The Advisors' Blog

– Broc Romanek

This article from Semler Brossy’s Kathryn Neal is interesting, illustrating how pay practices at private companies can be something that public companies can look to for examples of good practices…

– Broc Romanek

Here’s the intro from this piece by Semler Brossy’s Barry Sullivan and Rami Glatt:

Today, nearly one-third of the S&P 500 companies measure Return on Invested Capital (ROIC), or a similar capital measure, in their executive incentive programs. Why is there so much interest in ROIC for executive incentives? Investors often look to ROIC as a key indicator of management’s effectiveness and an important driver of premium shareholder returns. The financial theory is pure: ROIC captures how well a company and its management team uses its capital — both equity and debt — to generate earnings.

ROIC can be useful in absolute — to help ensure a company is generating a return above the cost of the capital it uses. ROIC can also be useful as a relative test. Investors often pick stocks based on whether – and by how much – a given company is outperforming other players in the same industry.

Again, the financial theory is pure, and there is real-world evidence to support it. The chart below shows that premium shareholder returns come with strong ROIC, in balance with top-line growth over time. Importantly, growth is a necessary balance to ROIC, in our view, to help ensure a company’s ROIC is sustainable over time, and not simply a function of short-term behaviors (e.g., “pumping” earnings, or “starving” the asset base).

– Broc Romanek

Here’s the intro from this memo by Meridian Compensation Partners:

Given its strong alignment with shareholder value creation, earnings per share (EPS) is a common performance metric selected for short-term incentive and long-term incentive plans. A company’s generally accepted accounting principles (GAAP)-based EPS is equal to its after-tax net income divided by the number of common shares outstanding (either on a basic or fully diluted basis). However, in performance arrangements, companies often use an adjusted EPS performance measure, which is a non GAAP measure. Directors should consider examining the different approaches companies use to develop non-GAAP EPS measures when deciding what’s best for their own company’s compensation program.

– Broc Romanek

Recently, a member asked this in our “Q&A Forum” on TheCorporateCounsel.net (#9860):

Are ERISA-governed severance plans typically approved by a company’s full board or the compensation committee or both? Our compensation committee charter does not specifically address authority relating to benefits plans.

John noted:

I think practice for broad-based ERISA plans varies & there’s not a one-size-fits-all approach. Take a look at Section C of this Wachtell Lipton memo. Even if your committee charter does not expressly extend to ERISA plans, it seems that the full board could opt to delegate those responsibilities to the committee if it desired to do so.

– Broc Romanek

The SEC’s new rule requiring companies to disclose their practices or policies regarding their employees’ (including officers) and directors’ ability to hedge the economic risk of owning the company’s equity securities now applies to companies with fiscal years beginning on or after today. Check out this new Compensia memo that provides reminders about the key provisions of the new rule (and here’s other memos about it)…

– Liz Dunshee

We’ve posted the transcript for the recent webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.” Mark Borges, Dave Lynn & Ron Mueller shared their latest takes on these topics:

1. Say-on-Pay Results
2. Performance-Based Compensation Disclosure
3. Shareholder Responsiveness Disclosure
4. Perquisites Disclosure
5. Director Compensation Disclosure
6. CEO Pay Ratio Trends
7. Hedging Disclosure Rule
8. Status of Other Dodd-Frank Rulemaking
9. Shareholder Proposals
10. Proxy Advisors
11. Proxy Strike Suits

– Liz Dunshee

Emerging growth companies aren’t required to provide a CD&A or conduct a say-on-pay vote – but that doesn’t mean they can ignore executive compensation issues. This Semler Brossy memo points out that the EGC period is a time to lay the groundwork that will allow their governance practices & pay programs to evolve gradually after the IPO. And according to the memo, there are a few things that should be “high-priority” right out of the gate:

1. Avoid egregious pay practices (such as repricing options, overly generous or non-standard employment agreements and/or tax gross-ups)

2. Establish a peer group to understand comparative practices

3. Set reasonable and defensible pay levels (for example, informed by peer group); avoid outsized pay packages without sufficiently disclosing the rationale

– Liz Dunshee

I’ve blogged a couple of times about what might be a growing push to eliminate the “Reg G” exception for CD&As. This Audit Analytics blog says that more than two-thirds of the S&P 500 now use non-GAAP measures to establish compensation targets – and that number could go even higher if companies integrate ESG performance criteria and EVA metrics into their programs. Should we care? Well…

A recent study from B-School profs at Cornell & MIT that says companies that use non-GAAP earnings end up over paying their C-suite executives and that non-GAAP measures aren’t a truer picture of business. But what probably matters more (to the SEC, to shareholders, to courts) is whether investors can understand how those payouts are calculated (and the main complaint in CII’s April rulemaking petition was that right now, that’s really difficult).

The blog goes on to consider Corp Fin comment letter trends on non-GAAP metrics and says the Staff is no longer just looking at how non-GAAP figures are disclosed, but diving deeper to consider whether the adjustments are misleading. So far, though, the Staff isn’t commenting on non-GAAP measures used exclusively for executive compensation purposes.

– Liz Dunshee

Broc & I have blogged several times about the director pay analysis that ISS will start applying next year. So far, it hasn’t been super clear how ISS will treat “outliers” – directors whose pay was in the top 3% of their peer category. But this Pearl Meyer blog takes a look at what recent proxy filings – and corresponding ISS comments – can tell us. Here’s an excerpt:

It’s becoming clear that outliers will be categorized into two buckets, those that may be able to provide a compelling rationale for outlier compensation and those that may not. ISS’ position on what may qualify as compelling rationale is based on feedback from investors. We reviewed detail from Main Data Group on 2018 proxy filings for Industrials companies in the Russell 3000 to see how many board members, board chairs, and lead directors received outlier compensation, and what types of director fees or other compensation positioned these directors in the top 3%.

– The companies with outlier compensation were larger from a revenue size perspective. Because the ISS evaluation is based on indices, which include companies across a wide range in revenue size, a larger company within a given index is more likely to have directors be identified as outliers (given that director pay tends to be correlated with company size).

– It matters which index the company is a member of, and will be evaluated against, particularly for companies in the S&P 500. The 97th percentile director compensation for the S&P 500 is significantly higher than the other indices.

– More than half of the 14 companies with outlier director compensation (one or more board members) could likely provide a compelling rationale for the positioning above the 97th percentile. Reasons for the outlier positioning included (from most to least prevalent): receiving a chair retainer for a portion of the year, newly-elected directors receiving an initial equity grant; special fees for work on a transaction; consulting fees; and payment of dividend equivalents.

– Liz Dunshee

Here’s a few articles about how CEO pay levels look this year, based on this season’s proxy statements:

– WSJ’s “CEO Pay Ranking”
– WSJ’s “How Six CEOs Were Paid on the Way Out”
– Mercer’s “CEO Pay Analysis of S&P 500 Early Filers”
– New York Times’ “The Highest-Paid CEOs of 2018: A Year So Lucrative, We Had to Redraw Our Chart”
– AP’s “Female CEOs are competitively paid, but greatly outnumbered”