We researched 10 years of say-on-pay proxy advisory recommendations and results to understand how common it has been for a company to receive an “Against” vote recommendation or low say-on-pay support in a given year. The results are illuminating; more than 40% of Russell 3000 companies have received an “Against” vote recommendation from ISS, and almost half have received low say-on-pay support. The trend also suggests that these percentages will continue to increase each year. Therefore, we believe companies would be well served to conduct regular, proactive stockholder outreach and engagement to mitigate the impact of a future negative vote recommendation.
The memo offers 5 tips for planning say-on-pay engagement. And as this Georgeson blog concludes – based on an analysis of recent voting behavior of the top 10 investors at companies that have failed say-on-pay – success really hinges on understanding your shareholders’ unique concerns:
Lack of strong correlation among investors’ votes at these failed say-on-pay proposals suggests that how one of the investors voted was not a strong signal as to how another one would vote. Early negative votes by some of these investors does not mean that others among these investors would be non-supportive, as well. It also means that engagement with investors should not be a one-size-fits all approach. Even among the key index investors, there are differences in the likelihood of gaining their support and the issues they focus on. Companies should understand the key issues an individual investor considers in its analysis, and in their outreach try to mitigate any concerns associated therewith. Demonstrating awareness of an investor’s priorities when communicating your story will show that you have done your homework and best position you to gain the investor’s support.
It’s so rare that you read anything about pay-for-performance at private companies that I wanted to point out this Nixon Peabody blog. Meanwhile, some argue that public companies would be better if they moved to simplified pay like PE – see something on that in this blog…
Also see this report from Lodestone Global about how directors are paid at private companies…
Here’s the intro from this NY Times article about employees submitting shareholder proposals to their employers (also see this “Activist Insight” article – which suggests companies can reduce this risk through open & authentic internal communications about employees’ concerns):
Silicon Valley technology firms are known for giving stock to their workers, a form of compensation that often helps employees feel invested in their companies. But tech workers are now starting to use those shares to turn the tables on their employers. As many tech employees take a more activist approach to how their innovations are being deployed and increasingly speak out on a range of issues, some are using the stock as a way to demand changes at their companies.
At Amazon, more than a dozen employees who had received stock grants recently exercised their rights as shareholders. In late November and early December, they filed identical shareholder petitions asking the e-commerce giant to release a comprehensive plan addressing climate change.
This piece from ISS Analytics has a bunch of stats, charts, etc. about director pay. Here’s an excerpt:
Director compensation correlates with company size, as larger companies generally pay higher director fees. At approximately $285,000, the median total annual director compensation of S&P 500 companies is 63 percent higher than the median total director pay for the rest of the Russell 3000.
Based on 2019 meeting data, median director compensation for all Russell 3000 companies increased by 2.7 percent compared to last year from approximately $193,000 to $198,000. Smaller companies (Russell 3000 constituents outside the S&P 1500) saw the highest rate of increase in median pay at 5.2 percent compared to last year, while the change in median non-executive director pay in the S&P 500 stood at 2.9 percent. The compound annual growth rate of director compensation during the past seven years ranges from 3.2 percent for the S&P 500 to 4.5 percent for Russell 3000 non-S&P 1500 companies. This rate of increase appears reasonable to most investors, especially given the increased demands placed on boards and directors in recent years.
This BBC article reveals how binding say-on-pay has worked in the United Kingdom over the past three years. Here’s the intro:
Since 2013, all listed firms have had to give shareholders a binding vote on top boss pay at least once every three years. But the High Pay Centre said that every single vote at a FTSE 100 firm was approved between 2014 and 2018. The government said new reforms were making companies “more accountable”.
The research looked at more than 700 pay-related resolutions voted on at the annual general meetings of FTSE 100 firms. It found only 11% attracted “significant” levels of dissent of over 20% of shareholders.
I was out hiking in Laguna Beach the day Abigail Disney began her mini-crusade against Disney’s CEO pay ratio of 1,424-to-1. She laid it all out in a bunch of tweets. “Jesus Christ himself isn’t worth 500 times median workers’ pay,” she had said just weeks earlier. Supporters and critics quickly jumped into their respective trenches. The former decried capitalism. The latter brushed off her remarks as socialist propaganda. (I exaggerate, but you get the point.)
Among her critics was Jeff Sonnenfeld, the ever-present Yale management professor. He pointed to Disney’s 580% stock return under Iger and the 70,000 jobs it’s created, and that the CEO’s pay still pales in comparison to that of some hedge fund managers, who don’t really create anything. “When pay and performance is properly aligned as it is at Disney, we need to recognize it,” he wrote.
What most of Abigail’s critics, including Sonnenfeld himself, failed to grasp was her actual point: That the wealth Disney’s created hasn’t been shared equitably with most of its employees. In her lengthy series of tweets, she took a swipe at the shareholder-centric model of running companies and the consequences that sometimes follow for workers, the environment and surrounding communities. “When does the growing pie feed the people at the bottom?” she rhetorically asked the universe.
This question about what’s a fair sharing ratio — how much of the monetary gains of a successful company should be reaped by the single person in charge — is something I will explore in a series of stories later this year. (A sneak peek would be my piece from April about the CEO of a tiny California bank who took home twice as much as Jamie Dimon last year.)
Recently, a member asked this in our “Q&A Forum” (#1287):
Instruction 10 to Item 402(u) provides that, where there is a CEO transition, the registrant may use the “PEO serving in that position on the date it selects to identify the median employee and annualize that PEO’s compensation.” Since the new CEO would, of course, not have been the CEO when the Year 1 median employee was selected, would this mean that, whenever the registrant has a CEO transition and wishes to annualize the new CEO’s compensation for purposes of the pay ratio, it needs to identify a new median employee on a date when the new CEO was serving? Thanks.
In response, I noted:
This was a fairly common point of discussion this past year – and just this week – at the JCEB meeting and the consensus was that the change in CEO is not intended to override the ability to use the prior year’s median employee determination process. This is just one area where language in the rule is imprecise in a number of areas when applied in the ‘Year 2’ context.
I’ve blogged – last fall as well as last month – that the CEO pay mix has been shifting to include more full-value stock awards and fewer stock options. This CFO.com article – which is based on this 2017 research – says that executives who receive primarily restricted stock have incentives to deliver more predictable earnings and engage in less risk-taking. Dan Walter gives more color in his blog:
Restricted stock is mainly used as a retention tool. It is low risk with limited reward. Stock options are mainly used as an incentive tool. Options are high risk with the potential for extraordinary rewards. The research shows that the characteristics of these two vehicles seep into decision making that drives company earnings in profound ways.
Shareholders generally appreciate predictability when it comes to projecting future company performance. The research shows “the results are consistent with stock holdings aligning the interests of managers and shareholders, and managers using discretionary accruals to smooth past earnings to reveal information to investors about future performance.” In other words, restricted stock makes it easier for investors to know what they are investing in.
On the other hand, stock options were linked with excessive risk-taking and the use of awards “to mask the volatility of less predictable future earnings.” In other words, stock options may turn investors into gamblers. This is where too much of a good thing can be a bad thing.
When a company leans too heavily on either equity tool they miss out on the potential for better success.
I’ve blogged about the secondary market for private company equity awards. This blog from myStockOptions.com looks at innovations in private company awards that help ease tax obligations, which – notwithstanding new(ish) Internal Revenue Code Section 83(i) – can be burdensome to employees due to the lack of a market for the shares. Here’s an excerpt (but check out the full blog if this is your jam – and see this article for detailed survey results of private company executives’ “total compensation”):
One big difference in private companies is the illiquidity of the stock. Employees cannot sell shares at exercise or vesting, even to pay the taxes owed on the income recognized. This lack of liquidity, along with securities-law restrictions on resales of stock, does not delay the tax-measurement date at option exercise or restricted stock vesting.
Given the vastly differing liquidity situations of private and public companies, having the same tax treatment for stock grants at pre-IPO and large publicly traded companies seems out of balance. To address this issue, a provision in the Tax Cuts & Jobs Act (tax reform) created “qualified equity grants” for private companies under the new tax code Section 83(i). While this alters the standard tax treatment when various conditions are met, in its current form this provision will get little use. (For details, see our past blog commentary on it.)
However, long before this provision came along, smart lawyers and accountants had already come to the rescue. Operating within the existing tax laws and IRS regulations, they developed new structures for stock option grants and RSUs at private companies that work around the standard tax treatment. You can see this widespread use in a review of the Form S-1 registration statement filed with the SEC by Uber Technologies (April 11, 2019 draft), and in the effective registration statements for the now-public companies Lyft, Pinterest, and Zoom Video Communications.