Our webcast earlier this week included a lot of practical tips & experiences from folks who have been in the trenches to respond to (or anticipate & avoid) low say-on-pay votes. It’s also useful to consider what the data shows, and a recent study from Amit Batish, David Larcker, Lucia Song, Brian Tayan & Courtney Yu – of Stanford’s Rock Center for Corporate Governance – does just that.
Using disclosures from 77 companies in the Russell 3000 that implemented compensation changes in 2023 in response to a failed say-on-pay vote in 2022, the paper identifies patterns that anyone advising on compensation should be aware of, such as the primary factors that drove negative votes, according to the company:
– 30 percent of the companies cited criticism of a special award (its size, term, or performance criteria for vesting equity grants) as the main reason for the negative vote.
– 18 percent cited too little (or no) performance-based awards in the long-term incentive program.
– 13 percent said their shareholders believe the overall pay level was too high.
– 12 percent said shareholders objected to the performance metrics used in the short-term bonus.
– 10 percent cited criticism of a discretionary action the company took to award a bonus payment (short- or long-term) when it would not otherwise have been merited.
– Less frequently, the primary objection was pay mix, disclosure practices, the choice of companies in the peer group, or governance practices (apart from its compensation structure—see Exhibit 6).
This excerpt summarizes the steps that companies took following the say-on-pay failure:
– Companies made 2.5 changes, on average, to their compensation program.
– 66 percent made changes to the performance metrics or weightings in their short- or long-term incentive programs.
– 36 percent increased disclosure.
– 19 percent changed a performance measurement period.
– Actions less frequently made include compensation caps, modifying peer groups, ownership guidelines, ESG incentives, eliminating overlapping metrics, or changes to the compensation consultant or compensation committee members.
– 5 percent of companies committed not to awarding special awards in the future (see Exhibit 7).
The study found that following these changes, say-on-pay support rebounded significantly, to levels achieved prior to the failing vote. That said, the post-correction support levels averaged 76%, which still fell short of Russell 3000 average support. The data showed that post-correction support was somewhat correlated to the number of changes the company made to its pay plan, and the biggest jump in support came at companies that were able to win a positive recommendation from ISS in the year following the failure. Specifically:
The number of changes did not matter nearly so much as whether these changes were in line with ISS criteria (see Exhibit 11). This finding is consistent with recent scientific research showing that proxy advisory firm recommendations contribute to standardization in CEO compensation.
The study poses a few key questions that warrant follow-up. It asks whether this process reflects a healthy dynamic of market correction or simply a standardization process that doesn’t substantively improve managerial incentives. It also observes that while special awards are the biggest drivers of a negative say-on-pay vote, it isn’t outside the realm of possibility that special awards may be appropriate in some circumstances, and it’s unclear from the high-level data whether shareholders are distinguishing between appropriate vs. inappropriate situations. I’ll leave you with this excerpt, which hits the nail on the head regarding the complexity of executive pay programs:
It is very difficult for third-party researchers to understand and digest the pay structure and issues regarding pay among even a relatively small sample of companies. How can a portfolio manager analyze pay across an entire portfolio and make informed decisions? In theory, proxy advisory firms serve this market need. However, it is also not clear that proxy advisory f irms can digest and analyze this information. How effective are proxy advisory firms at identifying companies with “inappropriate” pay practices? Are the companies that fail their say-on-pay votes the most egregious offenders, or “unfairly” caught up in somewhat arbitrary compensation guidelines?
A recent write-up from Fintool maps the latest proxy statement disclosures from every NYSE and Nasdaq-listed company in order to determine compensation consultant market share. Nearly one-third of listed companies didn’t disclose the name of a compensation consultant. Here are a few other takeaways:
The compensation consultant market in 2024 shows both concentration and diversity. While a few large firms dominate across various indices, there also a long tail of specialized or boutique consultants serving specific market segments.
Key observations include:
– The S&P 500 and Nasdaq 100 show higher concentration among top firms compared to the broader Russell 3000 index.
– There are notable differences in consultant preferences between NYSE and Nasdaq-listed companies, possibly reflecting differences in company profiles and industries.
– Some consultants show particular strength in specific indices or exchanges, suggesting potential specialization or targeted market strategies.
If you’re curious, Fintool is an “AI copilot” that applies a large language model to EDGAR filings. So, you can quickly search, analyze and slice & dice the results. For example, with the comp consultant data, you can dive into market share categorized by exchange and major index.
Earlier this month, ISS issued an off-cycle update to its FAQs on executive compensation policies (another update will be published in December). The release adds two Q&As, which relate to:
– Will there be forthcoming changes to ISS’s realizable pay methodology for 2025 meetings? Yes, but only for companies that have experienced 2 or more CEO changes within the applicable 3-year window. For those companies, ISS will no longer display a realizable pay chart.
– What is needed in order for ISS to consider a clawback policy “robust,” as displayed in the “Executive Compensation Analysis” section of the resource report? In order to receive credit for a “robust” clawback policy in the “Executive Compensation Analysis” section of the research report, a company’s clawback policy must extend beyond minimum Dodd-Frank requirements and explicitly cover all time-vesting equity awards. A clawback policy that adheres only to minimum Dodd-Frank requirements will not be considered robust, because those requirements generally do not cover all time-vesting equity awards.
This Cooley alert takes a closer look at the implications for the clawback FAQ. Here’s an excerpt:
Many companies do not go beyond the minimum Dodd-Frank requirements. Regardless, it appears that – going forward – a clawback policy that does not apply to time-based awards will be viewed negatively by ISS in determining its SOP vote recommendation, though it is not clear how much weight will be given to this factor.
We continue to think that while companies should periodically revisit their clawback policies and take this new ISS position into account as another factor in the overall calculus, the guiding principle should be to ensure that the policy remains appropriate and best serves its purpose in the company’s particular circumstances.
The Cooley team points out that the new FAQ is consistent with ISS’s existing position under its Equity Plan Scorecard, where an equity plan will not receive points under the clawback policy metric unless the policy applies to both time- and performance-based awards. But now this concept applies to say-on-pay recommendations as well.
Even though say-on-pay support was generally high this year, most companies face an uphill battle at one point or another – some even face legal challenges on compensation arrangements. Tune in tomorrow – Tuesday, October 29th – at 2 pm Eastern for our webcast, “Surviving Say-On-Pay: A Roadmap for Winning the Vote in Challenging Situations.” Get practical tips for scenarios that companies frequently encounter – from D.F. King’s Zally Ahmadi, Compensia and CompensationStandards.com’s Mark Borges, Orrick’s JT Ho, Foot Locker’s Jenn Kraft, and Tesla’s Derek Windham.
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As calendar-year companies finalize and file their third-quarter 10-Qs, here’s a timely reminder from the team at Perkins Coie addressing a common client question: When do shares withheld upon the vesting or exercise of equity awards need to be disclosed under Item 703 of Regulation S-K?
Item 703 of Regulation S-K requires, among other things, tabular disclosure of any purchase made by an issuer of shares that are registered under Section 12 of the Exchange Act. For context, Question 149.01 of the Regulation S-K C&DIs makes it clear that if an employee utilizes a “net” option exercise to cover taxes due upon exercise of a stock option, Item 703 tabular disclosure is not required. The idea is that with “net” exercises, Item 703 disclosure is not required because the underlying shares were never issued under the option.
In contrast, with respect to restricted stock, the SEC staff has said that shares withheld to cover taxes due upon vesting of a restricted stock award do require Item 703 disclosure because the restricted shares were already outstanding at the time of the vest.
What about RSUs and PSUs, though? The blog continues:
RSUs (and PSUs), like options, are not outstanding shares. At a high level, these securities represent a contingent right to receive shares in the future. Therefore, shares withheld to cover taxes in connection with an RSU vesting do not require Item 703 disclosure.
Thanks to this Troutman Pepper insight for alerting me that the FTC has filed a notice of appeal of the Northern District of Texas’s decision to set aside the non-compete ban. Here’s a reminder of the status of the various challenges to the rule:
This is the second case appealed by the FTC, following its earlier appeal of a Florida federal court’s decision enjoining the FTC rule with respect to the individual Florida plaintiff. A third case challenging the FTC’s rule in Pennsylvania federal court was voluntarily dismissed by the plaintiff in early October. For now, the rule will remain on hold as the appeals make their way through the Fifth and Eleventh Circuits.
Like many things at the moment, though, the insight reminds us that the future of these appeals is subject to the political winds.
Regardless of which candidate wins the presidential election, a new administration will decide the leadership of the antitrust agencies and whether to continue the FTC’s appeals in the Fifth and Eleventh Circuits. Further, the timing of the appeals is unclear, and so is whether one or more appeals will eventually go to the Supreme Court. The FTC also has suggested that its appeals might not focus solely on the merits and has questioned whether the Texas court had the authority to set aside a rule or issue an injunction on a nationwide basis. Accordingly, an appeal could be decided on a number of different grounds.
I hope you were able to join us last week for our 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences. I’d like to send a big shoutout to our colleagues at CCRcorp who made everything happen and worked tirelessly to give our in-person and virtual attendees great experiences! I also want to thank all our fantastic speakers and sponsors. We quite literally couldn’t do it without you!
I thought I would take the opportunity to share some key points I took away or interesting tidbits I enjoyed from the conference panels. Here are a few I happened to be able to jot down, in no particular order:
– Michele Anderson of Latham, Anne Chapman of Joele Frank and Sean Donahue of Paul Hastings discussed 12 things a public company should do to be prepared for activism. Tip #12 was a practical suggestion for your annual D&O questionnaires: There are eight or so questions you need to include in the D&O questionnaire if a contest ensues. There’s no reason not to have those in your D&O questionnaire all the time, so the questionnaire you send an activist under your advance notice bylaw is already ready to go.
– Davis Polk’s Ning Chiu kicked off the panel on Rule 14a-8 and shareholder proposals by acknowledging that shareholder proposals are something many mid- or small-cap companies don’t often deal with but noted that these companies are impacted by proposals nonetheless, as they expand what voluntary disclosures become “market.” When a large company gets a proposal and starts reporting additional information voluntarily, say as a result of a settlement, that practice of reporting becomes the norm and pressures other companies to follow suit, even those that don’t regularly get proposals.
– It can be fun to learn about perks! Mark Borges and Alan Dye of Hogan Lovells described some more novel perks they’ve encountered over the years — like Employer Subsidized Pet Health Assistance and home lawn mowing. For some of these, it might be appropriate to ask first whether they are company-wide benefits. Sometimes they turn out to be a company-wide benefit (as Employer Subsidized Pet Health Assistance was for the particular company) saving you from further analysis. Others may not be widely offered (as, it turned out, lawn mowing was not) and you’ll need to assess under the two-step test to determine whether something is a perquisite or other personal benefit.
There were so many other gems I’d love to include here! You can also check out these two LinkedIn posts from my former colleague and these conference highlights from the Cooley PubCo blog for more.
If you missed any parts of the Conferences, archives of the sessions are now available. Attendees should have received an email yesterday with a link to our 2024 Conference Archives page. Members of TheCorporateCounsel.net who registered for the Conferences can use their existing logins to access the Proxy Disclosure Archives and the Executive Compensation Archives. You may be eligible to earn CLE credit for the replays if you follow the instructions outlined on our CLE FAQ page, but note that you may not earn CLE credit for any session or session combinations that you previously watched live.
If you didn’t register to attend the conferences, you can purchase access to the archives (which will be available until October 15, 2025) online or by emailing sales@ccrcorp.com or calling 1-800-737-1271.
Finally, we want to hear from you! Be on the lookout for an email asking for your feedback. And don’t let the formal feedback survey stop you from sharing suggestions with our editorial team directly at any time. Our contact information is always at the bottom of our daily blog emails and on the “About Us” page on TheCorporateCounsel.net.
Interim CEOs — the folks who step up to lead a company when it loses its CEO without an immediate successor — have a hard job. And this is a group of folks I don’t often see a lot of compensation data about. It’s always seemed like compensation packages for interim CEOs ran the gamut. But this WTW article breaks down the patterns of interim CEO compensation. Not surprisingly, the pay package for the role depends greatly on the background of the folks taking it on. The article separately analyzes pay for interim CEOs that come from the company’s executive officers and pay for interim CEOs who were previously non-executive directors.
When a company finds itself without a CEO, 55% select a named executive officer (NEO). Prior to being named interim CEO, more than one-third of these NEOs held the position of CFO. … Compared with pay of the former CEO, 77% of named interim CEOs earned at median:
53% of the total direct compensation
82% of salary
37% of long-term incentives (LTIs)
The other 23% did not receive additional compensation for their temporary service; however, 80% served in the interim CEO role for 3 months or fewer.
When executive candidates are unavailable or not ready to take the helm even temporarily, it is common to appoint an interim CEO from the company’s board of directors. … Of directors who were appointed interim CEO, 38% were the non-executive board chair.
Moving from the board to an interim executive position includes a new title and new compensation. Pay for a non-employee director serving as interim CEO switches from typical board pay – generally comprising cash and equity retainers – to compensation that more closely mirrors that of the executive team.
Among directors serving as interim CEO, 88% received compensation in recognition for their service. At the median, directors serving as interim CEO received $1.3 million cash compensation (cash plus bonus).
In several cases, director interim CEOs received higher fixed pay compared with the outgoing CEO’s pay, to offset limited participation in incentive programs (e.g., just 29% of directors participated in the company’s annual incentive plan). However, 22% received a special bonus; these were provided for either signing-on to serve as interim CEO or for the successful completion of the interim service. The median value for this special bonus was $500,000.
In addition to cash compensation, directors received $1.5 million in stock-based compensation at the median. Ninety-one percent of stock compensation received was in the form of restricted stock/restricted stock units (RSUs), most commonly cliff-vesting after one year. While restricted stock/RSUs were the most prevalent vehicle, 20% of interim CEOs were granted stock options and another 14% were granted performance-based LTIs.
Companies may also recruit from outside to fill the role of interim CEO, but the article doesn’t analyze pay for this group since they are typically selected because the company may be experiencing a shock event or turnaround situation.
In the latest 25-minute episode of the Pay & Proxy Podcast, Meredith interviewed WTW’s Heather Marshall and Peter Kimball about say-on-pay learnings from the latest proxy season. Topics include:
1. 2024 Say-on-Pay support and failure rates among Russell 3000 companies
2. First-time Say-on-Pay failures and the practices that contributed to them
3. The most common drivers of negative recommendations from ISS
4. Why an ISS negative recommendation “isn’t game over; it’s game on!”
5. The four-step formula for Say-on-Pay success
6. What “responsiveness” means and the forms it can take
7. How companies facing 2023 failures turned things around
8. Why even support levels just under 90% may be concerning
9. Shoring up your disclosure and telling your story
For more on this topic, make sure to mark your calendars for our upcoming webcast on Tuesday, October 29th, “Surviving Say-On-Pay: A Roadmap for Winning the Vote in Challenging Situations.” Even though say-on-pay support was generally high this year, most companies face an uphill battle at one point or another – some even face legal challenges on compensation arrangements. Hear tips on working through scenarios that companies frequently encounter – from D.F. King’s Zally Ahmadi, Compensia and CompensationStandards.com’s Mark Borges, Orrick’s JT Ho, Foot Locker’s Jenn Kraft, and Tesla’s Derek Windham.
As John noted earlier this week on TheCorporateCounsel.net, ISS has released the results of its benchmark policy survey, which will inform updates to the proxy advisor’s voting policies for the 2025 proxy season. Those updates are typically proposed and open for comment sometime in November/December and finalized towards the end of the year.
I blogged about the compensation-related issues from this year’s survey back in August when it was published. Here are the key takeaways on those questions (also see this Compensation Advisory Partners memo):
– Time-Based Equity Awards with Lengthy Vesting Period: The Survey asked respondents to identify whether ISS should consider the use of time-based equity awards with extended vesting terms as a positive mitigating factor in its pay-for-performance assessment, similar to performance-based awards. The Survey also asks whether ISS should consider equity awards with a meaningful post-vesting holding period as a positive mitigating factor in the context of a pay-for-performance misalignment.
– 43% of investors chose the option to “continue with the current approach” (31% were in favor of a change and 26% fell in the “other response” category)
– 70% of non-investors were in favor of a revised policy where time-based equity awards with extended vesting periods would be considered a positive mitigating factor, similar to performance awards.
– Of those who wanted to revise the current approach, 66% of investors and 58% of non-investors supported a vesting period of “at least five years”
– When asked whether a meaningful post-vesting holding period should be present to consider such awards a positive mitigating factor, 68% of investor respondents said “yes” but 73% of non-investors said “no, a post-vesting holding period requirement is not necessary.”
– Discretionary Annual Incentive Programs: The Survey asked respondents to identify whether largely discretionary annual incentive programs, such as those adopted by some large financial sector companies, are problematic, even if the program structure is consistent with industry and/or peer practice.
– 52% of investors said “yes”
– 38% of non-investors said “no, discretionary programs are not problematic…”
– 31% of non-investors said “sometimes, discretionary programs are only problematic if pay is not aligned with company performance”
– Shareholder Proposals on Workforce Diversity: Currently, ISS will evaluate, on a case-by-case basis, shareholder proposals requesting that a company report on: (i) pay data by gender, race or ethnicity, or (ii) policies and goals to reduce any gender, race or ethnical pay gap taking into account certain factors. The Survey asked respondents to identify whether certain human capital management metrics or disclosures should be considered by investors in evaluating a shareholder proposal on workforce diversity (e.g., EEO-1 data, promotion velocity data, retention rates, hiring rates, adjusted gender pay gap disclosure, unadjusted gender pay gap disclosure, board oversight, etc.).
– For a majority of investors, the “top 3” most relevant metrics/disclosure for the analysis of human capital management shareholder proposals were: (i) Racial/Ethnic Diversity and Gender Representation Data (such as EEO-1 data in the U.S.) (22%); (ii) Board oversight of the human capital management issue raised in the respective shareholder proposal (19%); and (iii) Adjusted (accounting for factors such as job role, education, and experience) Gender Pay Gap Disclosure (14%).
– Non-investors’ “top 3” were: (i) Management oversight of the human capital management issue raised in the respective shareholder proposal (25%); (ii) Racial/Ethnic Diversity in Gender Representation Data (20%); and (iii) Board oversight of the human capital management issue raised in the respective shareholder proposal (20%).
Based on the survey results, it is probably too early to write off the preference for performance-based awards. But the results do also suggest that post-vesting holding periods could be a way to mitigate investor concerns if there is a lack of performance criteria. As always, it’s a good idea to talk with your investors, and if you’re able to get them on board and disclose that support, that may also work in your favor with ISS. We’ll stay tuned for the proposed changes to the benchmark voting policies (if any)!