Earlier this year, I blogged about disclosure of investor engagement following a failed or low say-on-pay vote result. With a failed or low say-on-pay vote result, most companies will consider a variety of actions and a recent Compensia memo reviewed low say-on-pay vote results at technology companies to help shed light on actions companies took. Each company will make decisions about changes to compensation design or structure based on its own circumstances, although it’s helpful to know what other companies have done if you find yourself dealing with this issue.
A low say-on-pay vote result is described as a vote that failed to win shareholder support or for ISS, a vote receiving less than 70% support, and for Glass Lewis, less than 80% support. Some of the most common actions companies took (the memo delves further into each category of changes) include:
– Long-term incentive design changes – 92%
– Enhanced CD&A/outreach – 76%
– Performance share design changes – 60%
– Short-term incentive design changes – 44%
Compensia also found what it describes as “more dramatic” actions – 52% of the observed companies made a change to the membership of their Compensation Committee in the two years following an unfavorable result, while 36% of the companies subsequently changed their independent compensation consultant. Although the reasons for such changes usually cannot be directly attributed to the say-on-pay vote, it is possible that, in the course of their review, the Board of Directors determined that a fresh point of view might benefit the oversight of the executive compensation program.
Last, it’s also worth noting that the memo says although the size of a CEO’s pay package is generally a key factor in the analysis of a say-on-pay proposal, Compensia’s research was inconclusive as to whether a failed vote or low support ultimately resulted in a reduction in CEO pay in a subsequent year. The memo suggests when evaluating a failed or low say-on-pay vote result that companies consider the absolute level of CEO pay as a potential issue and whether a reduction is appropriate in light of shareholder concerns.
Over a year ago, Liz blogged about Hertz’s lawsuit seeking to recover incentive compensation paid to executives. The lawsuit came about after the company had to restate three years of financials. The SEC had investigated the company’s accounting and disclosure, which the company agreed to pay $16 million as part of its settlement of the matter. Now, just last week, the SEC announced it charged Hertz’s former CEO, Mark Frissora, with aiding and abetting the company in filing of its financial statements and disclosures and that Frissora has agreed to settle – with the settlement including repayment of almost $2 million in incentive compensation.
The SEC’s complaint says that, to date, Frissora hadn’t reimbursed Hertz for any portion of his incentive-based compensation received during the 12-month period following the filing of the allegedly materially false financial statements. Here’s an excerpt from the SEC’s press release (also see this Stinson blog):
The SEC’s complaint, filed in federal district court in New Jersey, charges Frissora with aiding and abetting Hertz’s reporting and books and records violations and with violating Section 304 of the Sarbanes-Oxley Act by failing to reimburse Hertz for the requisite amount of incentive-based compensation he received. Without admitting or denying the allegations, Frissora consented to a judgment permanently enjoining him from aiding and abetting any future violations of the applicable federal securities laws, requiring him to reimburse Hertz for $1,982,654 in bonus and other incentive-based compensation and requiring him to pay a $200,000 civil penalty. The settlement is subject to court approval.
The SEC’s press release says that in addition to settling fraud and other charges with the company, late last year, it also settled an order against Hertz’s former controller.
I blogged earlier this week that COVID-related pay decisions will dominate the upcoming proxy season. Unfortunately, the business environment remains uncertain and companies must examine whether previously-adopted metrics remain appropriate. In our “Covid-19″ Practice Area, we’ve posted this chart from Winston & Strawn that catalogues companies that have disclosed changes to annual or long-term incentives due to the pandemic and resulting economic uncertainty. This 9-page Aon memo outlines a framework for deciding whether – and how – to change pay programs. Here’s an excerpt:
Now that we are almost six months into dealing with the pandemic, it’s becoming clear that compensation committees will need to use far more discretion than they have in the past. Given scrutiny over executive compensation is far greater in the era of say-on-pay voting than it was a decade ago, compensation committees will want to review performance objectively and rely more on measured judgement than pure discretion to make compensation decisions.
Relevant internal stakeholders — including compensation committees, executives, HR and rewards leaders — should begin the process by thinking through these types of questions:
▪ How, and how much, should executives and employees be rewarded for results delivered during an unprecedented crisis?
▪ How do we measure performance when performance measures or goals established early in the year don’t translate to the long-term health of the company given the current environment?
▪ How do we help compensation committees move from formulaic to measured judgement?
▪ What should we expect in terms of shareholders’ and proxy advisory firms’ reactions?
To ensure companies are prepared in the coming months to make compensation decisions with measured judgement that withstands intense scrutiny, now is the time to start establishing a process with a solid framework.
Keep in mind that while mid-year adjustments and discretionary awards might be necessary to motivate executives during a challenging time, they also contribute to skepticism of incentive pay programs. This Economist article discusses the growing contingent who are questioning whether “pay-for-performance” is working (a phenomenon I’ve blogged about a few times over the last couple of years). Here’s an excerpt:
In 2017 MSCI, a research firm, published its analysis of realised chief-executive pay between 2007 and 2016 at more than 400 big public American firms. At more than three-fifths of the firms, it showed no correlation with ten-year total returns. Some firms overpaid lousy bosses; others underpaid successful ones. Pay-for-performance “may be broken”, MSCI concluded. A recent paper co-authored by Lucas Davis of the Haas School of Business finds “strong evidence” that bosses of energy firms see clear pay gains when stock valuations rise as a result of an oil-price spike which they have no way to influence.
A fresh analysis by Equilar, commissioned by CalPERS, a big Californian public pension fund, identifies similar trends. It looked at the past five years of realised CEO pay for most firms in the Russell 3000 and compared this with the companies’ total returns. The bosses in the top pay quartile made twelve times what those in the bottom quartile did, but produced financial returns only twice as good. The bosses in the second-lowest pay quartile made nearly three times as much as those in the bottom quartile, even though their firms’ total returns were actually worse. “There is no evidence that boards can tell in advance who is a talented CEO,” sums up Simiso Nzima of CalPERS.
We’ve been blogging about “human capital” as an emerging issue for a few years now, but it feels like this year has been the tipping point for the topic to attract significant attention. Momentum was building around long-term corporate purpose and commitments to “stakeholders,” and pay ratio disclosure led to greater exposure & examination of income inequality. Against that backdrop, the pandemic and social unrest have united many investors in their focus on workforce health & safety, as well as pay equity and diversity & inclusion. Investors want to know the board is attuned to these issues, and companies are recognizing that.
As I blogged last fall, some compensation committees are beginning to change their names to reflect a broader “human capital” role. This E&Y memo says that express board oversight is becoming much more common. Here’s an excerpt:
Investors’ prioritization of workforce issues manifested in a number of ways, from publicly-declared stewardship goals to high-profile letter campaigns to record-level support of related shareholder proposals.
This year’s proxy disclosures demonstrate that many companies are paying attention: the percentage of Fortune 100 companies that voluntarily highlighted human capital initiatives and commitments more than doubled over the past three years, rising from 32% in 2017 to 77% in 2020. Similarly, the percentage of companies that explicitly assigned board or committee oversight of human capital jumped from 28% in 2017 to 69% in 2020, with those responsibilities generally assigned to compensation committees.
The memo notes that the “top 5” human capital topics addressed are: diversity; health, wellness & safety; compensation; and development, skills & capabilities – and points out that how a company treats employees in the wake of the COVID-19 crisis could affect its brand value for years to come.
At our upcoming “Proxy Disclosure & Executive Compensation” Conferences, we have a panel featuring Keir Gumbs of Uber, Blair Jones of Semler Brossy and Maj Vaseghi of Freshfields who will be discussing the Compensation Committee’s growing role in human capital management. These conferences are coming up September 21st – 23rd and will be held virtually so that everyone can safely attend. Check out the agendas – 15 panels over 3 days. Register today to make sure you get the info you need to know for your fall engagements and the approaching proxy season.
A couple of weeks ago, I blogged about planning opportunities that may arise for RSUs and performance awards under the “Generic Legal Advice Memorandum 2020-004” issued by the IRS in May. NASPP Executive Director Barbara Baksa shared these additional thoughts:
The GLAM doesn’t change existing law (and can’t be relied on a precedent), although it does certain clarify it. It is an internal IRS memorandum to clarify the tax treatment to other persons at the IRS (in this cause, auditors). It was issued to support an update to the audit procedures in the Internal Revenue Manual relating to when taxes need to be deposited for RSUs and SARs when the IRS’s next-day deposit rule is triggered. Thus, the process Troutman Pepper recommends was always possible under the Internal Revenue Code (provided all awards are paid out within the 409A short-term deferral period) but the GLAM clarifies and draws attention to this opportunity.
Particularly for performance awards, it’s not uncommon for companies to have a short administrative delay before issuing the shares after the comp committee certifies performance. A delay of more than a day or so would generally also delay the taxable event for the award (if it didn’t, there would be no way for the tax deposit to be timely). According to a 2019 NASPP/Deloitte Survey, only 44% of companies pay out performance awards immediately upon certification by the comp committee, even though the awards are considered fully vested at that time. The remaining respondents are delaying payout for anywhere from a week to over six months (24% pay out awards within a couple of weeks of certification and 20% within a month).
The NASPP has seen a general trend to consolidate RSU vest dates for grants to non-insiders. This is most often accomplished by consolidating grant dates (e.g., everyone hired during a quarter receives a grant on the same date), but I’m not aware that this practice has extended to Section 16 insider grants—most likely because, under most companies’ procedures, insider grants generally have to be approved by the comp committee and are thus tied to the committee’s meeting schedule. The procedure Troutman Pepper suggests provides an interesting solution that I expect would be helpful to a number of companies. It will be interesting to see if companies adopt it.
Scrutiny of pandemic-related pay decisions is mounting, as mass layoffs and furloughs draw even more attention to the gap between executive pay and pay of the average worker. Last week, ISS released takeaways from its “2020 US Compensation Proxy Season Review.” Among the findings:
COVID-related compensation decisions expected to dominate next year’s proxy season landscape. As the pandemic arrived in the US during the 2020 compensation cycle, related changes will not be fully disclosed until the 2021 proxy season. Looking ahead, compensation topics in the 2021 proxy season are likely to be defined by mid-year adjustments to incentive programs and use of discretion or one-time awards.
That finding is emphasized by the AFL-CIO’s annual “Executive Paywatch” – which was updated last week and highlights 20 CEOs – primarily of retail companies – who furloughed a majority of their workers yet had a pay ratio of more than 1000 to 1. The unions suggest that CEO salary cuts were “symbolic” and, with base salary making up less than 10% of the average CEO’s total compensation, were more than offset by equity awards.
Although the ISS review found that the rate of say-on-pay failures decreased this year, it also found that median say-on-pay support levels dropped to the lowest level since mandatory voting began in 2011. That might foreshadow a trend as we head into next year and need to explain pandemic-related decisions.
We’ll be addressing these difficult issues at our “Proxy Disclosure & Executive Pay Conferences” – coming up virtually September 21st – 23rd. Register today to get the latest essential & practical guidance, direct from the experts. Here are the agendas – 15 panels over 3 days, plus interactive roundtables to discuss pressing topics.
We’ve posted the transcript for the recent webcast: “Executive Compensation Planning in a Down Market.” Tony Eppert, Richard Harris and Jamin Koslowe shared their takes on these topics:
1. Actions companies have already taken in response to recent economic volatility
2. How compensation plans are affected by a down market
3. Prevalence of changes & exceptions to stock ownership guidelines
4. Suggested modifications to Rule 10b5-1 plans
5. What to think about during fall compensation planning season
Liz blogged recently about purpose-related pay goals as discussion about shareholder vs. stakeholder primacy continues. A recent Directors & Boards article from Seymour Burchman and Seamus O’Toole of Semler Brossy says Covid-19 is accelerating the move toward stakeholder-centricity. Creating accountability to all stakeholders sounds great, but it’s obviously a bit of a balancing act. The article walks through an example of one company that prides itself in its stakeholder-centric approach and outlines four key principles for reinforcing stakeholder-centricity through compensation:
– Emphasize the long-term: It’s impossible to attend to all stakeholders equally in the short term so companies need to make near-term trade-offs while optimizing outcomes for all over the long-run and says the company emphasized an ownership culture with greater equity compensation, broad participation and policies that promote longer holding periods. The company steered clear of overlapping three-year performance cycles as the overlaps effectively create a series of one-year cliffs that emphasize short-term thinking.
– Explicitly tie pay to outcomes for all stakeholders: balance investor-focused metrics for the bonus with stakeholder-oriented goals such as employee engagement, customer retention and supplier satisfaction.
– Balance metrics with discretion: the board set specific priorities and definitions of success but allowed for discretion in actual assessments and payouts and allowed updates of priorities to ensure continued alignment with strategy.
– Stick to your guns: Let cash-based incentives awards follow stakeholder outcomes even when short-term financials are weak and pull back on pay when stakeholder priorities aren’t achieved. Boards need to build the credibility to diverge from “one-size-fits-all” status quo on pay, which will require them to be consistent and transparent in their compensation decisions.
The last point about sticking to your guns is probably the most difficult aspect of aligning compensation with stakeholder interests because as the article points out, investors and proxy advisors may grow impatient as their guidelines tend to be more aligned with shareholder interests. Internal and external communication will likely be key to keeping focus on stakeholder interests.
A recent Pearl Meyer blog suggests companies start thinking about next year’s proxy statement now. It seems early but with all the challenges companies have faced in 2020, the blog suggests companies plan ahead for content changes to ensure CD&A narratives are responsive to expectations from investors and others. The blog includes several suggestions to get ahead of the game – here’s what it says about CD&A drafting:
There is no doubt CD&As will have more content this next year, so making sure that all stakeholders who are involved in the development process are clear on the overall proxy production timeline, roles for drafting and reviews, and the protocols for approval. Consider building reviews of content ideas, narrative outlines, and even preliminary working drafts into your Q3 and Q4 compensation committee meetings, so you’re not dealing with a CD&A fire drill come Q1.
Over on TheCorporateCounsel.net I blogged about ISS’s “Annual Policy Survey”, which it announced late last week. Like last year, ISS is using a single survey with a limited number of questions to help streamline the process. Even though the process is streamlined, it still covers a broad range of topics, including compensation topics related to pandemic adjustments. Check out the survey to see all topics covered, but here are two compensation-specific questions:
(1) As a result of the many impacts of the COVID-19 pandemic, many decisions regarding executive compensation and performance expectations, including both short-term and long-term, will be made by boards and by shareholders during the remainder of 2020 and throughout 2021.
Which of the following most closely reflects your organization’s view of executive compensation in the wake of the pandemic? Possible responses include, in addition to a free-form answer:
– The pandemic is different from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executive compensation.
– The pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into compensation decisions to adjust pay and performance expectations, and should be clearly disclosed to shareholders.
– The impact of the pandemic is not substantially different from other major market downturns, such as the financial crisis of 2007-2008, and decisions regarding performance and executive pay should reflect actions taken to promote a return to profitability and financial health over a reasonable timeframe without significant short-term adjustments to performance expectations or executive compensation.
(2) With respect to short-term executive incentives, many companies have announced changes to their immediate annual incentive or bonus programs in response to the COVID-19 pandemic and the resulting general economic downturn.
Regarding short-term/annual incentive programs, which of the following best represents your organization’s view of what is a reasonable company response under most circumstances? Possible responses include, in addition to a free-form answer:
– Making mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities
– Suspending the annual incentive program and instead making one-time awards based on committee discretion
– Both the first and second response could be reasonable, depending on circumstances and the justification provided
– Companies should avoid mid-year adjustments and make payouts based on the original program design
As always, the policy survey is just the first step as ISS formulates its 2021 voting policies. In addition to the survey, ISS will gather input via regionally-based, topic-specific roundtables and conference calls. From there, interested market participants can comment on the final proposed changes to the policies.