This Orrick memo is a reminder that companies need to furnish – by next Monday, February 1st – annual information statements to people who exercised ISOs or transferred ESPP shares during 2020. Companies also need to file an information return with the IRS in March.
The memo explains what IRS forms to use, how to contact participants and make the IRS filings, and also links to a sample statement that could be provided to participants.
Willis Towers Watson recently published its annual analysis of director pay levels and practices among S&P 500 companies. As I’ve previously blogged, arrangements have been pretty consistent year-over-year – but the memo gives a detailed breakdown of the value of different pay components on an average and median basis – as well as at the 25th and 75th percentiles, and as compared to 2018 and 2019. The info on stock ownership guidelines is also useful, as investors continue to want companies to demonstrate a focus on long-term value creation.
The memo also notes that 68% of S&P 500 companies have now set annual compensation limits for directors – a 4% increase since last year (and a practice that will likely persist in light of Delaware case law). Here’s more detail:
– Of the companies that have newly adopted limits, 91% of the limits cover both cash and equity and 9% cover equity only
– 19 companies updated compensation limits last year – with 74% of those amended to include cash compensation for a combined compensation limit
– Of all the companies with limits, 31% combine fixed-value cash and equity limits, 26% use fixed-value equity limits, and 11% are based on a fixed number of shares
– The median fixed-value limit for cash & equity is $750,000 (unchanged from 2018 and 2019)
We’ve blogged before about CII urging companies to reduce complexity of their incentive plans. One positive outcome from simplifying incentive programs is that it also simplifies drafting the CD&A disclosure and helps increase investor’s understanding of the program. A recent Meridian memo says that due to uncertainty resulting from Covid-19, for companies making changes to 2021 long-term incentive awards, one common adjustment is to simplify things by granting more time-vested restricted stock. Using time-vested restricted stock may not be the right move for everyone but the memo discusses some of the benefits and considerations, here’s an excerpt:
The rationale for this predicted shift to increased use of time-vested restricted stock is not hard to understand. In this environment, restricted stock provides two key advantages over performance-based LTI:
– More certain retention value for executives in an uncertain environment; and
– No requirement to set realistic multi-year performance goals, a well-nigh impossible task for some companies right now.
Every company should carefully evaluate the design of their own program and its alignment with their unique business and talent strategies. Executive teams may reasonably question whether complex long-term incentive programs actually drive any meaningful change in behavior or performance.
However, no change to the executive compensation happens in a vacuum. As discussed in the memo, CII calls for more time-vested restricted stock. CII also calls for longer vesting periods – which can help further align executives with shareholders on a truly long-term basis and can potentially help better bridge periods of temporary uncertainty. Another crucial piece of the equation is the size of the opportunity. If companies reduce the inherent “risk” of CEO compensation by reducing or eliminating performance-based awards, they should also consider whether the size of the current pay opportunity should be adjusted accordingly.
Tune in tomorrow for our webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance – including the latest SEC positions – about how to use your executive & director pay disclosure to improve voting outcomes and protect your board, as well as how to handle the most difficult issues on oversight, engagement and disclosure of executive & director pay.
Looking back at 2020, compensation committees ended up addressing a lot of issues resulting from Covid-19. As the economic effects continue, a recent Ogletree Deakins memo lists 5 key executive compensation trends and issues for 2021. The list can serve as a reminder about issues to consider when making decisions about executive compensation and 2021 changes and covers clawbacks and “cause” definitions, temporary salary reductions, 2020 performance awards, 2021 incentive compensation and change in control and severance agreements.
With respect to change in control and severance arrangements, the memo suggests this could be particularly important for companies that may be dealing with financial challenges:
Due to financial challenges, a number of companies are facing difficult restructuring decisions. In addition, many financial buyers and competitors have not abandoned their strategic business plans and may initiate acquisitions of companies that are temporarily undervalued in the COVID-19-disrupted economic environment. Accordingly, companies may want to review existing change in control or severance arrangements or implement new arrangements. With respect to severance arrangements, it is important to consider whether they are subject to the ERISA and Internal Revenue Code Section 409A, and, depending on how post-termination health benefits are provided, determine any continuing health benefits compliance issues under the COBRA. Companies should consider reviewing change in control arrangements to ensure leadership continues to be focused on the company’s business and is protected in the event of an unexpected or unwanted transaction.
This Stinson blog gives a timely reminder to be careful in your proxy disclosures when seeking shareholder approval of your equity incentive plan. In Pascal v. Czerwinski, the shareholder plaintiffs claimed that the company’s proxy statement failed to disclose that the company’s directors could grant awards to themselves under the plan as compensation for past efforts to take the company public.
The defendants argued the 2019 Proxy did disclose both intentions: the proxy provided that the EIP was meant to “attract, retain and reward the best available persons for positions of substantial responsibility and to recognize significant contributions made by such individuals to the Company’s success.”
The Court found that the 2019 Proxy did not explicitly mention the possibility of retrospective payment for the go-public conversion. However, the 2019 Proxy did set out that the company might issue awards in part for past accomplishments. And, given that “awards for past accomplishments” encompasses “retrospective payment for the conversion,” the Court did not find it reasonably conceivable that stockholders would have found the difference between the two to be material.
It’s a good reminder at this time of year to think carefully about disclosures when asking for approval of equity compensation plans.
The WSJ reported last week that General Electric’s board decided not to claw back pay to former CEO Jeff Immelt and other executives. They had been considering that course of action in response to 11 shareholder demands to investigate breaches of fiduciary duty and securities law violations. The company’s market cap has declined by about $200 billion since 2017 and it recently agreed to pay $200 million to settle an SEC charge that it misled investors about the circumstances leading up to that drop.
Although it’s still pretty rare for companies to claw back executive pay, there does seem to be a growing expectation that that will happen when a CEO’s decisions or actions are closely related to a scandal and/or drop in value. So, some people were surprised that GE didn’t take that step – and perhaps the company’s actions and communications will serve as a roadmap to other companies that face these demands in the future. Based on statements provided by the company and its lawyers, the WSJ reported these steps:
– The board investigated the shareholder allegations by reviewing thousands of documents and conducting dozens of interviews – and concluded it didn’t have a sound legal claim to bring against any current or former officer, director or employee of the company, or against KPMG
– The company enhanced its disclosures and internal controls
– The former CEO didn’t receive any severance when he left GE
– Most of the members of GE’s board have changed since the activities at issue occurred
– No changes to GE’s financial statements were required in connection with the SEC settlement
– The company took action to fire its auditor of more than a century as a result of the accounting issues that led to the stock drop
On the flip side, if the company’s current directors end up encountering resistance to their re-elections because of this, it could be another reason for other companies to strengthen clawback policies and provisions. Boards can benefit from having a strong legal basis for recovery if they find themselves facing shareholder demands to do that. Along those same lines, this Agenda Week post highlights the expansion of “for cause” termination provisions in CEO employment agreements – based on preliminary data from a forthcoming research paper about the #MeToo impact on those contracts.
We’ve posted the transcript for our recent webcast – “Covid-19 Pay Adjustments: Engagement, Decision-Making & Documentation” – in which Charlene Kelly of Conagra Brands, Jim Kzirian of Meridian, Mike Melbinger of Winston & Strawn and CompensationStandards.com and Reid Pearson of Alliance Advisors discussed how companies are handling and explaining pay decisions resulting from economic fallout and operational disruptions related to the Covid-19 pandemic.
I’ve blogged a couple of times about companies announcing that they’re planning to link diversity metrics to executive pay. This Semler Brossy memo captures the trends that we’re seeing emerge on this topic among Fortune 200 companies. It includes a chart that tracks the metrics by company, industry, weight and performance outcome – with a link to the disclosure. Here are its key takeaways:
• 20 companies have incorporated Diversity and Inclusion metrics in their incentive compensation programs
• Of these companies, the metrics tend to be assessed qualitatively and are more operational in nature
– 19 of the 20 companies studied have incorporated these metrics within their annual incentive plan, and one incorporated it within their long-term incentive program
– Amongst the companies studied, typical Diversity and Inclusion weightings make up approximately 5%-30% of metrics within annual incentive plans
• We expect the prevalence of Diversity and Inclusion metrics to rise in 2021 as multiple stakeholders call for greater oversight/progress on HCM topics and the nature of the metrics to evolve to be more strategic
About a year ago, I blogged about shareholders that were scrutinizing how clawback policies apply to situations of “reputational harm.” At the time, the NYC Comptroller led a group of proponents and submitted a shareholder proposal to McDonald’s in an effort to expand a clawback policy. Now, according to a recent news report, a group of investors, one being the NYC Comptroller, are pressing for board turnover – including the compensation committee chairman.
The investors are calling for resignations of McDonald’s board chair and the company’s compensation committee chair because they’re unhappy with severance paid to the company’s former CEO. The company is in the process of trying to claw back the severance, but the shareholders – who reportedly own less than 1% of the company’s outstanding shares – want accelerated board turnover.
The shareholders want action now in advance of the company’s annual meeting. Liz blogged last summer about increased scrutiny of pay decisions, especially this year. We’ll see how this plays out but for now, the saga highlights shareholder increased scrutiny of clawback policies and other pay actions, including board responses to shareholder requests for action.