A few weeks ago, I blogged about whether the DGCL allows boards to delegate authority to an officer to grant options. An astute member responded with these additional thoughts:
I think per 157(b) the board has to set the terms so a delegated officer wouldn’t have discretion. If the delegation was made to a CEO designated as a committee of one (which was commonly done before the statute was changed to expressly allow delegation to officers for restricted stock grants) then the action would be a board action and the terms could be set by the CEO who would be acting as the board.
Here’s something that Liz blogged yesterday on TheCorporateCounsel.net: Although many of you know our work simply by the names of our “Essential Resources” – e.g. TheCorporateCounsel.net, CompensationStandards.com, Section16.net, DealLawyers.com and our related print newsletters – we’re actually part of a company called “EP Executive Press” that was founded by Jesse Brill over 40 years ago (here’s the last installment of Jesse’s “reminiscences” when the company celebrated its 35th anniversary).
Now, we’re entering another new chapter – with a parent-company rebranding to “CCRcorp.” Our new name stands for “Corporate Counsel Resources” – but I for one will forgive anyone who mixes us up with a certain ’60s rock band, especially since we’ll be “chooglin’ on down to New Orleans” for our “Proxy Disclosure Conference” this September.
You may notice some logo changes following our formal announcement later this week. But rest assured, we’ll be providing the same practical info…and when Broc & John are at the keyboard, it’ll even be entertaining.
Last month, I blogged that directors are split on whether to incorporate E&S metrics – like diversity – into incentive plans. This Farient Advisors blog says that more companies are saying that they pay for E&S accomplishments – but the metrics aren’t well defined and are tied to only a small portion of pay. In other words, they seem to be rooted in “virtue-signaling” rather than well-considered strategic plans – so executives perform accordingly, and shareholders remain dissatisfied. Here’s an excerpt:
The Farient team examined compensation plans from companies in the Russell 3000 and found that E&S compensation metrics are almost exclusively used in determining annual bonuses. As would be expected, we found a concentration of companies – 57 specifically – in the energy, materials (think mining) and utilities sectors that were using environmental compensation metrics in these plans. Twenty five of these companies were in the S&P 500. But other metrics in the E&S category were few with only 18 companies using metrics around “diversity” and nine using “sustainability.”
In examining these plans more closely, we found many of the companies combine E&S compensation metrics with other metrics into an overall category that is generally not weighted more that 10 percent of the overall short term incentive award. And, in addition to not being tied to a significant amount of compensation, the goals around these metrics aren’t generally well defined or aren’t disclosed at all.
Glass Lewis & CGLytics have been partnering on compensation & data analytics in Europe for a while now. Last week, they announced that they’re expanding that collaboration to North America. Glass Lewis will use CGLytics data as part of its peer group comparisons & pay-for-performance analysis – which underpin the proxy advisor’s voting recommendations on Say-on-Pay and other executive pay topics – as well as its “Proxy Paper” research reports. They’ll also integrate the data into the proxy voting policies of institutional investors via “Viewpoint” (their vote management service that implements those custom policies). Here’s more detail (also see the product page):
Glass Lewis’ Say on Pay analysis will now also be available via CGLytics’ proprietary platform, giving investors, issuers, advisors and board members the exact same data, tools and insights Glass Lewis uses to review and model CEO and executive compensation plans, and prepare for engagements with all stakeholders. Combining Glass Lewis’ proprietary policies and methodologies and CGLytics’ extensive data and analytical tools, the two companies will give all market participants unprecedented transparency and access into Glass Lewis’ compensation analysis that was not widely available and is needed for successful governance and stewardship in the modern digital age.
This blog from Willis Towers Watson looks at practices & plan design features that originated because of the “performance-based” exemption under Section 162(m). In addition to investors’ continued desire for companies to link pay to performance and regularly submit equity plans to shareholders (every 3-5 years), companies also might want to keep some of these other practices in place – even though there’s no longer an express tax reason to do so. That includes:
– Establishing maximum amounts/shares payable to covered employees (per the plan document)
– Agreeing upon extraordinary items and rules around financial metrics exclusions at the beginning of period (not decided after the fact at year-end)
– Pre-establishing performance goals (i.e., within the first 90 days after the beginning of the performance period)
– Ensuring performance goal outcomes are substantially uncertain when adopted
– Limiting the use of “upward” discretion outside of individual performance goals (which should generally be measurable and objective)
The question is whether to hard-wire those requirements into the plan, versus adding some leeway to the plan documents or even stripping out the requirements and providing a “softer” disclosure commitment. Remember that this is still an area that plaintiffs are watching, and there’s a litigation risk if aspirational disclosure commitments don’t align with practices. Here’s what Willis Towers Watson says about another disclosure point:
Companies must also decide whether they’ll continue to use “negative discretion,” and how the plan is disclosed in the proxy with the overarching consideration being whether this would alter the Summary Compensation Table (SCT) disclosure.
SEC staff guidance in Compensation and Disclosure Interpretations 119.02 permits 162(m) compliant plan payouts using negative discretion to be disclosed in the Non-Equity Plan Compensation (NEPC) column. If positive discretion is applied instead, this would cause more compensation to be shown in the SCT’s Bonus column due to discretionary adjustments. It’s unclear whether suddenly moving disclosed values to the Bonus column will increase scrutiny from proxy advisors and shareholders, but if this approach is taken we strongly suggest that a clear description of the reasoning appears prominently in the proxy. And such action might require more detailed disclosure of actual performance thresholds, targets and maximums in the Grants of Plan Based Awards (GOPBA) table as we discussed in “162(m) changes will affect your proxy disclosure, but not in the manner some suggest”, Executive Pay Matters, December 21, 2017.
Tune in tomorrow for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
Reduced Rates – act by June 14th: Proxy disclosures are in the cross-hairs like never before. With Congress, the SEC Staff, investors and the media scrutinizing disclosures, it is critical to have the best possible guidance. This pair of full-day Conferences will provide the latest essential—and practical—implementation guidance that you need. So register by June 14th to take advantage of the discount.
As they do every year, Semler Brossy has been publishing regular updates on the voting results for say-on-pay, equity plans, director elections and other proposals – as well as this year’s pay ratio stats. We post these memos in our “Say-on-Pay” Practice Area. Their latest report shares these details:
– The current failure rate (1.9%) is 20 basis points lower than the failure rate at this time last year (2.1%)
– The 91.3% average vote result thus far in 2019 is 40 basis points higher than the average vote result at this time last year (90.9%)
– Nearly one-third of the S&P 500 has received vote support below 70% at least once since 2011
– 9% of the Russell 3000 and 7% of the S&P 500 constituents have failed Say on Pay at least once over the same period
– The average vote result for companies that received an ISS “Against” recommendation is 31% lower than for companies that received an ISS “For” recommendation
And when it comes to pay ratio, here’s how S&P 500 and Russell 3000 companies compare, based on nearly 2000 disclosures:
– The median CEO Pay Ratio of the S&P 500 is 2.1x the median CEO Pay Ratio of the Russell 3000, which is slightly lower than the 2.2x multiple we observed between the two indices at this time last year
– The range of median employee compensation for the S&P 500 is slightly higher than the Russell 3000, except at the 90thpercentile, where the Russell 3000 is 12% higher
– The Russell 3000 CEO Pay Ratio distribution trails off near the 300:1 while the S&P 500 distribution trails off near 500:1
– The distribution of CEO Pay Ratios is most highly concentrated near 60:1 for the Russell 3000 and near 120:1 for the S&P 500
– The median change in Pay Ratio by company in the Russell 3000 is +2% and in the S&P 500 is + 1%; the median change in Summary Compensation Table CEO pay by company in the Russell 3000 was +6% and in the S&P 500 was +4%
A recent Bracewell memo notes that – in light of the Delaware Supreme Court’s 2017 Investors Bancorp decision – nearly 75% of surveyed LTIPs now include a director-specific limit on the size of annual grants, with many plans also capping total annual compensation for board members.
That trend isn’t likely to die out any time soon. Last week, the Delaware Court of Chancery reaffirmed that the entire fairness standard applies to most decisions that directors make about their own compensation. The opinion – Stein v. Blankfein – says that director pay decisions can be actionable even if the directors held a “good-faith, Stuart-Smalley-like belief” that they were “good enough, smart enough, and doggone it, they were worth twice—or twenty times—the salary of their peers” (bravo to the Vice Chancellor on the SNL reference – and in this case, it’s not much of a stretch to envision the Goldman Sachs directors holding that belief).
This Stinson blog has the details about the case & its implications – here’s an excerpt:
The following courses of action remain available to public company boards in approving director compensation:
– Have specific awards or self-executing guidelines approved by stockholders in advance; or
– Knowing that the entire fairness standard will apply, limit discretion with specific and meaningful limits on awards and approve director compensation with a fully developed record, including where appropriate, incorporating the advice of legal counsel and that of compensation consultants.
It may also be possible to obtain a waiver from stockholders of the right to challenge future self-interested awards made under a compensation plan using the entire fairness standard. To do so, stockholders would have to approve a plan that provides for a standard of review other than entire fairness, such as a good faith standard. In addition stockholders would have to be clearly informed in the proxy statement that director compensation is contemplated to be a self-interested transaction that is ordinarily subject to entire fairness, and that a vote in favor of the plan amounts to a waiver of the right to challenge such transactions, even if unfair, absent bad faith. Note that the Court did not conclude, because it was not required to do so, that such a waiver was even possible.