is working” at the end.
In a memo published earlier this month, Willis Towers Watson analyzed pay versus performance year 2 trends. WTW reviewed the disclosures of ~530 sample organizations in the S&P 1500 and found that year 2 disclosures were consistent with year 1:
– The majority of organizations continued to use profit or income measures for their company-selected measure. This comes as no surprise, as a short list for determining the company-selected measure was to review the measures used in company executive incentive plans, which tend to rely heavily on profit or income measures, especially in annual incentive plans.
– In terms of the total shareholder return (TSR) comparator group, the market pointed to the use of an industry index, with 80% of organizations opting for that route.
– The locations of the PVP disclosure continues to be near the CEO pay ratio, and graphical descriptions of PVP were heavily favored over narrative descriptions.
Additionally, WTW analyzed the disclosures of individual companies to see if companies changed their PVP disclosure–and 31% of them did.
Of the types of revisions and changes WTW examined, alterations to disclosed pay or performance values were more common than revisions of PVP disclosure decisions. PVP disclosure decisions include determining the company selected measure or TSR comparator group.
In case you missed it, earlier this month, the NY Times engaged Equilar to help with a more specific PVP analysis of executive pay (specifically CEO pay) comparing “traditional pay” (Summary Compensation Table and CEO Pay Ratio disclosure) and new-ish “Compensation Actually Paid”. The article named names and summed up its findings as “So now we have two complete data sets using distinct and complementary analytical methods, both demonstrating what we’ve always known: It’s good to be the boss.” If naming names is of interest, the WSJ also analyzed 2023 exec comp data–but for CFOs.
While a recent research report from Pay Governance on incentive plan design focuses on companies in the industrial and energy sectors, there are helpful insights for any company that’s looking to avoid “performance goals that are either overly challenging (and, in some cases, unachievable) or quite the opposite, lacking rigor and just plain too easy in hindsight.”
The report provides considerations for both annual and long-term compensation, with the following practices highlighted for annual incentive plans:
Performance Metric Considerations: More metrics to measure performance. Use of a greater number of metrics reduces the focus on one or two metrics and therefore reduces the likelihood of a zero or maximum bonus payout. In addition, use of non-financial measures—such as operational, safety, and environmental metrics.
Performance Range Considerations: Wider performance ranges to accommodate swings in commodity prices and economic volatility, thus reducing the frequency of maximum or zero payouts.
Performance Measurement Considerations: Using partial year performance goals when the business outlook for the full year is uncertain. This typically involves the implementation of two shortened performance periods, or “First Half” and “Second Half” goals, to mitigate the uncertainty of setting full-year goals while still maintaining a single annual payout.
Performance Goal Setting Considerations: Use of a “target performance range.” Under this method, a company establishes a range around the target performance goal reflecting insights regarding expected commodity price volatility or economic performance.
Given the recent turbulence in the tech space, I wouldn’t be surprised if research would bear out that many have also used these levers to appropriately incentivize and retain exec talent in a rapidly changing environment.
This is how most companies create compensation programs: Determine the company’s strategy and then figure out a way that best incentivizes folks (from execs to rank-and-file workers) to advance that strategy. The first installment of a three-part series (kicked off last month from Semler Brossy) looks into 3 situations where the opposite happened:
[S]ometimes—quite surprisingly—the process works in reverse, and compensation discussions uncover gaps in underlying premises, leading to important and deep discussions that clarify strategic intent.
What’s notable in all three of these case studies is that the conversations around comp metrics were exposing areas where the board did not have enough or the right information to determine key objectives for compensation for the next year given the current state of the business. As described in the “Healthcare Hustle” case study:
As the conversation progressed, it became clear that there was insufficient clarity in their strategic planning discussions on how the activities could be coordinated to achieve profitability. The renewed focus led to discussions about how the company could improve its processes . . . to reduce costs, improve payments and increase profitability. It also led to productive discussions about where to focus new membership growth and how to integrate new members into the organization to drive higher margins.
The rest of the series will cover how compensation impacts talent decisions and compensation’s impact on changing how work is done. As someone who finds human motivation deeply complicated and fascinating (and as a proponent that intrinsic motivation (vs. extrinsic) is the way to get sustainable results), I’m looking forward to seeing what they have to say on the matter.
In this week’s CS webcast, our panelists held an insightful post-mortem on the 2024 proxy season, including Say-On-Pay results. Back in 2022, we saw a dramatic dip in support for Say-On-Pay proposals for the Russell 3000 and S&P 500. In 2023, we saw support increase and 2024 continues that trend. While giving an update on the 2024 Say-on-Pay results, Dave Lynn opined that this trend is perhaps expected given that there were no big changes in ISS and Glass Lewis frameworks & voting guidelines and the market continues to improve since a low in 2022 (and thus, there is less hostility toward exec comp packages).
Tracking those observations, Semler Brossy’s mid-season report shows approvals at levels unseen since 2019. It summarizes preliminary 2024 results as follows:
2024 year-to-date Say on Pay failure rate is well below historical average halfway through the proxy season. Nine Russell 3000 companies (0.8%) have failed Say on Pay thus far in 2024 [compared to 19 companies at this time last year]. Average Say on Pay support for Russell 3000 companies (91.6%) thus far in 2024 is 50 basis points higher than the average support at this time last year.
This Sullivan & Cromwell post on the HLS Blog also delves into preliminary results with the following key observations:
Say-on-pay performance improved overall. Across both the S&P 500 and the broader Russell 3000, say-on-pay proposals are passing at a higher rate than in 2023 and are passing with higher support.
ISS recommendations were impactful. ISS recommended in favor of a higher percentage of say-on-pay proposals. ISS recommendations appear to have a high correlation with voting outcomes. Every proposal that ISS supported in 2024 passed, while every failed proposal received a negative or do not vote recommendation from ISS. Even if an ISS negative recommendation did not result in a failed vote, they corresponded to significantly lower than average votes.
For 2024 failed votes, ISS focused on perceived pay-for-performance issues and lack of rigor/transparency. 2023 failed votes generally were not “sticky”, and none of the companies that had a failed vote in 2024 also had a failed vote in 2023. The key criteria underlying the ISS’s negative recommendations in failing 2024 proposals include pay-for-performance and compensation rationale issues, such as non-rigorous performance goals and lack of transparency.
Failed votes focused on a narrower set of industries. The only S&P 500 companies with failed votes in 2024 were industrial and technology companies, whereas companies in the healthcare, real estate and financial sectors also received failing votes in 2023.
Tune in at 2 pm Eastern today for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Goodwin & Ron Mueller of Gibson Dunn discuss the ins and outs of compensation disclosures during the 2024 proxy season. They’ll cover:
The State of Say-on-Pay During the 2024 Proxy Season
Highlights and Tips from this Year’s CD&As
Best Practices for Disclosing Incentive Compensation Adjustments and Outcomes
Trends in Disclosure Regarding Operational and Strategic Metrics
Pay-versus-Performance: SEC Staff Guidance Issues and Year 2 Enhancements
Perquisites Disclosure and Recent Enforcement Focus
Shareholder Proposals – Company Strategies; No-Action Trends; Activists and Universal Proxies
Proxy Advisory Firms – Is Their Influence Starting to Wane?
Rule 10b5-1 Plan Disclosure Developments
Pending SEC Rulemaking
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE, which require advance notice) for this 90-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.
In what I suppose was an unsurprising development, shareholders ratified Elon Musk’s $56 billion 2018 Tesla pay package late last week. Even less surprising, folks have plenty of opinions about it. This is the latest installment in the saga related to Musk’s potentially gargantuan comp payout and it likely isn’t the last.
A quick summary of how we got here: Earlier this year after many years in the court system, the Delaware Court of Chancery ordered Musk’s performance equity grants rescinded. Then, as Meredith flagged in April, Tesla included an unusual proposal for its AGM requesting that shareholders ratify Musk’s 2018 pay package. In its proxy statement, Tesla acknowledged that the practical effect of the vote was unclear under Delaware law. Nevertheless, at the AGM, the proposal passed with what a quick read suggests as over 70% of shares (excluding Musk and his brother, Kimbal) voting in favor.
The New York Times reported on the competing reactions to this development—ranging from “relief to Mr. Musk’s admirers, who feared that rejection would prompt him to spend less time managing Tesla or even quit” to concerns from investors that this does not set the right precedent for high CEO pay packages. Vanguard also issued a statement explaining its change of heart on the 2018 package:
Given the strong alignment of executive pay with shareholder returns since 2018 and the benefits the board asserted related to the motivational value for the CEO in preserving the original deal (which was approved by a majority of shareholders in 2018), the Vanguard-advised funds voted for the ratification of the CEO’s 2018 option award at the 2024 annual meeting.
Despite the shareholder approval, it’s still an open question about whether this resolves the matter under Delaware law. Since my crystal ball is broken at the moment, we’ll just have to all stay tuned to see how this eventually plays out.
During our webcast “The Top Compensation Consultants Speak,” Jan Koors of Pearl Meyer said, “I do think that by virtue of the fact that [AI is] going to change how all companies do their jobs, who does their jobs and their workforce needs, it’s going to impact compensation structure and human capital management over time.” That got me thinking that, at the rate AI is developing, some HR professionals and compensation committees, at least at companies that are already developing or significantly leveraging AI, should already be considering how their HCM strategies need to shift in the face of this disruption.
I have a feeling that much ink will be spilled on this topic in the near future, but I haven’t seen much written on the intersection of HCM and AI, or about AI considerations for HCM yet. So I was excited to stumble on this blog post by the executive vice president for people operations and the chief talent and organization effectiveness officer at Mastercard highlighting five ways they’re leveraging AI to improve the way their employees “work, grow and manage their careers.” Here are short excerpts from the blog on each of the five ways — check out the full blog for more.
AI as career coach. We’re using AI in Unlocked, our internal talent marketplace, to match employees to opportunities, including short-term projects, volunteering, open roles, mentors and learning pathways, recommending them based on both skills they have and skills they want to build. Today, 90% of our workforce is on the platform, with 500,000 project hours and counting.
AI as wellbeing guide. To understand what employees think and feel about the company and what matters most to them, we need to synthesize a lot of data and extract the most meaningful insights. We use AI sentiment analysis to help us understand key themes and areas of opportunity, and to deliver personalized insights to our employees on how to optimize their working habits.
AI as workflow assistant. AI is being built into the flow of work for everyday moments — nudging a manager to approve a team member’s vacation request, for example. Our automated interview-scheduling tool uses AI to coordinate and, when needed, reschedule interviews with hiring managers.
AI as copilot. AI can be a personal digital assistant, improving productivity by reducing repetitive tasks and creating capacity for innovation. We’re using AI to make meetings more productive with real-time summaries and action items directly in the context of the conversation.
AI as workforce planning partner. AI can be an advisor for intelligent decision-making, helping understand demand and supply for skills in a local market. Using Unlocked, we can see skills across our employee base, learn where we have gaps and develop learning paths or hiring plans to address them.
The blog also has this word to the wise:
AI is an exciting tool, and that’s important to remember — it’s a tool that people use. […] We host ongoing discussions about the trends, technologies and safeguards we’ve put in place to ensure our employees know our AI strategy and the current use cases for AI that create value for our business. To drive general AI proficiency, we’ve set up self-paced learning opportunities with customized content depending on an employee’s level or expertise in the area. This training is coupled with our commitment to ethical AI and avoiding bias in AI through education of our data privacy and responsibility principles and AI guidelines.
On TheCorporateCounsel.net, I recently blogged about this Semler Brossy article that addresses four common scenarios in CEO transitions. That blog discussed the prevalence of each scenario among S&P 500 companies in 2022 and 2023. The Semler Brossy article also delves into the pay implications of each scenario.
When the outgoing CEO transitions to an executive chair role: Executive chairs often see a reduction in cash compensation (base and bonus) following transition — often in the range of 50%. Eligibility for, and the design of, future equity grants varies considerably with timeline and role. Roles with a longer runway and more substantive responsibilities will often receive additional equity awards. In either case, continued service generally allows for continued vesting of prior grants received as CEO and, in select cases, other ancillary benefits or perquisites (e.g., office space and administrative assistant).
When the outgoing CEO transitions to a senior advisor role: Pay is typically structured as a consulting agreement with either a defined hourly, weekly or monthly rate payable in cash. Eligibility for an annual bonus or future long-term incentive grants is very rare, but continuous service typically allows for continued vesting of prior grants received as CEO.
When the outgoing CEO transitions to a board member: Compensation for the transitioning CEO will almost universally follow the standard program for board pay during the individual’s tenure and, again, offers the opportunity for continued vesting in outstanding equity awards.
When the outgoing CEO has no continuing affiliation with the company: Such transitions often lack future pay considerations and require careful messaging to shareholders to avoid misinterpretation.
Microsoft is the latest high-profile company to announce that it plans to base some of its senior management’s compensation on cybersecurity “plans and milestones.” I previously blogged about media reports that this practice is “inching up” among the biggest U.S. companies, but the media coverage may be overselling the use and utility of these metrics.
As consumers, we might like to hear that companies are putting their money where their mouth is and taking security — including of our data — seriously, but the panelists on our recent “The Top Compensation Consultants Speak” webcast noted that cyber metrics may not make sense as a shared goal. Here’s more commentary from Blair Jones of Semler Brossy during the webcast:
There was some literature and discussion in the press earlier this year that some companies might be adopting cybersecurity metrics and that cybersecurity might gain more prevalence as a metric. We haven’t seen that trend happening. Looking at the S&P 100, about 13% of companies have a metric like that. Clearly, cybersecurity is a huge issue for all companies, but there are many reasons we have seen its prevalence remain pretty low.
One is that while the whole organization needs to be vigilant, cybersecurity policy and systems are managed by a smaller group of people. Those individuals might have specific goals in their individual goals related to cybersecurity, but we don’t frequently see cybersecurity as a shared goal across the whole population. Where we do see cybersecurity goals showing up is in industries where you might expect, like some of the payment companies where cyber is a huge threat, and a huge part of their reputation is being a safe marketplace.
So we might see companies that find themselves in similar situations to Microsoft look to these goals to emphasize their security commitment, but for now, they otherwise make the most sense as individual goals for certain employees.