Lots of considerations go into selecting a compensation peer group and proxy advisors tend to select peers based on industry, companies of similar size in terms of revenue and what they call “peers of peers”. Pre-IPO companies though are likely to have different considerations.
This memo from Jim Heim at Meridian discusses the reasons why pre-IPO peer groups should be constructed using different considerations and says that understanding what the benchmark data will be used for impacts selection of the peer group. The memo sets out key compensation actions that a pre-IPO company faces and says that a peer group for a pre-IPO company could be selected by considering the following factors:
– Industry and related sectors (i.e. 2-digit GIC rather than 4)
– Recency of IPO
– Market value at time of IPO
– Size/complexity of organization at time of IPO
– Growth trajectory leading up to the IPO
– Founder status and overall ownership position of management prior to IPO
This recent Pearl Meyer survey covers compensation committee governance, 2020 executive pay projections, incentive plan design changes and gender pay – and it looks like the workload for compensation committees is only getting heavier. Some nuggets include:
– Increased oversight responsibilities for compensation committees – 39% are now overseeing leadership and talent development, 29% are overseeing diversity & inclusion and 26% are overseeing corporate culture & employee engagement
– Half of survey respondents – 199 companies – recently made or are considering annual incentive plan design changes
– 43% of survey respondents made or are considering long-term incentive plan design changes – most common action being adding new metrics
– Only 14% of public company respondents use or plan to include ESG metrics in executive incentive plans
On a “pay ratio” note, the survey says that CEO salaries are expected to increase by an average of 2.9% next year – compared to 3% for other employees. So that pay component might have a steadying affect on next year’s pay ratios. Of course, CEOs are getting a lot of variable pay too. And in hard numbers, 2.9% of billions of dollars is quite a bit more than 3% of median employee pay…
Georgeson recently issued a good reminder in this blog that ISS’ policy on non-employee director compensation took effect February 1st – and under the policy, ISS will recommend shareholders vote against directors who are responsible for setting director comp when a company’s non-employee director pay is “excessive” for two or more consecutive years unless a compelling rationale is disclosed. ISS introduced the policy in 2018 but it didn’t take effect until earlier this month.
According to the blog, last year, ISS identified almost 100 companies as having excessive non-employee director pay. The memo helps explain how ISS determines “excessive” pay and the disclosure necessary to provide a compelling rationale for the pay so that companies can take steps to help avoid “against” recommendations for directors.
Here’s a recent report from Willis Towers Watson showing trends over the last 10 years for S&P 500 companies on executive stock ownership guidelines and retention requirements. The report shows that 63% of S&P 500 companies have both stock ownership guidelines and also retention requirements, while another 33% of the S&P 500 have stock ownership guidelines only. The report says that the prevalence of retention requirements has increased 82% since 2010.
The report also shows trends in retention requirement design and says that although 52% of the S&P 500 companies have a retention requirement for executives to hold shares until ownership guidelines are met, some companies have either a stand-alone retention requirement or a requirement to hold shares beyond meeting the stock ownership requirement.
Liz blogged last fall about how one company was planning to tie executive compensation to elements of strategic ESG goals. Shareholders continue to ask for standardized ESG disclosure and talk continues about finding ways to tie executive comp to ESG goals. Acknowledging that most agree with monitoring ESG goals and that it’s undecided whether ESG goals should be factored into incentive plans, this recent Directors & Boards blog highlights key areas of focus for compensation committees in 2020 and what they should do, one area being ESG:
– Identify the key ESG measures for your organization: based on the nature of your business, what are the most critical ESG metrics (e.g., environmental emissions, energy consumption, employee safety, pay equity, diversity)?
– Determine what the goals are for improving ESG performance: what level of progress is required to meet the objectives of the organization or be an industry leader?
– Assess whether there is a role for ESG in compensation decisions: should ESG measures be incorporated into the individual performance assessment for the CEO and other members of management? Are there any ESG measures (e.g., employee safety, diversity or environmental progress) that are critical enough to be included in the incentive plan for executives?
The blog also highlights other compensation committee to-dos for 2020 involving pay equity and diversity, ISS EVA metrics and pressure testing the company’s compensation structure.
Tune in tomorrow for the webcast – “Tying ‘ESG’ to Executive Pay” – to hear Aon’s Dave Eaton, Southern Company’s James Garvie, Mercer’s Peter Schloth, and Willis Towers Watson’s Steve Seelig discuss how to handle the growing growing pressure to consider environmental, social & governance factors in their board structures and business operations – including demands to incentivize management’s focus on ESG goals through executive pay. Tying ESG metrics to executive pay may improve outcomes, but challenges abound.
As reported in this Reuters article, recent statements by Corp Fin Director Hinman say the SEC won’t be writing new rules to require public companies to explain why and how they use adjusted or non-GAAP financial measures in the CD&A.
Last spring, Liz blogged about how CII had filed a petition with the SEC recommending changes to Item 402 that would require all non-GAAP financial measures presented in the CD&A be subject to Reg G and Item 10(e). CII filed the petition after SEC Commissioner Rob Jackson had co-authored a WSJ opinion piece calling for increased transparency about the use of non-GAAP measures in setting executive pay.
The Reuters article high-lights some of Director Hinman’s remarks made at a December 2019 AICPA conference. Here’s an excerpt:
“The CD&A is excluded from having to reconcile non-GAAP numbers, but we do in the rule ask people to show how you get to that number if it’s a non-GAAP number. You don’t have to do the full reconciliation; many times people will sort of cross-reference the reconciliation. We would encourage people to, you know, when they are using [non-GAAP] … to provide at least how they got there. The method of calculation is it’s what the rule says. It’s not reconciliation but it’s pretty close.”
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.