Last year, ISS reported on the widening transatlantic gap in CEO pay. Comparing CEO pay at large cap companies in the US and UK, an ISS study found that CEO pay levels at S&P 500 companies “markedly outpaced” CEO pay at FTSE 100 companies between 2019 and 2023. This recent HLS Blog from Glass Lewis says that’s concerning to UK asset managers and the UK Investment Association is reviewing its Principles of Remuneration “to ensure that they are supporting a competitive market.” The Investor Relations Society reports, “particularly for the largest UK companies and those with significant US presence or revenues, there are challenges in attracting US executives and competing in the US market.”

The UK may start to follow a US approach:

– There is a need for more flexibility to offer higher LTIP awards to create a competitive remuneration structure.

– Global companies wish to operate hybrid schemes (with both performance and restricted shares), which are used in the US and other jurisdictions, again for competitiveness reasons.

Glass Lewis says that there’s at least some reception to this shift across the pond:

– Among FTSE 350 companies that held a policy vote this year, one in ten have proposed a U.S. style ‘hybrid’ incentive plan where a portion of the awards vest solely on time served, and three in ten have proposed to increase the total opportunity under one or both incentive plans.

– A wide range in voting support on these proposals (ranging from 56.8% to 99.9%), indicates that shareholders are open to considering higher bonus opportunity or retention-focused awards, but will oppose proposals absent a compelling rationale.

The shift is intended to allow pay packages at UK companies to be competitive with those executives could make at a US-based company, but of course it could impact the market and pay for CEOs in the US as well.

– Meredith Ervine 

WTW’s latest review of key compensation-related vote results and trends from the 2024 proxy season is out now with some added color on say-on-pay results — beyond the general takeaway that average support is similar to historical norms and the failure rate is down. Here are some of the other helpful lessons from the report:

– Seventeen companies failed the SoP vote for the first time in 2024, representing 63% of total failed votes. Top two reasons for first-time failures were: (1) poor disclosures and (2) special awards.

– The proportion of SoP failures from midcap and smallcap companies have been cut more than half in previous years.

• S&P 500 failures: 5 (2024), 13 (2023), and 22 (2022)
• Midcap failures: 6 (2024), 3 (2023), and 10 (2021)
• Smallcap failures: 2 (2024), 10 (2023), and 22 (2022)
• All other failures: 14 (2024), 27 (2023), and 32 (2022)

– There was an uptick in say-on-parachute failures this year, with many coming from deals voted on at the beginning of 2024. One-in-five (20%) say-on-parachute proposals failed in 2024, up from 16% in 2023. Single-trigger equity vesting remains the primary driver of say-on-parachute opposition, followed by provisions that allow performance awards to vest at maximum levels of performance during a merger.

– Meredith Ervine 

As Dave shared on TheCorporateCounsel.net, ISS recently ran its Annual Benchmark Policy Survey (closed on September 5). As this Winston & Strawn blog notes, ISS selects the questions it asks of survey respondents to gauge investor and other stakeholder interests and market sentiment. For that reason, the survey can shed light on ISS’s potential areas of policy focus for the upcoming proxy season. Here are two highlights from the executive compensation-related questions:

Time-vesting Equity Awards. Under ISS’s current approach to its pay-for-performance analysis, when reviewing a quantitative pay-for-performance misalignment, ISS generally views a predominance of performance-conditioned equity awards as a positive mitigating factor, while a predominance of time-vesting equity awards is generally considered a negative exacerbating factor.

ISS is contemplating revising the weight given to performance-vesting over time-vesting equity awards to view both performance-vesting and long-term time-vesting equity awards as positive mitigating factors. To that end, ISS is soliciting feedback with respect to the threshold vesting period for such time-vesting equity awards and whether a meaningful post-vesting holding period should be required for ISS to view such awards as a positive mitigating factor.

Discretionary Performance Assessments. ISS generally views incentive programs with quantified, pre-set goals and disclosed targets favorably and views incentive programs that are heavily reliant on discretionary determinations negatively. However, some companies maintain incentive programs that are entirely based on discretionary performance assessments on the basis of company-, peer-, and/or industry-specific considerations.

ISS is soliciting feedback with respect to whether discretionary incentive programs should be viewed negatively in all circumstances, even where such discretionary incentive programs are consistently used across a particular industry or group of peer companies.

– Meredith Ervine 

I blogged this past spring about “director say-on-pay” – a proposal that was structured as a binding bylaw amendment. Seven or eight companies received no-action relief on this proposal, and the five that went to a vote didn’t get much love:

Notable this year was a new type of proposal to amend company bylaws to require shareholder approval of director compensation. 11 such proposals were filed this year. Five went to a vote, receiving 2% average support.

That’s from Georgeson’s proxy season recap (available for download), which also points out that support was down overall for executive and director severance and compensation proposals – and has significantly dropped since 2022. Georgeson says the decline correlates with fewer “For” recommendations from proxy advisors.

I thought that last tidbit was interesting because in his final update on director say-on-pay, Michael Levin at The Activist Investor (who was the proponent for director say-on-pay) gave a peek behind the curtain at his experience working with the proxy advisors on the proponent side of things.

We did talk with ISS and Glass Lewis, and explained our proposal and rationale. We diligently kept them updated as we submitted proposals and worked through SEC no-action requests.

We requested a copy of their recommendation. ISS sent us one company’s out of five, with a friendly note that they don’t typically provide these to proponents. Glass Lewis provided nothing. Aside from the one ISS report, we don’t know the recommendations, although we assume they advised clients to oppose the proposals at each company. Both ISS and Glass Lewis offered to sell us copies of the reports, though.

ISS and Glass Lewis have an elaborate process for responding to companies. They have procedures for companies to submit data and rebut proposals, and share copies of a company’s report with them in advance of a vote. They have updated recommendations based on company input. Proponents have no such access.

I’ll note that these company accommodations (to the extent they do exist) have come by way of a lot of hard work and negotiations over many years. Here are Michael’s parting thoughts:

We thought shareholders would welcome the opportunity to express views about a BoD beyond empty complaints to a nominating committee or a feckless “vote no” campaign. We thought proxy advisors and the SEC would embrace or at least not object to a corp gov innovation that could prevent other companies from trying the same stunts as the TSLA BoD. Boy, we got that wrong.

Look, shareholders don’t owe us anything, much less an explanation why they voted against the proposal. Yet, we thought we put together something that should matter to investors interested in improving corp gov materially. We thought we interacted with them in an appropriately discrete and civil manner.

We’d like to understand why they “really hate” the concept. We still don’t know whether they have too many proposals to vote on, are happy with the current ways to object to directors, or don’t want to provoke companies by supporting something as forceful as a vote on director pay.

Wait ’till next year, it seems.

– Liz Dunshee

Meredith blogged last week about early disclosures about Dodd-Frank clawback policies – and about recommended steps for the clawback review process. We’re also starting to see Corp Fin comment letters on this topic. Here’s a comment from July that was issued after a company filed a Form 10-K/A to restate financials:

We note that in 2023 your executive officers received bonuses based on the achievement of key performance indicators as determined by your board of directors. We also note the statement that you performed a recovery analysis and determined there was no incentive-based compensation tied to financial performance for any of our executive officers during the relevant recovery period. Please briefly explain to us why the application of the recovery policy resulted in this conclusion. See Item 402(w)(2) of Regulation S-K.

Although comment letters are always situation-specific, this suggests that the Staff is taking a close look at what companies say about application of their policies. To get practical guidance on this complex situation, make sure to join us next month at the “Proxy Disclosure & 21st Annual Executive Compensation Conferences.” Compensia’s Mark Borges, Ropes & Gray’s Renata Ferrari, Davis Polk’s Kyoko Takahashi Lin, and Gibson Dunn’s Ron Mueller will discuss “lessons learned” from clawback disclosures and comment letters to-date (and more). Here’s the full agenda for all of the topics we’ll cover over the course of 2 days.

Time is running out to register! You can do so online or by calling 800-737-1271. You can join us in person in San Francisco or attend virtually, and with either format, you’ll have access to on-demand replays for a fully year after the event. That’s incredibly valuable, because it means you can go back to listen to critical guidance as situations arise.

– Liz Dunshee

I blogged earlier this year about Apple’s win in case that alleged a problematic approach to equity award valuations. Even though the company won on that particular claim, this guest post from Orrick’s J.T. Ho says that plaintiffs are continuing to scrutinize disclosures about equity award valuations & assumptions. Fortunately, there may be an easy fix to stay out of their crosshairs. From J.T.:

This proxy season, several companies have faced shareholder complaints requesting disclosure of the assumptions used to determine the grant date fair values of stock-based compensation, calculated using a Monte Carlo simulation in accordance with FASB ASC Topic 718.

The basis of this complaint is Instruction 1 to Item 402(c)(2)(v) and (vi) of the Summary Compensation Tables rules, which requires companies to “include a footnote disclosing all assumptions made in the valuation by reference to a discussion of those assumptions in the registrant’s financial statements, footnotes to the financial statements, or discussion in the Management’s Discussion and Analysis.” The requested information includes assumptions such as the expected volatility, risk-free interest rate, dividend yield, and expected life of the performance-based stock awards.

Many companies do not include all this information in their footnotes to the Summary Compensation Table or footnotes to the financial statements in the Annual Report on Form 10-K, which are referenced in the Summary Compensation Table footnotes. However, since the requested information should be readily available and is generally not sensitive, companies are advised to consider whether to modify their footnotes to the Summary Compensation Table to mitigate against such claims.

For a couple of examples of how companies are supplementing their disclosures, check out the additional materials filed by NetScout Systems and LiveRamp Holdings.

– Liz Dunshee