The Advisors' Blog

– Liz Dunshee

Yesterday, Glass Lewis issued new details on its approach to executive pay in the context of COVID-19. The proxy advisor hasn’t changed its executive pay framework – but the guidance explains in more detail how those existing policies will apply to pay programs and the pay-for-performance analysis in light of the pandemic, as well as proposals for additional equity plan reserves and other compensation-related topics.

This is going to be important guidance to consider as you draft your CD&A, so that you can provide disclosure that’s responsive to what the investor community is expecting. Read the whole thing for details. Here are some high points that could affect say-on-pay recommendations:

1. Increases to Quantum. Unless companies have performed very well on a relative and absolute basis, we will view increases to short-term pay levels or above-target payouts with great scrutiny. Moreover, companies that have adjusted their programs to provide enhanced outcomes will have a high bar to prove the appropriateness of their actions.

2. Forwards vs Backwards. We generally view year-over-year increases to target incentive payout opportunities more tolerably than high payouts for backward-looking performance, as we recognize the need to incentivize executives going forward. However, this allowance is contingent on the incentive plan incorporating robust performance requirements that are reflective of executive efforts.

3. One-Off Awards. Glass Lewis continues to be wary regarding one-off awards granted outside a company’s regular incentive schemes, as such awards have the potential to undermine the integrity of a company’s regular incentive plans, the link between pay and performance, or both.

4. Major Structural Changes. We will view any major structural program changes with caution. Glass Lewis believes that boards should be thoughtfully restrained regarding sweeping, long-term changes, which may appear preemptive given ongoing market uncertainties and may only serve to heighten shareholder concerns.

5. Potential Windfalls. We will evaluate the potential for any program changes, particularly to equity-based grants, to result in windfall benefits to executives, should the company’s prospects improve over time as a result of improving conditions that lie outside of executive control.

6. No Penalty For Late Bloomers. We will not penalize firms which did not provide extensive discussion of their broad response to the pandemic in their 2020 proxy season filings — but we will credit companies that did provide some insight into the board’s approach for their willingness to address the proverbial elephant in the room. In particular, for firms which made significant adjustments to the pay program in the first months of 2020, we will review the overall framework of the program in the context of boom and bust times. We view short-sighted concessions negatively, particularly if the company has recovered meaningfully and no counterbalance to windfalls or compromises can be identified.

7. We Will Take Past History Into Account. Companies that have exhibited a healthy track record of good governance, pay-for-performance alignment and appropriate use of board discretion prior to the COVID-19 pandemic will likely be viewed through a more accommodating lens than companies that have not.

For more discussion about what this means for your proxy statement, mark your calendar for our webcast next month – “Your CD&A: A Deep Dive on Pandemic Disclosures.”