This 10-page memo from Cleary Gottlieb & PwC walks through accounting and financial reporting considerations that apply to executive pay – e.g. factors that impact how equity awards are expensed, and assets & liabilities for deferred compensation plans. This excerpt highlights why these issues matter to compensation committees:
Types of pay that seem economically similar may be recorded in the financial statements in different ways. Those accounting differences can impact the company’s earnings per share or industry ratios — attracting or driving away investors. Understanding them is important to the committee’s ability to effectively oversee compensation plans.
Other than paying them well, what do CEOs want from us? It all comes down to knowing your audience – and with a CEO, that means tying all conversations back to strategy, customers, investors and culture. Here’s a “cheat sheet” from an executive perspective – courtesy of Dan Walter of FutureSense (also see his “cheat sheet” from the CFO):
1. Start with something I don’t know and summarize it to a level that allows me to either make a decision or ask critical questions. Have the details at the ready, but don’t insist that I see them.
2. Give me solutions, not suggestions or problems. If it takes you a few extra days to turn your idea into a working prototype that proves its capabilities, please let me know in advance and we will meet in a few days.
3. Please know our business and be able to speak to me in terms I use on a regular basis. I don’t want to learn your “language” of HR and compensation. Listen in on investor conference calls and read any memo you can get your hands on. Please learn my language of success.
4. Don’t make assumptions about our business strategy. We explain it pretty darned well in our Proxy Statement. I secretly wish you had already read and understood our entire 10K and those of our most important peers.
5. Explain EVERYTHING from the perspective of how it helps our business become more successful. It’s great if something is new, or trendy, or if you want to make employees happier, but all of that is useless if we aren’t growing and winning.
6. PREPARE. There is a great quote from Woodrow Wilson that reads: “If I am to speak ten minutes, I need a week of preparation; if fifteen minutes, three days; if half and hour, two days; if an hour, I am ready now.” Which did you prepare for?
7. Please try and tell me everything from my perspective, not yours. I know this can be tough but, trust me, it is probably harder for me to see the world through your eyes (unprepared) than vice versa.
Every CEO really wants each department in their company to be a profit center. How can Compensation, a department that is an open tap of money pouring out the door, be a profit center? Know the business strategy and have a story that explains how the compensation philosophy, structure, pay levels and communication programs will create more value than they cost. Be specific. Use timeframes that make sense. Make sure you have backing evidence or credible opinions from consultants, academic studies or colleagues at similar companies.
If you do your homework, you will be quick on your feet. That, my friends, is perhaps the most important aspect of working with a CEO. Most are in their position because they are bright, fairly impatient and have high expectations of themselves and anyone who wants to be called their business partner. Truly understanding your preferred solution and at least two or three alternatives provides you with the simple and important function of exceeding expectations. Exceed expectations and you will be invited back to the table again and again.
I’ve blogged a few times about the expanding role of the compensation committee. Yet the number of committee meetings in a year seems to be holding steady at 4-5 – and the number of hours in a day hasn’t changed either. This Semler Brossy memo says that to reach the next level, directors will need to leverage technology in decision-making. Here are three areas where artificial intelligence & machine learning could help compensation committees:
1. Workforce & executive succession planning: Committees need a sense of a company’s cost of labor as they oversee the HR function and strategize about workforce automation – and can use predictive technology in executive succession & recruiting.
2. Pay design & pay management: Eventually, committees may be able to get real-time performance info to understand whether incentives are working – and non-financial metrics can be better incorporated into incentive plans as data tracking improves.
3. Company values & risk management: AI & ML-related issues will surface in risk reviews and require advance thinking about the ethics of using these capabilities in the workforce.
Not too long ago, Liz blogged about how director pay continues to attract more and more attention. As director pay faces increased scrutiny from investors, this blog from Pearl Meyer suggests companies should approach proxy statement disclosure about director pay much the way they approach the CD&A – that is – striking a balance between marketing the executive compensation program, or in this instance the director pay program, and satisfying the SEC’s disclosure rules.
Not that anyone wants to make a proxy statement any longer, but it’s a suggestion that could help tell the story and potentially provide comfort to investors. Decisions about director pay commonly include considerations about competitive pay as well as appropriateness based on the unique characteristics and value the directors bring to the board and company so it seems like a good story to tell.
Here’s an excerpt from Pearl Meyer’s blog suggesting companies follow the same approach with director pay disclosure as is used for the CD&A:
– Outline the philosophy, guiding principles, and objective that drive the program design
– Provide an overview of the pay mix structure and explain how it aligns with shareholder interests
– Summarize the compensation governance features of the director pay program – much like ‘what we do/don’t do’ as is commonly found in CD&A disclosures
Not long ago, I blogged about some suggestions for shortening the CD&A so when someone says expand CD&A disclosure, it makes me wonder – ‘what else is there to say’? As summarized in Deloitte’s highlights from a recent AICPA conference, Corp Fin Director Hinman noted that comp committees often take stock buybacks into consideration when setting executive comp but the CD&A might not include disclosure about the committee’s considerations. So, he encouraged companies to consider expanding CD&A disclosure accordingly.
A recent Georgeson blog sheds light on disclosure of investor engagement practices after a company failed or received a “red zone” say-on-pay vote result. Georgeson’s review included analysis of 2019 proxy statement disclosures for S&P 500 companies that received less than 80% support for their say-on-pay proposals in 2018.
The blog says there were 43 companies that fell into the fail or “red zone” bucket. Some of the findings for these 43 companies include:
– 80% disclose some information around investor outreach and/or attendees included in the outreach
– 72% disclosed director involvement in the engagement process
– 61% included charts or tables showing what they heard during engagement and actions taken in response
– Only 5 of the companies disclosed that they engaged with ISS and/or Glass Lewis and 4 of the 5 received less than 70% support for their 2018 say-on-pay proposal
The report also discusses engagement by the “Big 3” investors, BlackRock, Vanguard and State Street and shows how many of the 43 companies included in the review engaged with each of the Big 3. Some data points here include:
– Only 2 of the 43 companies didn’t engage with any of the Big 3
– 44% of the 43 companies engaged with each of the Big 3
The blog also provides reference to sample ways companies have spruced up shareholder engagement disclosure after receiving a low say-on-pay result.
Here’s something I recently blogged on TheCorporateCounsel.net: John blogged a few months ago that 70% of restatements are now “Little r” revisions, according to data from Audit Analytics. This WSJ article reports on a couple of studies that analyze the potential connection between the presence of clawback provisions & performance awards, on the one hand, and management’s discretion to “restate” versus “revise” financials, on the other. Here’s an excerpt (also see this CLS “Blue Sky” blog):
A study by Ms. Thompson found that almost half—45%—of Little r revisions from August 2004 through 2015 that she analyzed met at least one of the guidelines for them to be considered Big R restatements.
Her research points to one potential motivation: “clawbacks” that allow companies to recoup compensation from executives in the event of a Big R restatement. Companies with such clawbacks were more than twice as likely as others to use revisions for potentially material errors, her analysis found.
Although the article tries to also draw a link between “Little r” revisions and performance awards, the data doesn’t directly connect declines in performance award metrics like EPS to a company’s decision to carry out a “Big R” restatement versus a “Little r” revision. The article points out that in at least one situation, Corp Fin was deferential to a company’s decision to correct an accounting error via a revision even though the error had flipped one quarter’s earnings per share from negative to positive and the company used an annual EPS metric in its long-term incentive plan.
Also see this article suggesting that executives who are subject to clawback policies are more likely to push for tax savings – e.g. through use of tax havens. It wouldn’t seem there’s much downside to that for shareholders, but for companies that follow GRI Sustainability Reporting Standards, it’s relevant to know that GRI is recently announced a new “tax disclosure standard” to promote transparency of tax practices that could impact funding of government services & sustainability initiatives.
There’s a lot of attention lately to the fact that CEO pay growth is outpacing the growth of “average” worker pay. Maybe if companies are moving away from “shareholder primacy,” that’s a fair thing to focus on – but if you’re looking at shareholders and their retirement accounts, there’s not a lot to complain about, at least in recent years (see this blog for data over a 40-year time period). According to this “Harvard Law” blog, from 2014 to 2018:
– Median CEO pay growth (as reported in Summary Compensation Tables) was 23% for S&P 500 companies – compared to 50% growth in total shareholder return
– In the commercial banking industry, median CEO pay growth was 31% – compared to TSR growth of 40%
– In the retail industry, median CEO pay growth was 1% – compared to TSR growth of 49%
– In the computer software industry, median CEO pay growth was 59% – compared to TSR growth of 141%
The blog also offers these conclusions:
– CEO pay growth, at most public companies, is not closely correlated with TSR performance (the “pay-for-performance” rule proposed by the SEC in 2015 – SEC Release No. 34-74835 – has not yet been adopted)
– Over the 2014-2018 period, at S&P 500 companies and at the companies in the three industries examined (commercial banking, retail & computer software), the median CEO pay growth trailed TSR performance
– CEO pay decisions at most public companies reflect a variety of facts and circumstances that go beyond TSR performance