Late last week, the Business Roundtable issued this statement on advancing diversity & inclusion through employment practices. In addition to encouraging voluntary public disclosure of key diversity metrics, the statement says:
Unjustified disparities in compensation are one of the drivers of gender- and race-based wealth and income inequality. Business Roundtable calls on companies to conduct periodic pay equity reviews and regular pay equity analyses, and to implement processes to review and close gaps.
Most large companies already conduct pay equity reviews – but the BRT’s statement is significant because it also calls for closing pay gaps. That can be a complicated process – especially if you’re truly looking to close the unadjusted pay gap, which can reflect the difficulties in advancing underrepresented groups to high-level positions.
We’ll have info on how to prepare for – or move forward with – pay equity initiatives in our November 19th webcast – “Pay Equity: What Compensation Committees Need to Know.” Mark your calendars to hear from Mintz’s Anne Bruno, BlackRock’s Tanya Levy-Odom, Equity Methods’ Josh Schaeffer and Impax Asset Management’s Heather Smith.
Last week, Starbucks announced that it would tie executive pay to 2025 diversity targets – joining a smallbut growing number of companies to do so (JPMorgan also recently got some press for cutting executive bonuses due to a failure to advance diversity, which was notable since that program doesn’t rely on formulaic goals).
Starbucks’ commitment is part of the company’s overall effort to advance racial & social equity, including anti-bias training and mentorship programs. Here’s more detail:
We will be transparent in our approach to Inclusion and Diversity goal setting and progress.
– We are committed to publicly sharing our current workforce diversity. (View Public Data).
– We will set annual Inclusion and Diversity goals based on retention rates and progress toward, achieving BIPOC representation of at least 30% at all corporate levels and at least 40% at all retail and manufacturing roles by 2025.
– We will complete the roll out of an analytics tool that will provide leaders with visibility to current diverse representation relative to Starbucks representation goals.
– We will continue to publicly share our Inclusion and Diversity commitments, goals, and progress through annual reporting.
We will hold ourselves accountable at the highest levels of the organization.
– We will incorporate measurements focused on building inclusive and diverse teams into our executive compensation programs beginning in FY21.
– We will establish an internal governance structure to integrate Inclusion and Diversity throughout the organization, beginning with an Inclusion and Diversity Executive Council in Q1 FY21.
– We will require all vp+ leaders to complete a 2-hour anti-bias training and the foundational and racial bias courses from the To Be Welcoming Curriculum as a role expectation.
– We will join the Board Diversity Action Alliance to act alongside peer companies as we are committed to representation of racially and ethnically diverse directors on corporate boards of directors.
CalPERS voted “against” 52% of say-on-pay proposals this past proxy season – and nearly 3000 comp committee members at those companies also received “against” votes under the pension fund’s policy to vote against directors in the same year that it votes against say-on-pay or compensation plans. Now it’s updated its Executive Compensation Analysis Framework to add a “grant date target pay” methodology to the pay-for-performance assessment, which could make it even more difficult for some companies. Here’s an excerpt:
Grant date target pay analysis allows us to assess whether target pay is being set at a reasonable level relative to peers after taking into account a company’s historical performance relative to its peers. As an example, a company that sets target pay at the 50th percentile of peers while its historical performance is at the 25th percentile of the same peers would be considered to be setting target pay outside of what appears justified by its historical performance.
The updated framework also clarifies that CalPERS wants companies to prohibit hedging & pledging for execs.
– CalPERS’ preference for 5-year performance periods
– What components of pay are included in “realizable pay”
– Peer group methodology and views on problematic benchmarking
– CalPERS’ preference for 5-year minimum vesting periods or 5-year minimum holding periods for equity awards vs. stock ownership guidelines
– Views on use of discretion by comp committees
The FAQs also emphasize that a high score on the quantitative P4P model doesn’t guarantee a vote “for” say-on-pay – qualitative factors are also important. We’ve posted the framework along with the FAQs in our “Investor Voting Policies” Practice Area.
ISS has issued these FAQs to explain how it will approach COVID-related pay decisions in its pay-for-performance qualitative evaluation. As in the past, an elevated concern from the quantitative screen will continue to result in a more in-depth qualitative review.
The FAQs explain what disclosure ISS will be looking for if there were changes to salary, bonus programs or incentive cycles or grants of one-time awards – e.g., to show that compensatory actions further investors’ interests versus creating windfalls for executives. The FAQs also note a couple of changes to the proxy advisor’s responsiveness policy and Equity Plan Scorecard. Here’s an excerpt:
10. Are there any changes to ISS’ responsiveness policy in light of COVID-19?
When a company receives less than 70 percent support on the say-on-pay proposal,ISS’ responsiveness policy reviews three factors:(1) the disclosure of the board’s shareholder engagement efforts;(2) the disclosure of the specific feedback received from dissenting investors; and (3)any actions or changes made to pay programs and practices to address investors’ concerns.
The expectations regarding the first two factors will remain consistent with prior years. With respect to the third factor, if a company is unable to implement changes due to the pandemic,the proxy statement should disclose specifically how the pandemic has impeded the company’s ability to address shareholders’ concerns. If pay program changes are delayed,or do not necessarily fully address shareholder feedback, the company should disclose a longer-term plan on how it intends to address investors’ concerns.
11. Are there any changes to ISS’ Equity Plan Scorecard (EPSC), Problematic Pay Practices (PPP), or option repricing policies in light of COVID-19?
There are no changes to these policies specifically related to the pandemic. However, for the 2021 policy year, the passing score for the S&P 500 EPSC model will increase to 57 points. The passing score for the Russell 3000 EPSC model will increase to 55 points. For all other EPSC models, the passing score will remain 53 points.
For compensation committees, getting outside advice can be critical. A Pillsbury Winthrop memo discusses the value of collaboration between executive compensation counsel and compensation consultants, especially when developing and approving compensation arrangements. As much as it can be a hassle to coordinate busy schedules, the memo says taking steps to ensure both the compensation consultant and executive compensation counsel are present for committee meetings can have an immediate impact. The memo walks through several examples to highlight the importance of compensation committees receiving input from both advisers as part of the committee’s decision-making process. As one example, the memo discusses advance modeling of possible compensation decisions:
Having executive compensation counsel collaborate with a compensation consultant to model how different executive compensation decisions will be disclosed in a Form 8-K filing or in the proxy statement, specifically the CD&A, prior to approval is a great way for a compensation committee to screen out decisions that may garner scant support. This exercise eliminates the headache of drafting and defending poor or rushed executive compensation decisions at the end of the year after those decisions were made. Additionally, with the early exposure of gaps in potential compensation decisions, the two advisors can then work together to prepare an executive compensation decision that will receive better support.
State Street Global Advisors recently released its Q2 2020 stewardship report. In addition to providing insight into how the Covid-19 pandemic affected the asset manager’s 2020 engagements generally, it also provides insight into potential upcoming focus areas for engagements addressing executive compensation. Here’s an excerpt:
Use of discretion: SSGA expects compensation committees to be clear about the discretionary powers available to them and when committees use discretion to adjust payouts, they should ensure the outcomes will reflect company and executive performance and align with shareholders
Bonus plan complexity: SSGA says annual plans are becoming overly complex and making it difficult to understand how executives are being incentivized – SSGA encourages companies to simplify bonus plans and ensure they have a clear link to strategy.
Relative TSR: SSGA says relative TSR shouldn’t be used as the sole performance metric and it encourages companies to take a more holistic approach by using a blend of relative TSR and long-term operational metrics that align with a company’s strategy
For those working with stock plans, periodic questions arise about how quickly other companies use up shares reserved under incentive plans or about the number of shares typically included in additional share requests. To help answer some of those questions, FW Cook recently issued its 2020 aggregate share-based compensation report. The report reviews share usage trend data covering the three-year period 2017 – 2019 from 300 companies spread across five industry groups. Data analyzed includes annual grant rates based on annual share usage and fair value transfer (FVT), potential share dilution, prevalence of long-term incentive plan share requests and the allocation of long-term incentive pools to the “top 5” proxy officers. Here are a few high-level highlights:
– FVT rates as a percentage of market cap were generally stable compared to the firm’s 2017 study – the median 3-year average annual rate was 0.92% in the current study
– Potential dilution from outstanding equity awards trended down over the last three years, and continues a downward trend observed over the last 12 years – driven by companies granting more equity in the form of restricted and performance shares, which typically use fewer shares than stock options and remain outstanding for far shorter periods of time
– Over 1/2 of the sample companies requested shareholder approval of an incentive plan share request and the median size of the requests was approximately 4% of common shares outstanding – with requests varying based on company size and the year of request
In terms of what we might see going forward, the report says that if companies encounter ongoing stock price declines for the rest of 2020 and into 2021, we’ll likely see increased FVT rates as companies grant more shares to help offset the market decline
Check out this 66-page Argyle guide to enhanced compensation disclosures in proxy statements. It highlights sample disclosures – organized into these categories:
1. Inclusion of Table of Contents in CD&A
2. Inclusion of a Letter from the Compensation Committee
3. Executive Compensation Overview
4. Presentation of Compensation Principles/Objectives/Philosophy
5. Presentation of Feedback & Responses on Shareholder Engagement
6. Presentation of Compensation Elements
7. Presentation of Metrics Used in Incentive Programs
8. Inclusion of the Evolution of the Company’s Executive Compensation Program
9. Presentation of Compensation Process
10. Presentation of Peer Groups
11. Presentation of Goals & Performance
12. Presentation of CEO & NEO Scorecards
13. Presentation of Other Compensation Policies & Practices
14. Other Compensation Disclosure Enhancements – Q&A, etc.
Compensation Advisory Partners is out with its annual “CAP 120″ survey – which analyzes 120 companies from ten industries, to provide a broad representation of market practice among large U.S. public companies.
CAP reviewed Annual Incentives, Long-Term Incentives, Perquisites, and Stock Ownership Guideline Requirement Provisions of these companies in order to gauge general market practices and trends. Especially helpful this year is the new interactive tool that breaks down the data by industry. Here are some of the overall takeaways:
• 84% of companies use 2 or more metrics in their annual incentive plans (ensuring a broader view of company performance and mitigates risk within the program).
• 43% of companies incorporate strategic and non-financial (including ESG – environmental, social, and governance) annual incentive measures that are unique to a company’s strategy.
• Performance-Based Long-Term Incentives are the largest portion of the LTI mix for the CEO and their use has continued to increase over time (from 46% in 2011 to 63% today, a shift from stock options to performance-based incentive awards).
The annual “Corporate Governance & Executive Compensation Survey” of the 100 largest companies from Shearman & Sterling is always a “hot ticket” item, perhaps because it’s one of the oldest. With perquisites getting more attention lately – due to the impact of the pandemic and recent SEC Enforcement Actions – I was interested in some of the takeaways on that topic. Page 78 gives this info about aircraft use:
– 82 companies allow personal use of corporate aircraft – 46 offer this perk to all NEOs, 21 offer it to only the CEO, 5 offer it to the CEO & CFO, and 10 offer it to the CEO, CFO and other NEO
– 30 require execs to reimburse the company for all or a portion of their personal aircraft usage
– In many instances, personal usage is limited to availability and requires approval by the CEO
– 7 companies disclose that they provide tax gross-ups on some or all perks to execs