Earlier this month, I shared this Semler Brossy article noting that say-on-pay assessments have gotten more rigorous for non-CEO NEO pay. The article pointed to the “increasing levels of executive pay for roles other than the CEO” as one potential reason for the heightened attention.
A recent Compensation Advisory Partners insight that spotlights compensation actions for CFOs – using 2023 data from 132 companies with median revenue of $14.6 billion – provides supporting evidence. The report compares compensation changes between CFOs and CEOs in 2023. Here are some highlights:
– The median change in base salary in 2023 was 4.0% for CFOs, similar to last year’s 3.8% increase. For CEOs, the median salary change was 0%, well below last year’s 2.9% median increase. Among executives who received salary increases, the median increase was 5.0% for CFOs and 4.0% for CEOs.
– Median target bonus opportunities remained consistent for CEOs at 160% of salary and for CFOs at 100% of salary. 32% of CFOs and 27% of CEOs had an increase in target bonus for 2023.
– LTI awards increased at a higher rate in 2023 than 2022, reflective of competitive pressures to deliver market competitive pay. LTI awards increased 11% for CFOs and 9% for CEOs (vs. 7% and 5% last year, respectively). The increase in LTI awards in 2023 is not driven by special one-time awards, which we found very low prevalence of in our sample. LTI awards have increased 6% for both CFOs and CEOs annually, on average, between 2013 to 2023.
– CFO turnover is higher than CEO turnover. In 2023, median CEO tenure is 7 years versus 5 years for CFOs.
We recently shared data from FW Cook showing that most large companies have added or retained more expansive clawback policies that go beyond the requirements of the listing rules. This HLS Blog post from the folks at the AI-powered legal intelligence platform DragonGC assesses what those policies look like and lists these most prevalent voluntary triggers at S&P 500 companies:
– Breaches of Company Policies or Legal Requirements: 51.4%
– Breaches of Fiduciary Duty or Fraud: 48.6%
– Misconduct with Reputational or Financial Harm: 32.9%
– Administrative Enforcement: 28.9%
– Termination or Criminal Resolutions: 23.9%
– Inappropriate Conduct: 20%
Join us at our 2024 Proxy Disclosure & Executive Compensation Conferences on October 14-15 in San Francisco to hear the latest on tricky clawback issues and market practice during our “Living with Clawbacks: What Are We Learning?” panel. You can peruse our agenda to see what else our expert practitioners will cover and register here for in-person or virtual attendance.
Debevoise recently studied the use of ESG metrics in incentive plans by the 100 largest public companies — finding that they were used by 71% of that group (most of which used more than one), and 7% took ESG factors into account in setting compensation. Here are a few interesting takeaways:
– Despite the long-term nature of ESG considerations, they remain popular primarily in annual plans. 65% included them only in annual plans, while 4% included in both annual and LTI plans and no companies included them only in LTI compensation. 2% included them in a special bonus program.
– Social goals remained the most common (68%), with the most popular metrics related to DEI (51%). The article notes that the impact of the Students for Fair Admissions cases was not yet reflected in the 2024 proxy season, given the timing of the opinion (released after most 2023 compensation decisions).
The article makes a few predictions for next proxy season and beyond:
– Companies have revisited DEI metrics after the U.S. Supreme Court’s opinion last year in the Students for Fair Admissions cases. We have seen some companies making changes to DEI goals or the disclosure related to such goals, especially where such goals are quantitative representation goals that may result in a higher litigation risk. We have seen other companies remove DEI goals from their incentive compensation plans. However, we have not seen and do not expect to see most companies walking away from DEI goals altogether given the importance of these goals to workforce strategies and long-term business performance.
– With respect to other ESG-related metrics, we expect companies will continue moving toward quantitative goals and away from qualitative or discretionary measures in the face of investor and institutional shareholder demands.
– We expect to see more specificity around ESG goals in incentive plans, rather than broad or general measures. We also expect that even more companies will use stand-alone weighted ESG metrics rather than scorecards where ESG measures have no defined weighting.
– Finally, we anticipate that more companies will begin to include ESG goals in their long-term incentive plans to align with the inherently long-term nature of their ESG strategy, recognizing that some of these metrics are less suited for short-term objectives.
As Meaghan previewed in June, PVP disclosures in the 2024 proxy season weren’t very different than first-year disclosures. This Pay Governance alert has more detail on what companies changed – or didn’t – in year 2.
Going into the 2024 proxy season, we anticipated that only a few companies would make changes to their disclosures other than the addition of another year of new data. Much effort and thought went into deciding the Company-Selected Measure, TSR comparison group, and the list of Important Financial Metrics last year; those decisions proved to be durable for this year and likely future years, barring a large incentive program change. Below is a summary of disclosure observations for this year compared to last year:
– 96% of companies used the same Company-Selected Measure as last year
– 86% of companies used the same peer group or index as last year for TSR comparisons. Not surprisingly, the large majority of those companies that had a different peer group were those using custom peer groups whose constituents changed from last year
– 87% of companies had the same number of Important Financial Metrics as last year, 7% had fewer metrics, and 6% had more metrics
– Of those that had the same number of metrics, 93% used the exact same metrics, with only 7% changing their metrics between years
I think it tells a great story about the effort companies put into this disclosure in late 2022 and early 2023 that some of these complicated decisions, like the company-selected measure and which peer group to use for disclosure purposes, as the alert says, “proved to be durable.” Despite the short timeframe to prepare incredibly complicated and specific new disclosures, most companies seemed to “understand the assignment” and, where needed, hired supplemental outside help for valuations and disclosure prep.
I don’t think I’m speaking too soon in saying this, although it’s probably worth reminding everyone that we may learn more from 2024 comment letters that could impact 2025 disclosures.
This Cooley blog discusses what private companies need to know about Rule 701, a key rule for private company executive compensation programs that, unfortunately, is responsible for a fair number of foot faults often uncovered during one of the most inopportune times (the IPO process) as counsel diligences past equity grants. The SEC has also been known to conduct periodic audits and assess fines for noncompliance.
Rule 701 is the primary US federal securities law exemption for offers and sales of compensatory awards – e.g., options, restricted stock awards (RSAs), restricted stock units (RSUs), etc. – by a private company to its employees, directors, officers, consultants, advisers, and other individuals providing bona fide services to the company (or any of its subsidiaries), that are issued pursuant to a compensatory benefits plan such as an equity incentive plan.
The availability of Rule 701 comes with certain quantitative limits. Early-stage companies usually operate well within these limits. However, later-stage private companies should understand the limits of the exemption and start monitoring before additional requirements kick in to avoid inadvertently failing to comply with Rule 701.
The blog then breaks down in Q&A format some of the trickiest parts of Rule 701 — particularly for larger and later-stage private companies — including the rule’s quantitative limits.
To rely on Rule 701, the aggregate sales price of securities offered and sold during a 12-month period using this exemption must be at least one of the following:
Less than $1 million in total value.
Less than 15% of the total assets of the issuer (as of the most recent balance sheet date).
Less than 15% of the outstanding amount of the class of securities being offered and sold (as of the most recent balance sheet date).
Note: The 12-month period can begin on any date during the calendar year – it does not need to be tied to the calendar year or the company’s fiscal year. However, once you select a date, you must stick to that date for future analyses. Aggregate sales price means the sum of all cash, property, notes, cancellation of debt, or other consideration received or to be received by the issuer for the sale of the securities.
While compliance should be monitored continuously, the blog points to these factors indicating it’s time for a more detailed analysis:
– You have a high 409A valuation.
– Your company’s valuation is approaching $1 billion.
– Your board is regularly approving large option grant packages or is hiring one or more senior executives.
– You are hiring aggressively and/or making a large number of “refresh” grants.
– You begin issuing RSUs.
– You have conducted a repricing of your outstanding stock options recently.
From a say-on-pay perspective, companies usually expect investors to focus on concerns with CEO compensation, but this Semler Brossy article from earlier this summer noted that “competitive CEO pay alone does not always provide a ‘free pass'” for say-on-pay support and said, “it appears that assessments of non-CEO NEO pay have become more rigorous.” Specifically, in 2024, companies were criticized for these “one-time NEO pay actions that used to fly under the radar”:
– the lack of performance-based NEO equity grants (where the CEO received performance-based grants)
– one-time grants to NEOs (and not to the CEO)
– high average pay for the proxy-disclosed executive group (rather than just elevated CEO pay)
– the acceleration of awards upon an NEO’s retirement
The article notes that increasing levels of executive officer pay at all levels are being more closely scrutinized as the cost of management grows and notes that companies may still be at risk even when the quantitative evaluations of CEO pay and performance are low concern. If you have a one-time non-CEO NEO pay action this year, make sure you’re using your CD&A to explain the purpose and rationale, almost as much (if not as much) as if that one-time pay action was for your CEO!
When companies shift to using a multi-day average stock price to convert target value to the number of shares (a common approach in times of market volatility), I think most recognize the need for clear disclosure to investors of the calculation methodology and reasons for changing approach in the proxy statement. This FW Cook blog highlights the need to consider another type of communication — to program participants.
Use of a multi-day average typically results in a discrepancy between (1) the fair value of awards for proxy tabular disclosure purposes, and (2) the target value communicated to the award recipient. To mitigate potential confusion among recipients, a more detailed internal communication plan may be required to ensure that recipients understand that the discrepancy between their target award value and the value in their stock plan account is due to the design of the program rather than a calculation error.
Certain NEOs are likely to be involved in the change to a multi-day average price, but to the extent the approach represents a change from prior years, you may also need to communicate that change to non-NEO recipients.