A recent Pearl Meyer blog discusses the importance of temporary CEO succession plans as we confront the Covid-19 pandemic. Among other things, the blog lists considerations for the compensation committee about the form and structure of temporary CEO compensation – noting there is no prevailing practice. One practice pointer is to keep the temporary CEO’s compensation plan simple so it will be easier to communicate and disclose. Here’s an excerpt:
– Salary: It is common practice to increase the interim executive’s salary while in the CEO role. Raising the salary to the 25th percentile of the CEO pay benchmark for the period the executive will be serving as CEO may be a sound approach. The salary can revert to the prior level once the executive is back in his or her original role.
– Annual Incentive:You can employ the same concept here. Raise the target award based on the 25th percentile CEO benchmark levels. The more difficult actions are whether to modify existing goals or add new goals, and the committee should discuss how to incorporate discretion in assessing the temporary CEO’s performance.
– Long-term Incentives: Depending on the length of time the executive fills the temporary role, the committee may not need to make any adjustments to the “regular” long-term incentive grant. But, depending on the circumstances, the committee may want to consider a one-time grant either at the time the company appoints the temporary CEO, or after the original CEO returns, to acknowledge the additional service provided by the executive filling the temporary role.
A recent report from Semler Brossy includes predictions for the 2020 proxy season along with early vote results for say-on-pay, equity plan proposals and director elections. Here’s some of the data:
Predictions
– The firm predicts the Russell 3000 say-on-pay failure rate trend will reverse and drop below 2% and
– Say-on-pay vote support will be more varied across companies in 2020
– Russell 3000 average director election vote results will fall below 94.5%
Review of voting results so far in 2020
– 2 companies of the 147 reviewed have failed say-on-pay
– Current say-on-pay failure rate of 1.4% is the same as it was at this time last year
– 91.4% average say-on-pay vote result is 20 basis points lower than the average vote result at this time last year
– Current average say-on-pay vote result for companies receiving an ISS “against” recommendation is 38 percentage points lower than for companies that received an ISS “for” recommendation
– Current average vote support for equity proposals (91.7%) is higher than the average vote support at this time last year (84.6%)
– No equity plan proposals have received vote support below 50%
Here’s a recent Equilar blog that looks at say-on-pay vote trends over the last 5 years. The blog also reviewed say-on-pay votes from the largest asset managers and notes that only BNY Mellon and Prudential voted in favor of say-on-pay at less than 75% of the Russell 3000.
Last year, Liz blogged about gender pay gap proposals and how Citigroup was the first company to post unadjusted “pay gap” numbers on its website. Arjuna Capital and Proxy Impact recently issued their 2020 “Gender Pay Scorecard” and this year, Mastercard and Starbucks joined Citigroup on top of the list. The scorecard ranks 50 large companies on their pay equity disclosures.
Like last year, half of the companies included in the scorecard received a failing grade, so despite progress at the top of the list, it doesn’t sound like progress for everyone. The report also recaps the six-year history of gender pay gap proposals and although the proposals continue, so far this year the pace of proposals appears to be slowing down with 19 proposals submitted as compared to 29 last year. Here’s an excerpt:
As of March 2020, 19 proposals have been filed, with several more likely to be filed before the end of the year. Most of these proposals ask for median pay gap reports and several ask for racial, ethnic and gender pay data.
Thirteen of this year’s proposals are resubmissions, with nearly all of them targeting companies that averaged more than a 30% vote in 2019. Most of these companies have received three or more pay equity proposals already. These companies have either not provided gender/racial pay gap disclosure or still have significant omissions in their reporting.
For another look at pay equity, here is JUST Capital’s recent analysis saying that it’s still critically important in the time of coronavirus. Among other things, the non-profit found “companies that disclose they’ve conducted a pay equity analysis report, on average, an 8 percentage point higher mean 5-year ROE compared to their counterparts.”
Not too long ago, I blogged about Meridian’s memo discussing the $1 CEO salary coupled with equity awards approach. As Frank Glassner from Veritas Executive Compensation Consultants noted said “this approach was first used by Lee Iacocca at Chrysler back in the 70s and during the current COVID-19 pandemic, significant caution and thoughtfulness should be called for, as the current grants would likely be made at all time lows. This of course can potentially create ‘space-shot’ realizable value and subsequent payouts as the economy eventually recovers.”
Amid the current economic turmoil, there seem to be daily reports about CEO and employee pay cuts. Now this MarketWatch opinion piece from two academics has another take on executive compensation – it suggests U.S. CEOs donate their 2020 salary and stock compensation to workers and cities and towns on the front lines fighting the coronavirus pandemic. The authors specifically call on members of the Business Roundtable – and others – to stand by their commitment to social responsibility.
Many companies have in fact stepped up – among others, Apple has introduced a digital screening site aimed at helping users determine whether they should be tested for the coronavirus and Google has pledged $800 million in a pandemic relief package. Comcast announced that it was setting aside $500 million for employee wages and benefits where their jobs have been impacted by the crisis. Comcast also said its CEO and other executives were donating 100% of their salaries for coronavirus relief efforts.
Other CEOs have also already given up their salary and/or bonus to help companies pay worker salaries, see these reports about Texas Roadhouse, Marriott and Yum Brands. Although the pay reductions don’t include stock compensation and there hasn’t been a broad statement by members of the Business Roundtable as the MarketWatch opinion piece seems to want, the increasing number of companies announcing CEO pay cuts and/or donations shows companies are listening and aware of optics. With the economic effects from the pandemic far from over, this likely isn’t the last call for help.
We’ve blogged before about incorporating ESG metrics into incentive programs. Even though doing so can seem daunting, a recent report from Willis Towers Watson says that 50% of S&P 500 companies include ESG metrics in annual incentive programs compared to 4% that do so for long-term incentive programs. The report discusses some of the design features for plans incorporating ESG metrics including funding formula components and payout formula modifiers.
The report shows that funding formula components generally cover topics such as people & HR, customer service, diversity & inclusion, employee health & safety, governance and environmental & sustainability. It also says that 44% of S&P 500 companies include human capital measurements in their incentive plans. This seems somewhat intuitive as companies are likely further ahead in terms of tracking human capital data as compared to topics such as environmental and other sustainability measures.
The COVID-19 pandemic will likely lead to more calls for tying ESG factors to executive compensation as more are recognizing that environmental and social issues can create large-scale financial risk. This NY Times article shares thoughts from ISS and says that some directors may see ESG metrics as something management has more control over as investors will likely be more sensitive to executive pay given all the tragic consequences of the COVID-19 pandemic.
As COVID-19 health and safety issues continue to mount and be a matter of first priority, compensation committees are faced with executive pay issues. Reports of changes to compensation also continue and this blog from Equilar provides some examples of compensation-related disclosures so far. The blog says that Equilar will continue providing updates to the post throughout the 2020 proxy season…
A couple of weeks ago, I blogged about implications and approaches to dealing with the effect of the COVID-19 pandemic on executive compensation plans. As companies and boards try to get their arms around this unprecedented situation, Semler Brossy has issued a memo discussing a range of alternatives for dealing with incentive compensation.
The memo provides possible alternatives for companies where an incentive plan has already been approved and separate alternatives to consider if a plan hasn’t yet been approved – the alternatives are further broken down by annual and long-term incentives. Here’s some of what the memo says about annual incentive plans already approved:
– Let the plan play out as is, and communicate your intent to evaluate performance and exercise discretion at year-end – establish a framework for this use of discretion, with factors such as relative performance and historical performance
– Make no immediate changes, but communicate your intent to reset goals once you have clarity into the near future – presuming there is sufficient stability by mid-year.
– Establish an additional plan with stretch but realistic targets – this wouldn’t replace the existing short-term incentive opportunity but would be used to motivate executives to work toward hitting important strategic or financial goals – then make sure to net payouts earned against payouts from the original plan
Yesterday, I blogged about the need to all consider available options for addressing the impact of the current crisis on compensation programs. With all the market volatility, many are left wondering how long it will take for a market to recover and how long recent incentive grants will remain underwater. This recent Shearman & Sterling blog dives into option repricing and exchange programs and says there may be renewed discussion about them – something we haven’t heard much about since the 2008 financial crisis. No doubt though – many shareholders frown upon repricing and exchange programs.
It might be early and a repricing or exchange program won’t be realistic for all companies, but some may want to at least think about it.
The memo walks through different approaches for those that do want to consider such a program and lists the pros and cons for each. The memo also notes topical areas for consideration such as NYSE and Nasdaq shareholder approval requirements, ISS’s position on these programs, U.S. accounting treatment, U.S. tender offer rules, SEC disclosure rules, share registration considerations and tax treatment.
The coronavirus crisis and market volatility has left many wondering what they can do about compensation decisions made before the crisis ensued and if they haven’t already been made, what they should do. This blog from Pay Governance says two things have made this crisis different: the timing of events and rigidity of say-on-pay protocols. Because the crisis is different this time around, the blog says “everything should be on the table” – consider, discuss, deliberate everything – that includes:
– Exercise of discretion
– Addressing mid-stream incentive plans
– Reassessing equity grants
– Re-think long-term performance periods
– Dealing with out-of-the-money share awards
The blog touches on each of these considerations – which should help comp committees as they begin, and what will likely be, ongoing deliberations.
For compensation committees looking for resources, here’s a memo from Skadden that also runs through recommendations to consider…