According to this WSJ article and data from ISS Corporate Solutions, only 10 S&P 500 companies have had shareholders reject annual say-on-pay resolutions in the last year – but this year could be different.
In our “Top Compensation Consultants Speak” webcast on Tuesday of last week, Semler Brossy’s Blair Jones noted that the early proxy returns are indicating that failures are up and everything is being scrutinized. The very next day, shareholders at Starbucks rejected the company’s say-on-pay resolution. Here’s the company’s Form 8-K with the voting results.
The Starbucks vote followed “against” recommendations from ISS and Glass Lewis due to one-time awards to the CEO and former COO. The company had filed a proxy statement supplement to provide more color around those awards, but it wasn’t enough.
In another vote last week that was attracting attention in the Twittersphere, 48% of all AmerisourceBergen shareholders & 72% of independent shareholders voted against the NEO pay package. The company’s Form 8-K shows that the resolution narrowly passed. This article explains that Vanguard voted “for” and BlackRock voted “against” say-on-pay, which some are saying could be a sign of more splits to come. The state treasurers of Connecticut and Rhode Island also led a campaign against it because executive pay was calculated by excluding the costs of the opioid settlement.
As You Sow is forecasting that 2021 will be a “time of reckoning” for executive pay. That could be a problem for companies, with more shareholders voting against compensation committee members in the same year of a failed vote, and activists viewing a say-on-pay failure as “blood in the water.” As You Sow’s recently issued “100 Most Overpaid CEOs” report provides a few nuggets that underpin its prediction:
– Institutional opposition to overpaid CEOs is stronger than suggested by votes as reported to the SEC. As You Sow has used the level of shareholder votes against the CEO pay package as one factor in determining who the Most Overpaid CEOs are. This year – as described more fully in “How we identify the 100 Most Overpaid CEOs” – we used, with the assistance of Proxy Insight and Insightia company, an analysis that excluded votes from shares controlled by management and others and instead measured only votes controlled by institutional fund managers. Using these votes, the number of S&P 500 companies where the CEO pay package failed to get at least 50 percent of the votes more than doubled, going from six companies to 15 companies. Public shareholder opposition is less obvious when there is a dual-class share structure or significant insider ownership.
– The level of shareholder opposition to excessive CEO pay continues to grow, yet CEO pay continues to increase. The number of financial fund managers who voted against the CEO pay package of at least half of the “100 Most Overpaid CEOs”in their investment portfolios reached 47. Pension fund opposition was even higher. More shareholders are taking another step in calling for accountability by voting against members of the compensation committees. Yet, as further detailed below, executive compensation continued to increase.
– The economic disruption of the pandemic means that the upcoming proxy season could be a time of reckoning. What happens when performance criteria are not met? There are indications that executives may be insulated from bearing the full brunt of the downside though they are generally given full credit for the upside. Some investors have already noted that they will evaluate the context of the pay packages, in light of how shareholders and employees have fared during the pandemic.
This means that disclosure and engagement will be even more important this year, and you’ll need to understand the unique positions and hot-button issues for each significant investor. BlackRock issued stewardship guidance on executive pay last week – and we have other policies posted in our “Investor Voting Policies” Practice Area.
Here’s the latest 143-page guide for compensation committees from Wachtell Lipton – which includes sample compensation committee charters for NYSE & Nasdaq companies at the back. As noted in the guide’s introduction, although the guide is generally geared toward directors who are members of a public company compensation committee, the guide is also relevant to members of a compensation committee of a private company, especially if the company may at some point consider accessing public capital markets.
Now that say-on-pay has been on annual meeting ballots for 10 years, Compensation Advisory Partners issued a report summarizing the voting results. Although support has been fairly consistent for the last 10 years, the report says this year’s say-on-pay voting results may depart from these prior norms. Here’s an excerpt with findings about the impact of proxy advisor vote recommendations and because of the potential impact, areas where CAP says it’ll be even more important to include strong disclosure:
– Over the last 10 years, ISS has consistently recommended “against” say-on-pay for approximately 12% of companies per year
– Among companies that have failed their say-on-pay vote, the vast majority (96% on average) received an “against” recommendation from ISS
– Not all companies receiving an ISS “against” recommendation failed their say-on-pay vote – in 2020, 20% of such companies did
– In terms of the impact of ISS’s recommendation “against” has on the overall say-on-pay vote, even though most companies don’t fail the vote, the report says the median level of support in these cases was only 67%
For 2021, CAP says pay-for-performance misalignment will be the main driver for ISS “against” recommendations. Say-on-Pay vote results will continue to depend on the magnitude of pay, pay practices and stock price performance. For companies that may have a pay and performance misalignment, we expect reduced shareholder support if a company has not provided sufficient rationale for the following actions:
– Annual and long-term incentive plan adjustments
– Major employee actions (e.g., layoffs)
– Performance that is dramatically below investor expectations
– Low relative financial performance
– Above-target discretionary adjustments to payouts that previously missed threshold performance
During proxy season, one disclosure topic that some follow relates to potential payments upon termination or change in control. Earlier this year, Meridian Compensation Partners issued its 2020 study of executive change-in-control (CIC) practices at large companies. The study examined practices at 200 companies that were components of the S&P 500 index as of December 2019 and it examines the prevalence of certain severance benefits payable to NEOs in connection with a CIC and the types of qualifying events that trigger a CIC payment. This excerpt from the study’s executive summary provides high-level findings about practices relating to size of cash severance CIC-related benefits:
Nearly all companies determine cash severance based on a multiple of the sum of an NEO’s base salary and “annual bonus”, with annual bonus defined as “target bonus” by a slight majority of companies (56%).
Cash severance multiples are trending down for all NEOs.
― For CEOs, a 3× cash severance multiple remains the majority practice, but a 2× multiple is growing in prevalence.
― For all NEOs (other than the CEO), a 2× cash severance multiple is the majority practice
The executive summary also provides an overview about the prevalence of CIC -related cash severance, how companies define “double-trigger” events, other CIC-related benefits like heath care and perquisites, vesting and payout of equity awards and key administrative provisions.
Tune in tomorrow for our webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners discuss what compensation committees should be learning about – and considering – evolving views of pay-for-performance, expanding roles for compensation committees, goal-setting and adjustments, and an early look & predictions for the 2021 proxy season.
If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.
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We’ve posted the transcript for our recent webcast: “Your CD&A – A Deep Dive on Pandemic Disclosures.” Mike Kesner of Pay Governance, Hugo Dubovoy, Jr. of W.W. Grainger and Cam Hoang of Dorsey shared their thoughts on:
1. Trends & Investor Expectations for COVID-Related Pay Decisions
2. Adjustments to CD&A Format in Light of Pandemic
3. Investor & Proxy Advisor Policies for Disclosure
4. Framework of Key Factors for Exercising Discretion
5. Linking Your CD&A to Your Broader ESG and Human Capital Initiatives
6. Ensuring Consistency Between Your CD&A and Minutes
Who knows whether the changes that Rule 701 amendments that the SEC proposed last fall will go anywhere. But if they do, this blog from Dan Walter gives a nice summary of 5 things that pre-IPO and private companies should be aware of (and that “pre-IPO” group could be significant given what a big year it was last year for market debuts and SPACs):
1. They are proposing changing the crazy 12-month / $10M threshold. The current process essentially requires you to be psychic. The new rule would require disclosure of the additional financial and other information mandated by Rule 701(e) only concerning those sales that exceed the rule’s $10 million threshold in a 12-month period.
2. Rule 701 would cover some equity for consultants or advisers if substantially all of the activities of the entity involve the performance of services, and substantially all of the ownership interests of the entity are held directly by not more than 25 natural persons, of whom at least 50% perform such services for the issuer through the entity. Under the current rule, entities can receive grants under Rule 701 only if they are the wholly-owned “alter ego” of the service provider.
3. Extend the coverage of former employees receiving post-termination grants as compensation for services rendered within 12 months preceding the termination. Also covers terminated employees of an acquired entity where the securities are issued in exchange for securities of the acquired entity issued as compensation during the person’s employment with the acquired entity.
4. Increase the value of securities covered by Rule 701 from $1M to $2M during a consecutive 12-month period. Also, increases coverage from 15% up to 25% of the total assets of the issuer (or up to 15% of the outstanding amount of the class of securities being offered).
5. Companies can delay required grant date financial statement disclosures to 14 days after hire for new employees. This allows companies to grant equity for an upcoming hire, without needing to disclose the grant before the individual’s start date.
Check out this updated “Compensation Committee Handbook” from Skadden Arps. Written in a non-technical style that is easily understood & 120 pages long. Here’s an excerpt that explains some of the updates:
There have been significant developments over this past year to executive and director compensation practices and related trends, and those are discussed in this new edition of the Handbook, particularly with respect to human capital disclosures (discussed principally in Chapter 10), increased scrutiny of executive perquisites, and executive compensation in the era of COVID-19, as well as increased attention on environmental, social and governance (sometimes called ESG) considerations (each discussed principally in Chapter 10).
Love this “Compensation Cafe” blog from Dan Walter about how to prepare for the compensation aspects of a fast-moving SPAC deal:
Once you are brought into the process you need to learn who’s on the team and what they will be delivering. Then you need to take that information and determine how many of those people will need to work with on your compensation deliverables. This sounds like a normal process, but it will all happen over a few days (if you’re lucky.)
1. You will work with legal on old and new cash incentive programs.
2. You will work with HR, Finance, and Legal to gather information to complete CD&A and proxy filings.
3. You will work with outside compensation and benefits counsel to determine new equity compensation plans.
4. You will work with securities attorneys to determine the timing and details for SEC filings related to pay.
5. You will probably be asked to do research and modeling of Executive and Board compensation.
6. You will again work with Finance and Legal to answer questions about employment agreements, performance metrics, and other issues that may directly or indirectly impact pay.
And that’s just weeks 1 and 2 (maybe 3).
Smart companies will assign a very strong project manager who does little else other than herd a bunch of cats toward a common goal. I do not recommend you volunteer for this position. The amount of work that needs to be done by total rewards professionals is enormous. You will be challenged by deadlines, new issues, data inconsistencies, and questions about everything you have done for several years. You will be asked to run models of things you didn’t even know could be modeled. You will often do much of this with a fraction of the information you want or need. You will not have the time to be in control of anyone except yourself. This is a good time to not be a hero.
Your job is to do in 3 months all of the work that a typical pre-IPO company does over about 12 or 18 months. You cannot clean your data up too soon. You cannot get organized too early. If your company has had any aspiration of going public in the next two years, you should assume that a SPAC may happen before the end of 2021.