The Advisors' Blog

– Broc Romanek

During our upcoming “Proxy Disclosure Conference,” we have a panel devoted to the #MeToo era and how it might impact how your clawbacks (should) work. This PwC study shows how more CEOs were dismissed in the last calendar year for ethical lapses than for financial performance or conflicts with the board. So updating your clawback policies might be appropriate…

Reduced Rates Expire at the End of This Friday: Last chance – just a few days left before reduced rates disappear. Register by August 2nd for reduced rates for our popular conferences – “Proxy Disclosure Conference” & “16th Annual Executive Compensation Conference” – to be held September 16-17th in New Orleans and via Live Nationwide Video Webcast. Here are the agendas – nearly 20 panels over two days.

Among the panels are:

– 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 August 2nd: 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 August 2nd to take advantage of the discount.

– Broc Romanek

Last week, a group of proxy advisors released an updated set of “best practices for proxy advisors.” These “best practices” were first issued in 2014. Here is a report from the chair of the group – and here’s a press release. Here’s an excerpt from the press release:

These Principles have also been updated to address SRD II with ‘avoidance’ added to ‘management’ of conflicts-of-interest with regard to the policy which should be disclosed. It also responds to feedback from the 2019 BPP Stakeholder Advisory Panel, acknowledging that conflicts of interest will always exist; therefore it is incumbent upon the BPP Signatories to have proper policies in place to try to avoid such conflicts wherever possible and when they do arise, to be transparent and manage them properly. The 2019 BPP Review Stakeholder Advisory Panel also reiterated the importance of the more stringent updated “Apply and Explain” approach for BPP Signatories to follow in light of SRD II Article 3j in relation to the Principles.

Another further area the updated Principles focused on was delineating the scope of proxy advisors’ responsibilities versus those of investors, in light of continued market misperceptions regarding the alleged overinfluence of proxy advisors and/or alleged “robo-voting” on the part of investors.

– Broc Romanek

Here’s an excerpt from this Seattle Times article:

This alignment of CEO to shareholder value, with handsome rewards for top executives, is how the theory is supposed to work. In reality, executive compensation is often laughably disconnected from financial and stock performance. At its worst, the pay model has encouraged heedless risk-taking, accounting fraud and volatility.

This happens especially because of weak corporate governance, despite efforts to improve it. Even with nominally independent directors, the board and CEO are part of the same “club,” in world view, life path, outlook and extreme wealth.

– Broc Romanek

This article from Semler Brossy’s Seymour Burchman is interesting, illustrating how EVA has made a comeback – mainly due to ISS embracing economic value added (EVA) – and providing a historical lookback about how economic value has been used in pay packages over time…

– Broc Romanek

Here’s an interesting 10-minute video explaining the economics of private jets:

– Broc Romanek

Last chance – less than two weeks left before reduced rates disappear. Register by August 2nd for reduced rates for our popular conferences – “Proxy Disclosure Conference” & “16th Annual Executive Compensation Conference” – to be held September 16-17th in New Orleans and via Live Nationwide Video Webcast. Here are the agendas – nearly 20 panels over two days.

Among the panels are:

– 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 August 2nd: 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 August 2nd to take advantage of the discount.

– Broc Romanek

This article from CBS News notes the discrepancy between the overall CEO rate of pay inflation and the pay rate of ‘typical’ worker. I imagine this type of media attention will become more prevalent as word gets out – so at some point, companies may need to address this widening gap in their proxy disclosures. Here’s the bullets that introduce the article:

– The total median pay package for chief executives at S&P 500 companies rose to $12 million last year.
– The number — which includes salary, stock, bonuses and other compensation — is 7% higher than in it was in 2017, for an average pay hike of $800,000 for large-company CEOs.
– The median pay increase for the typical worker at an S&P 500 company grew just 3% last year, or less than half the rate that the top boss enjoyed.
– It would take 158 years for the typical worker at most big companies to make what their CEO did in 2018.

– Liz Dunshee

According to this recent Equilar report (available for purchase), CEO pay continues to grow – with median total compensation increasing by 8% since 2017. It also identifies this notable trend:

Since 2014, the percentage of Equilar 500 CEOs receiving performance-based awards has been steadily rising, exceeding both time-based stock and options grants as the most prevalent long-term incentive vehicle. In 2018, 87.8% of Equilar 500 CEOs received performance-based awards.

This ClearBridge memo on annual & long-term incentive plan trends says the proportion of companies using performance awards might be even higher than that Equilar figure. Some people think the pendulum is due to swing back towards salary & time-based awards…stay tuned.

– Liz Dunshee

Here’s a suggestion from this Pay Governance memo by John Ellerman:

The weighted average cost of capital (WACC) is an important financial precept that is widely used in financial circles to test whether a return on investment can exceed or meet an asset, project, or company’s cost of invested capital (equity + debt). The thesis of this opinion article is that companies can develop more meaningful return performance targets by better understanding the details of its WACC before setting a return performance target.

Simply stated, a company’s return on capital performance target will be more relevant if in fact the return shows that the level of performance to be achieved must equal or exceed the company’s estimated cost of capital. Directors serving on the Board’s compensation committee can use the WACC model to test the validity and reasonableness of an incentive plan’s return performance target by learning whether the return target meets or exceeds the company’s WACC over the performance period.

– Liz Dunshee

I’ve blogged that most companies will experience a say-on-pay failure at some point. This PJT Camberview memo says that might be because voting policies have become more complex. Here’s an excerpt:

Feedback from engagement meetings this spring indicated a heightened focus on one-time or supplemental awards and a desire for plan design that is tightly linked to challenging strategic and financial measures. As investors continue to become more sophisticated in their compensation analysis, they have also become more willing to support plans that have moved away from traditional metrics such as TSR and toward those specific to company circumstances and strategy. As a result, compensation plans have generally become more aligned with key performance metrics, with the caveat that unique plan design requires clear disclosure and more in-depth engagements to provide investors with context.

Underlying both voting and engagement trends is the continued search for perceived or actual gaps in pay and performance. Many investors have created proprietary quantitative pay screens to flag potential disconnects that can prompt an engagement request to understand the underlying causes.

Companies that faced investor challenges this spring on compensation can expect further discussion this fall into the rationale behind the compensation committee’s decision-making and how investor feedback has informed potential changes to plan design. 2020 should bring further complexity as investors continue to dig deeper into compensation plans and ISS potentially expands its analysis to include Economic Value Added (EVA) in addition to TSR and other financial metrics.