While we’re on the topic of things complicating say-on-pay for individual companies, during our recent webcast, “Proxy Season Post-Mortem: The Latest Compensation Disclosures,” Dave discussed a notable trend shown in Semler Brossy’s analysis of say-on-pay in the 2024 proxy season. A number of the companies that received less than 75% support received split recommendations this season — that is, “ISS would recommend one way and Glass Lewis would recommend another way and so you’d have “FOR” the Say-on-Pay vote from one proxy advisory firm, and “AGAINST” the Say-on-Pay vote from the other.” Here’s more from Dave’s commentary:

In fact, the Semler Brossy research identified 80 Russell 3000 companies that received a Say-on-Pay vote below 75% where they had a split recommendation between ISS and Glass Lewis. There’s not a whole lot you can glean from that because, in many respects, it is going to be very dependent on the particular company situations that they’re analyzing.

Obviously, as we all well know, ISS and Glass Lewis do not take the exact same approach to evaluating pay-versus-performance and overall compensation level approaches in their research. That’s something to watch out for. When you do have those split recommendations, it is something you have to think about in terms of how you might approach a company’s response or how you might approach engagement in that situation to try to garner sufficient support so you’re up above that 70% – 75% level.

– Meredith Ervine 

This Equilar blog takes a data-driven approach to understanding how companies respond to a failed say-on-pay vote using disclosure in 2023 proxies by 77 companies in the Russell 3000 with a failed vote the prior year (defined as less than 50% support). Comparing data from 2023 to 2019 showed that companies facing a failed say-on-pay vote in more recent years may have a harder time narrowing in on how to change their compensation programs and disclosures because shareholders may be looking for some fine-tuning of programs as compared to major changes.

In 2023, metrics or weightings adjustments were the most prevalent with 66% of the failing companies adopting this strategy. However, only 45% of the companies underwent different metrics or weightings in 2019. This suggests a heightened focus on refining performance evaluation frameworks and aligning executive compensation with company performance metrics in the recent year. Additionally, shareholders tend to express more concerns regarding transparency in disclosure, where 36% of the companies made corresponding changes in 2023 but only 29% in 2019.

Conversely, there was a notable decrease in the percentage of companies shifting towards performance equity in 2023 compared to 2019. Only 18% of companies made such changes recently compared to a sizeable 47% in 2019. This suggests that many companies already shifted towards a greater prevalence of performance equity in the past and are now fine-tuning the metrics being used. Overall, the data underscores the dynamic nature of corporate responses to Say on Pay challenges, reflecting evolving governance priorities and shareholder expectations over time.

The blog also noted that the average number of changes made in 2023 remained comparable to 2019 at 2.5 changes per company. Note that the data includes companies that did not have successful say-on-pay votes in 2023 — 80.5% of the surveyed companies passed say-on-pay following the program and disclosure changes. For the most part, there was no magic change or number of changes that allowed companies to pass say-on-pay the subsequent year, leading the blog to conclude that “there isn’t a golden rule that can affect shareholders’ votes to ensure a passing vote. However, the data does show that changes, in most circumstances, can lead to positive effects.”

While a shareholder outreach program will be expected by the proxy advisors in any event, this highlights the importance of being open-minded and actively listening in that outreach so that you can identify the changes that are most likely to help you succeed the next year. This fine-tuning can be challenging — shareholders (& proxy advisors) don’t always agree on appropriate metrics (or even equity award types) — and sometimes requires judgment calls, hopefully made with the help of seasoned advisors who understand your shareholder base.

– Meredith Ervine 

As John recently shared on TheCorporateCounsel.net, the SEC’s Spring 2024 Reg Flex Agenda was released this month. It showed some rulemaking activity pushed out past the election. This FW Cook blog describes the status of the SEC’s four pending rulemaking actions related to executive compensation in the proposed or final stages:

– Increased disclosures regarding human capital management — timing for SEC action moved from April 2024 to October 2024 (proposed)
– Incentive compensation rules for financial institutions under Section 956 of the Dodd-Frank Act — timing for SEC action on a new proposal moved from April 2024 to October 2024 (proposed)
– Increased disclosures about board diversity — timing for SEC action moved from October 2024 to April 2025 (proposed)
– Finalizing the 2022 proposed SEC rule regarding grounds for excluding shareholder proposals — timing for SEC action moved from April 2024 to April 2025 (final) 

The delay in the rulemaking to implement Section 956 of Dodd-Frank is particularly notable. As we recently discussed, three of the six required agencies already took action in May to repropose the rule. The notice of proposed rulemaking will not be published in the Federal Register until all six agencies propose it.

As a reminder, these dates signify general timeframes. New final or proposed rules could come before or after the dates suggested in the agenda. The Reg Flex Agenda only gives insight into the priorities of the Chair as of the date it was submitted — it’s not a definitive guide for anyone trying to predict SEC rulemaking for purposes of specific board agendas, budgets and workflows.

– Meredith Ervine 

Put this in the category of “nothing is ever easy.” There’s a new development in the multiple cases challenging the FTC’s broad non-compete ban. As reported by Bloomberg, the US District Court for the Eastern District of Pennsylvania found that the FTC “has clear legal authority to issue ‘procedural and substantive rules as is necessary to prevent unfair methods of competition'” and denied a tree trimming company’s motion for a stay of the effective date and a preliminary injunction.

This decision seems to directly conflict with an early July order by a federal judge in Texas granting a tax services firm’s motion for a preliminary injunction of the ban (which was limited to the plaintiffs and plaintiff-intervenors) — creating a divide in the judiciary. The article says, “a real estate firm in The Villages, Fla., is also pursuing a lawsuit over the rule in the Middle District of Florida.”

This Troutman Pepper alert says, “employers should take steps now to prepare for the possibility of the ban becoming effective right after Labor Day.” While the Texas court plans to issue a ruling on the merits by August 30, that is only four days before the ban’s effective date.

– Meredith Ervine 

Semler Brossy is out with its latest report on 2024 say-on-pay data and things are looking up! In fact, at Russell 3000 companies, the average support in 2024 is the highest it’s been since 2017, and the failure rate is lower than any year since 2015. Here are some more key takeaways from the report:

– The gap between the S&P 500 and Russell 3000 average vote support continues from 2023 — this diverging support for larger companies has persisted over the last five years.

– The current S&P 500 average vote result of 89.6% is 90 basis points higher than the index’s 2023 year-end average.

– Support was lowest in the Communication Services sector, with 65% of companies receiving over 90% support.

– ISS “Against” recommendation rates for Russell 3000 companies (11.4%) and S&P 500 companies (8.0%) continue to diverge.

– The average vote result for Russell 3000 companies that received an ISS “Against” is 22% lower than those that received an ISS “For” this far in 2024; the spread is 28% for S&P 500 companies.

– Meredith Ervine 

Sign up this week for our “2024 Proxy Disclosure & 21st Annual Executive Compensation” Conferences to get together with other compensation and governance practitioners in San Francisco on October 14 & 15 (back in person with NASPP) and receive our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate). This deal ends this Friday, July 26! You can register now by visiting our online store or by calling us at 800-737-1271.

Our Conferences are timed & organized to give you the very latest updates & tips you need to prepare for the flurry of year-end and proxy season activity. You’ll walk away with actionable “to dos” to improve your compensation practices and disclosures going into 2025! Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once? Plus, our on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them for one year. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.

As always, our panelists will be addressing all the proxy season, annual reporting and executive compensation hot topics that are top of mind for you right now (or should be in the fall as we head into proxy season) — like perks practices, living with newly adopted clawback policies and the resurgence of governance & compensation shareholder proposals — and will be giving their real-time thoughts on evolving situations and practices. Check out our terrific lineup of experienced speakers and all the timely topics they’ll be addressing.

We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts!) so you won’t miss out on the practical takeaways our speaker lineup will share.

– Meredith Ervine 

– 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
– Compensation Clawback Policies – Multiple Policies/Potential Disclosure Issues
– Proxy Advisory Firms – Is Their Influence Starting to Wane?
– Perquisites Disclosure and Recent Enforcement Focus
– Shareholder Proposals – Company Strategies; No-Action Trends; Activists and Universal Proxies
– Rule 10b5-1 Plan Disclosure Developments
– Pending SEC Rulemaking

Members of this site can access the transcript of this program for free. If you are not a member of CompensationStandards.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.

– Meredith Ervine 

On Monday, I shared data showing a significant increase in use of environmental metrics in incentive plans — particularly metrics related to GHG emissions. For companies or compensation committees with FOMO, this report from Pay Governance and SustainaBase has a guide to getting started. If you’re considering integrating environmental performance metrics in an incentive plan, the report suggests first understanding the company’s readiness to measure and quantify the considered objectives & aligning with the company’s existing environmental priorities — by considering the company’s most recent E&S materiality assessment, existing internal objectives and the requirements and preferences of external stakeholders. With respect to one group of stakeholders — institutional investors and proxy advisors — the alert says:

In our experience, institutional investors and proxy advisors prefer executive incentive designs that are measurable and transparent. This includes clearly detailing the performance metrics and goals used to reward executives. Therefore, when it comes to incorporating “E” performance metrics in incentive arrangements, quantitative metrics (i.e., predefined goals are set at the beginning of the performance period and achievement against the goal at the end of the performance period determines a corresponding incentive payout) are often preferable. Additionally, as companies’ environmental reporting capabilities become more robust and automated, this may further lend itself to companies considering whether quantitative “E” performance metrics should be included in their executive incentive designs.

While quantitative metrics are generally preferred, there are situations where qualitative metrics may be more relevant. Early-stage companies at the outset of their sustainability endeavors — such as those undertaking materiality assessments, instituting sustainability teams, or identifying internal benchmarks — require a degree of flexibility. [But] even well-established companies with robust environmental strategies occasionally find qualitative metrics beneficial, particularly when taking their initiatives to the next level.

The report also emphasizes the importance of aligning metrics with any specific frameworks used by the company so that one standard (like the GHG Protocol) is used to track environmental metrics across all departments — “from finance and investor relations to sustainability and operations.”

Side note: One of the authors of the report, Tara Tays, is participating on the panel “The Top Compensation Consultants Speak” at our 2024 Proxy Disclosure & Executive Compensation Conferences this fall! Our panel has a great agenda in store for attendees and plans to discuss topics like “Measures to Fit the Moment” and “Top Executive Compensation Plan Designs that Can Push Shareholders to a Failed Say-on-Pay Vote.” Register now to attend in person at our discounted “early bird” rate!

– Meredith Ervine 

After blogging twice last week about conducting thorough pay equity audits, I was pleased to stumble across this Seyfarth memo on maintaining privilege over pay equity audits and investigations. It starts with how and why the discoverability of audits and investigations is a high-stakes dispute:

Employers often learn about their employees’ equal pay complaints well before a lawsuit is filed in court. Employees frequently bring their concerns to company personnel first and only proceed to litigation if they feel those concerns were inadequately addressed. Depending on the circumstances, some employers may choose to investigate such claims or audit their pay practices as a result.

Many times, an employer’s investigation will reveal no evidence of unlawful pay disparities. If the employee rejects that conclusion and takes their claim to court, one issue that frequently arises in subsequent litigation is the discoverability of the employer’s investigation files. … Employers find themselves wanting to use aspects of their internal investigation to defend some aspect of an equal pay claim. Such documents can show, among other things, that the employer was diligent in responding to a plaintiff’s claims of discrimination, or that those claims are simply unfounded. … [But] maintaining privilege over investigation files is often as much a question of how those files will be used in litigation as it is a matter of how the investigation itself was conducted.

In one case, the court held that files were privileged because one primary purpose was to obtain legal advice, even though a non-lawyer conducted the investigation. But the EEOC claimed that the employer’s good faith defense waived privilege since the employer’s intentions were at issue, and the employer was forced to not rely on the files in its defense. In another case, the employer waived privilege by relying on its internal investigation report in its formal response to the EEOC complaint. In another, the court distinguished between denial and an affirmative defense:

An employer’s burden of proof is one of the fundamental differences between an equal pay claim brought under Title VII versus one brought under the Equal Pay Act. According to the court, the employer intended to use the report as evidence of a legitimate, nondiscriminatory reason for plaintiff’s termination under the McDonnell Douglas burden shifting framework applicable to plaintiff’s Title VII claim. Under that framework, “an employer is only required to articulate or produce a legitimate reason for its actions, but the employer does not bear a burden to prove or persuade, only to make a minimal evidentiary showing.”

This is in contrast to an employer’s obligation under the EPA, which many courts have held puts the burden of persuasion on the employer to establish its affirmative defense. Or, to put it in more practical terms, the court held that: “the fact that an attorney investigates a claim and reports to a corporate client does not waive privilege where ‘no actual defense of reliance on the attorney’s recommendations or findings is made as a basis of the defense against the claim.’”

Hmm. It almost goes without saying that you should work closely with your experienced labor counsel on any pay equity audits or investigations! I also found this recommendation from the alert to be a helpful — and understandable! — takeaway:

If [employers] have taken the trouble to ensure privilege over their audits and investigations, they should understand that their intention to use those documents in defense of their claims could cause them to lose the privilege they so rigorously protected. Employers will want to keep these issues in mind as they consider why they are conducting the internal investigation in the first place, or how they might want to use what they find in later litigation.

– Meredith Ervine 

When the final clawback listing standards were being adopted, there was a lot of speculation about what companies would do with existing policies — since those policies went beyond the stock exchange requirements in some ways and, in others, allowed greater flexibility than permitted by the listing standards. Would companies maintain the provisions that go beyond the requirements? Would their required policy be combined with their existing voluntary policy? We ran a survey of our members, and the results were split. This FW Cook blog has an update with data from the 2024 proxy season:

Now that the 2024 proxy season is underway, there is data to determine whether companies merely adopted SEC-compliant policies, or adopted (or retained) more expansive policies that may cover a broader population, definition of compensation, and/or clawback triggers. In an internal survey of practices among 45 large-cap companies (market capitalization greater than $10 billion), we found that 80% maintain an expanded clawback policy that goes beyond the SEC requirements. Unlike the SEC mandatory requirements, expanded clawback provisions typically provide for discretionary application. … Among the 20% of survey companies that only maintain a clawback policy that satisfies SEC requirements, one-third indicated an intention to review their policies soon and are considering adoption of an expanded policy.

The blog cites these as common features of the voluntary policies or provisions:

– 66% of the survey companies cover a broader population than SEC requirements, either by title (e.g., VP/SVP and above), coverage of all corporate officers, or the entire executive/leadership group

– With SEC requirements only mandating coverage of “incentive-based compensation”, 67% of the survey companies have expanded coverage to include broader types of compensation, such as all cash and equity incentives (including time-based awards)

– In addition to the SEC rules covering restatement-related clawbacks, expanded policies may include triggers absent a restatement, for example:

• Fraud or misconduct absent a financial restatement (64% prevalence)
• Reputational, financial, and other harm to the company (31% prevalence)
• Violation of company policy / code of conduct (25% prevalence)

If you joined us for our fall conferences last year, hopefully you heard our stellar panel on clawbacks. It was so chock full of helpful takeaways that we asked the panelists back this year for our “Living with Clawbacks: What Are We Learning?” panel. Join us at our 2024 Proxy Disclosure & Executive Compensation Conferences on October 14-15 in San Francisco to hear what tricky clawback issues they’re mulling over one year later. You can peruse our agenda to see what else our expert practitioners will cover! Our early bird price for in-person single attendees ends July 26, so register now to take advantage of this discounted rate!

– Meredith Ervine