A recent DealBook article and FT analysis found that about 50 companies gave their CEOs 50% more options than last year – and although the grant size was due to formulas and the timing was consistent with past practices, execs are profiting off of market upswings and it’s not playing well right now. But thanks to market volatility, there are plenty of companies facing the opposite problem – option grants that are now underwater and doing little to motivate execs.
Lynn blogged recently about what to consider if you’re modifying performance awards or granting supplemental awards due to pandemic-related underperformance. This 7-page Aon memo gives even more detail on alternatives – including repricings, which have been rare in recent years but may be an option of last resort for companies whose stock prices haven’t recovered. Here’s an excerpt (and as Gunster’s Bob Lamm discusses in this blog, don’t lose sight of the optics of pay changes):
A repricing or an exchange is more complex than additional grants, but it may be an attractive program to return value to employees and address retention concerns. We recommend a balanced approach to any stock option exchange by looking at the impact to dilution, potentially putting shares back in the pool (if allowed by your plan and shareholders), and not creating significant incremental expense. In order to balance these priorities, companies should consider exchange ratios above 1-for-1, which offsets some incremental expense and helps to address dilution.
For most companies, repricings or exchanges require shareholder approval, which poses significant obstacles to the design and implementation of the program. If taking this action does not require shareholder approval, it is still important to understand the institutional shareholder perspective, to have a business justification for your actions and to be prepared to respond to the shareholder criticism that will come—which may include negative say-on-pay votes and/or votes against the election of board members.
We’ve wrapped up the May-June issue of The Corporate Executive – and will be mailing it soon! It’s available now electronically to members of TheCorporateCounsel.net who also subscribe to the print newsletter at each of their locations (try a no-risk trial). This issue includes pieces on:
– The Impact of COVID-19 on Executive Compensation
– ISS and Glass Lewis Voting Policy Changes Due to COVID-19
– New Proposed Regulations under Internal Revenue Code Section 162(m)
With furloughs, layoffs and changes to executive & workforce pay, many companies’ 2020 pay ratio calculations are going to require some extra thought. This memo from Willis Towers Watson suggests strategies to anticipate these issues and minimize pay ratio effort. Here’s an excerpt:
Given all the changes that have occurred and may occur during 2020, companies should develop a dynamic model now, to avoid competing against other HR priorities that will fall in Q4. Changes in compensation programs that could take place during Q4 could include bringing back furloughed employees or taking further actions to reduce pay or headcount before year-end.
If a company is performing a recalculation in 2020, this analysis may influence the Determination Date it selects. For those companies still hoping to use the three-year rule using the median employee identified in 2018 or 2019, these changes during 2020 could mean they must start anew to determine a median employee for 2020.
Assuming companies intend to use the 2020 median employee in ensuing years, global pay demographic changes as a result of companies restoring stability will present complications in the Year 2 and Year 3 calculations. While companies may aspire to use the three-year rule, for many 2020 may simply not be an appropriate baseline going forward as demographics continue to change from 2020 to 2021.
We’ve just added Bill Hinman – Director of the SEC’s Division of Corporation Finance – as another top-notch speaker at our popular conferences – the “Proxy Disclosure Conference” & “17th Annual Executive Compensation Conference” – which will now be held entirely virtually, September 21-23rd. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Act now to get an “early bird” discount – here’s the registration information. Here are the agendas – 18 panels over three days.
Among the panels are:
– Bill Hinman Speaks: The Latest from the SEC
– The SEC All-Stars: A Frank Pay Disclosure Conversation
– The SEC All-Stars: Q&A
– Pay-for-Performance: What Matters Now
– Pay-for-Performance: Q&A
– Directors in the Crosshairs: Pay, Diversity & More
– Dave & Marty: True or False?
– Pay Ratio: Latest Developments
– 162(m): Where Things Stand
– Clawbacks: What to Do Now
– Dealing with the Complexities of Perks
– How to Handle Negative Proxy Advisor Recommendations
– Human Capital: The Compensation Committee’s Role
For a simple look at say-on-pay voting results, here’s a say-on-pay tracker from Farient Advisors – it allows searches by year, stock index, industry group and specific companies. The say-on-pay tracker also sorts data based on voting result – showing, so far this proxy season, a limited number of companies have received less than 80% support. The firm also has a CEO pay ratio tracker that aggregates data for S&P 1500 and Russell 3000 companies and provides summary data by sector including the median ratio, median employee and CEO pay.
A recent memo from Aon reviews director pay and compares private company director pay with public company director pay. It’s not a surprise that public company directors earn higher compensation, because as the memo notes, public company boards generally hold more meetings, are exposed to potentially higher liability and public and regulatory scrutiny. The report gives a quick review of Aon’s data and it found that private company boards generally earn 36% less than their public company counterparts – primarily in the form of lower amounts of long-term equity that are granted to public company directors.
Last week, I blogged about the scrutiny on executive compensation actions. A recent Pearl Meyer blog also urges caution, particularly when thinking about making an equity grant now for purposes of retention and alignment with shareholders. Here’s an excerpt:
Looking ahead three to five years, when the economy has fully recovered and stock prices are again robust, the executives who have been given extra equity grants today will begin cashing in on their gains. Unlike similar studies published in the middle of the last decade, these reports are likely to attract major attention. Investors are likely to hold the directors who gave out those equity grants, and the executives who are still active, accountable.
In terms of how directors should approach decisions about equity grants in today’s environment, the blog lists these questions to ask as a way to help guide any decisions:
– Was our stock price in early March truly reflective of our economic value?
– What is your estimate of how much cash the executive will lose in foregone salary and unearned bonus?
– If you make an equity grant now (whether a regularly scheduled award or a special grant), how much will the executive gain when the stock price gets back to “normal”?
– What else are you doing for the executives in terms of adjustments to incentive award calculations or using discretion in determining awards?
– Is the retention argument compelling in your case?
You’ll likely be hearing more about the SEC’s Enforcement Action against Argo Group International Holdings for failing to disclose certain perquisites. The SEC’s press release and order provide the details but the company paid a price. It settled with the SEC by agreeing to pay a $900,000 civil fee but the order also identifies several remedial actions the company took, which sound like they didn’t come cheap and caused quite a bit of upheaval at the company.
To help guard against this type of action, we have a 97-page chapter on Perks & Other Personal Benefits as part of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise” posted on this site.
We also have a panel about perk disclosures as part of our “Proxy Disclosure” conference – which is coming up in September via Nationwide Video Webcast. This is our big annual conference and it will cover all sorts of disclosure issues. Register now to receive the special Early Bird Rate!
A recent Equilar blog reports that it, together with the AP, has released its annual CEO pay study. The study says total compensation includes information disclosed in company proxy statements and includes CEOs that have served in that role at a S&P 500 company for two years as of fiscal year end 2019. Here’s an excerpt from Equilar’s blog:
Median total compensation for individuals included in the 2020 study totaled $12.3 million, a 4.1% increase from the year prior – a slightly smaller pay increase than in 2019 and 2018
This year’s study saw communication services emerge with the highest median CEO pay package among S&P 500 companies at $27.8 million, topping the healthcare industry, which led the way in each of the last two years. The healthcare industry, which includes traditional healthcare, insurance as well as biopharma companies, had the second-highest median CEO pay package at $16.4 million, followed by consumer defensive at $14.0 million. CEOs within the real estate industry were awarded a median $10.4 million, the lowest of the industries in the study.
Studies like this always get scrutinized and this year will likely attract greater scrutiny as companies grapple with furloughs, layoffs and other compensation changes – and, it didn’t take long, here’s an early media piece about the study that questions where CEO pay will go after the pandemic.
I’ve blogged before about reports we’re seeing of executive and director pay cuts. For companies thinking about potentially making pay cuts or salary reductions for employees, executives and possibly directors, this Simpson Thacher memo provides a thoughtful discussion of key issues companies should consider. The memo reminds companies that existing contractual obligations with employees require careful review as many contain “constructive termination” or “good reason” protections that might be triggered by a reduction in compensation. Here’s an excerpt:
The exact formulation of these provisions will vary, but, in the event the employer reduces pre-agreed elements of the employee’s compensation, they generally permit an employee to resign from employment as a result of “good reason” or “constructive termination” and receive severance payments and/or accelerated vesting. Occasionally, a “good reason” definition may contain an exception for a reduction that’s an across-the-board reduction affecting similarly-situated employees and/or that is not “material.” The uniqueness of COVID-19-related reductions may present challenging interpretation issues. Even if an employment agreement doesn’t contain a specific “constructive termination” or “good reason” protection, an employer’s unilateral decrease in an employee’s compensation levels could constitute a breach of contract (in which case the employee may have general damages claims) and/or violation of state wage laws (which may provide for significant liquidated damages).
To help avoid ambiguities and questions about whether a contractual provision is implicated, the memo suggests employers thinking about a reduction request each affected employee execute a consent agreeing to such reduction in advance of the reduction. By taking this preemptive step, an employer can obviate later disputes, including any claim for breach of contract.
A consent should expressly acknowledge the original and new compensation levels and specify when compensation will return to the original levels (if known) or that the reduction will continue indefinitely until further notice. The consent also should include a confirmation from the employee that they agree that the reduction doesn’t constitute “good reason” or a “constructive termination” (or term of similar meaning) under any agreement to which the employee is a party or any plan in which the employee participates, including any equity arrangements. The consent should also clarify whether the reduction will affect other compensation amounts that are based on percentages or multiples of base salary, such as 401(k) contributions by the employer or the calculation of annual bonuses and severance amounts.
The memo also covers considerations relating to the scope of changes, deferred compensation arrangements, severance and other retirement benefits, non-U.S. employees and collective bargaining agreements, SEC disclosure, requirements for employee notices, anti-discrimination laws and non-employee director compensation.