Last year, the IRS got enough funding to end its 7-year hiring freeze. But during that timeframe, it “essentially lost an entire generation of employees.” That’s according to this article, which points out that about 45% of the IRS’s total workforce will be eligible to retire within the next two years. And within the next two weeks, they need lawyers.
For all the tax gurus out there (or for those who know tax gurus), we’ve been alerted to five openings in the IRS Office of Chief Counsel – specifically, the program for “Employee Benefits, Exempt Organizations, and Employment Taxes” (EEE). While we don’t normally blog about job postings – we save the info for our “Job Board” on TheCorporateCounsel.net – these positions will only be open for two weeks and we wanted to get the word out for people interested in a government gig. Here’s what’s available:
We are a pretty good place to work – interesting issues, good work/life balance, friendly atmosphere. We are especially good with the smart but not corporate type of person. But also a heads up that all work here is on a team, and all work is reviewed, so we’re not the best fit for some who want to work completely independently.
These positions are for all the practice areas inside EEE, and folks can apply to as many as they want. These are GS-13 and GS-14 positions, so they require 2 or 3 years of experience. You can find the GS pay scale on OPM.GOV but please make sure and look at the DC-Baltimore area grid which has the locality adjustment or you will faint (these are all DC-based positions at the IRS building at 1111 Constitution).
Here’s something that John blogged last week on TheCorporateCounsel.net (also see this Cooley blog): SEC Commissioner Robert Jackson recently co-authored a WSJ opinion piece calling for increased transparency about the use of non-GAAP numbers in setting executive pay. The article notes that Reg G generally requires companies to provide comparable GAAP information & a reconciliation, but acknowledges that this doesn’t apply to the CD&A discussion. The authors think it should:
Unfortunately, those requirements do not apply to the reports that compensation committees of corporate boards disclose to investors each year. Thus, committees choosing to use adjustments when deciding on payouts need not explain why an adjusted version of earnings is the right way to determine incentive pay for the company’s top managers. This increases the risk that adjustments will be used to justify windfalls to underperforming managers.
The SEC’s disclosure rules have not kept pace with changes in compensation practices, so investors cannot easily distinguish between high pay based on good performance and bloated pay justified by accounting gimmicks. That’s why we’re calling on the SEC to require companies to explain why non-GAAP measures are driving compensation decisions—and quantify any differences between adjusted criteria and GAAP. A few public companies already provide investors with this kind of transparency. Others can too.
Meanwhile, I’ve blogged a few times about how ISS research reports now include “Economic Value Added” metrics in the pay-for-performance analysis. This Willis Towers Watson memo notes that there are 15 non-GAAP adjustments underlying ISS’s EVA calculation. Things could get rough in CD&A land if these aspirational metrics collide with Reg G reconciliations.
In the “Pay Ratio” Chapter of our “Executive Compensation Disclosure Treatise,” we note that although Item 402(u) allows companies to use the same “median employee” for three years, some companies are either required to identify a new median due to significant changes in the workforce or the prior-year individual, or voluntarily calculate a new median because they want to keep the pay ratio as precise as possible and don’t want to risk a big triennial change. What we haven’t known – until now – is how this would play out in practice.
According to this Compensation Advisory Partners memo, which takes a close look at pay ratio’s second year trends, using a new median employee is actually more common than not. For the 201 companies they analyzed, only 36% used the same median year-over-year. Here are all the key takeaways:
1. CEO Pay Ratio: While CEO pay ratio summary statistics (e.g., 25th percentile, median, and 75th percentile) were flat across the sample, two-thirds of the sample companies had pay ratios that fluctuated up or down by more than 10 percent. The significant volatility in individual company pay ratios is masked in the overall sample, so proxy readers should not be surprised if a company’s pay ratio moved year-over-year.
2. CEO Pay: CEO compensation increased 7 percent at median with two-thirds of CEO pay fluctuating by more than 10 percent. This may be driven by incentive compensation changing year to year, by CEO transitions and by changes in pension value calculations where applicable.
3. Median Employee: Only 36 percent of companies used the same median employee year-over-year – and about 80% of those re-ran the selection analysis versus selecting an employee who was substantially similar to the prior-year median. For the companies that use the same median employee, the pay of that employee went up 7 percent at median. Where companies selected a new median employee, the year-over-year change in pay was 4 percent at median. This indicates that companies that want to maintain a lower CEO pay ratio (for a couple of years) may be better off keeping the same median employee from year to year if possible.
4. Additional Disclosures: Despite interest expressed by some institutional shareholders in greater disclosure about the workforce, only 16 percent of companies disclosed additional information about the median employee (e.g., geographic location, role with the company, full-time vs. part-time, etc.). This is up from 12 percent of companies providing additional disclosures last year.
Within the last decade, median pay for S&P 500 CEOs has increased by 50% – to $12.2 million – and median pay for S&P 600 CEOs has nearly doubled. That’s according to this blog posted on Tuesday by ISS Analytics (which also hints at the motivation behind the “pay ratio” law by pointing out that pay to median workers increased by 20% during the same period).
Of course, those CEO pay numbers are based on the “total compensation” figures in companies’ Summary Compensation Tables – which can overstate what executives are actually taking home. Specifically, a record portion of pay now comes in the form of stock, and the grant date fair value has been…more than pocket change. Here’s more detail:
Increases in compensation are primarily driven by greater portions of pay paid in stock. So far in pay fiscal year 2018, the average stock grant to S&P 500 CEOs amounts to $7.2 million, compared to $3 million in pay fiscal year 2009. Stock-based compensation continues to increase, while the aggregate of all other components of pay remains relatively unchanged.
In fiscal year pay 2018, stock-based compensation comprises the majority of CEO pay at S&P 500 and S&P 400 companies for the first time. The trend is the same for smaller companies with stock-based compensation reaching 49 percent and 42 percent of total CEO pay for S&P 600 companies and Russell non-S&P 1500 companies, respectively.
Coinciding with these increases, the blog notes that there’s also been a big shift to performance-based compensation for both equity & cash awards. Even with recent changes to Internal Revenue Code Section 162(m), the percentage of total compensation that was performance-based increased to 58% last year (compared to 34% in 2009). TSR, earnings & returns are the most popular metrics.
While the shift to stock-based compensation has worked to the benefit of most executives as the market has climbed, there’s still a possibility that it will be a double-edged sword. I’ve blogged that now’s the time to recession-proof your compensation plans – and these stats really drive that point home.
Don’t let the name deceive you – a supplemental executive retirement plan doesn’t have to focus strictly on payouts in retirement. And if your company is trying to retain up-and-coming execs in their 40s, you probably don’t want it to. This Longnecker blog illustrates why you might want your plan to be more flexible. Here’s an excerpt:
Executive A is 57 years old. He’s married and has adult children who live on their own. A is maxing out his deferrals into the company 401(k) plan but still hasn’t saved enough for retirement. His employer wants to reward him for his 15 years of service and keep him around another 10 years until he plans on retiring. Putting a SERP in place that promises to pay him 40 percent of his final pay for life will accomplish the employer’s goal, because 10 years and retirement are foremost on the executive’s mind.
Now let’s take a look at his successor in training: Executive B is 40 years old. He’s married with three children, ages 4, 6 and 8. B’s wife stays at home to care for the children and doesn’t have formal employment. B is contributing to his 401(k) but is nowhere near maxing out contributions. His employer wants to retain him long term to succeed Executive A. The employer offers B the same SERP that will pay him 40 percent of final pay at retirement. Three years go by, and Executive B leaves the company for a higher-paying job. The plan did not achieve the employer’s goal. Why did it fail, and how could it improve?
Here’s a dispute out of Delaware – Batty v. UCAR International – in which a company and their former employee of 34 years are arguing over $1.5 million because of ambiguous defined terms in a nearly 20-year-old agreement. You’d think they’d settle! But there must be good reasons not to do that (yet) – which is lucky because now we all get to see how things blew up and carefully check our own forms. This blog from Steve Quinlivan explains why the court recently denied the company’s motion to dismiss:
The defendants argued that “accrued Incentive Compensation” was limited to cash compensation and thus excluded equity awards. The defendants relied on Section 1(f), which defined “Incentive Compensation” as “any compensation, variable compensation, bonus, benefit or award paid or payable in cash under an Incentive Compensation Plan.”
According to the defendants, Section 1(f)’s phrase “paid or payable in cash” modifies all preceding nouns (“compensation, variable compensation, bonus, benefit or award”). In the alternative, the defendants argued that they prevail even if “paid or payable in cash” modifies only the nearest noun, “awards,” because equity awards are “awards” and thus subject to the cash limitation. To bolster their interpretation, the defendants point to the definition of “Incentive Compensation Award,” which too is limited to “cash payment or payments awarded to [Batty] under any Incentive Compensation Plan.”
The Court noted the defendants’ interpretation of Section 2(a)(ii) was reasonable, but that it was not the only reasonable interpretation. Just as conceivable, according to the Court, was that the term “Incentive Compensation” could mean certain items that may be paid in cash or equity (“compensation, variable compensation, bonus, benefit”) as well as one item that is only paid or payable in cash (“award”). According to the Court, under this interpretation, regardless of whether the equity awards are “paid or payable in cash,” they would be included in Batty’s accrued Incentive Compensation. Because Section 2(a)(ii) is susceptible to multiple reasonable interpretations, the defendants’ motion to dismiss failed.
A few months ago, I blogged that Citigroup was the first US company to post unadjusted “pay gap” numbers on its website. That effort has landed it at the top of this “Gender Pay Scorecard” from Arjuna Capital & Proxy Impact, which ranks 46 large companies on their pay equity disclosures. Of course, half of the companies got a failing grade (report cards like this only come out when there’s something to complain about). The scorecard also recaps the five-year history of these proposals and says that the proponents won’t be letting up any time soon. Here’s an excerpt:
As of April 2019, 27 proposals have been filed with several more likely to be filed before the end of the year. The healthcare sector has seen the largest increase in shareholder activity this year. Only seven proposals have been withdrawn so far, partly since more investor proposals are asking for companies to provide unadjusted median pay data like the reporting requirement in the U.K. This data helps identify the opportunity gap for women. More detail regarding the difference between adjusted “equal pay” and unadjusted “median pay” disclosures is provided in a subsequent section.
In the last four years, at least 64 companies have faced more than 100 shareholder resolutions on the gender pay gap, along with many more shareholder dialogs in the absence of a formal proposal. The shareholder campaign has primarily focused on the information tech, financial services, retail, and healthcare sectors. It shows no signs of slowing down and will likely expand to more sectors in the future.
When the SEC adopted the pay ratio rule four years ago, it repeatedly stressed that company-to-company comparisons would be meaningless. The adopting release said:
As we noted in the Proposing Release, we do not believe that precise conformity or comparability of the pay ratio across companies is necessarily achievable given the variety of factors that could cause the ratio to differ. Factors that could cause pay ratio to differ from one company to the next include differences in business type, variations in the way the workforces are organized to accomplish similar tasks, differences in the geographical distribution of employees, reliance on outsourced workers, and the variations in methodology for calculating the median worker. Consequently, we believe the primary benefit of the pay ratio disclosure is to provide shareholders with a company-specific metric that they can use to evaluate the PEO’s compensation within the context of their company.
That message stuck: most people seemed to understand that the ratio would be company-specific, and there was a pretty “ho-hum” reaction to the first year of pay ratio disclosure. But, you might say, “What about tracking changes to a particular company’s ratio over time, to monitor how CEO pay increases compare to everyone else’s? Won’t that be useful?” More than a few people predict that pay ratio will garner more attention going forward, because shareholders & others will compare a company’s current year number to prior years.
The problem with that, as this WSJ article points out, is that the same factors that make comparisons among different companies meaningless are also things that can change from one year to the next at a single company. And as I’m sure you can guess, those changes cause big swings in the ratio. So for many companies, pay ratio doesn’t even provide meaningful year-over-year info (at least, about the relationship between CEO & employee pay). Here’s a couple of examples from the article:
Median pay at Jefferies Financial jumped to $150,000 last year from $44,584 in 2017 after the holding company sold most of its stake in its National Beef meat-processing unit in June 2018, cutting its workforce to about 4,600 from 12,600. The 2017 median employee at the company, formerly called Leucadia National, was an hourly line worker at National Beef, while last year’s was a senior research associate in the company’s Jefferies LLC financial-services operation.
Coca-Cola slashed its median pay figure by two-thirds after it finished shifting North American bottling operations to franchisees and acquired a controlling interest in African operations. The 2017 median worker was an hourly full-timer in the U.S. making $47,312, while last year’s made $16,440 as an hourly full-timer in South Africa. In its proxy statement, Coca-Cola said it intends to shed the African operation again after making improvements and offered an alternative median employee excluding that unit: an hourly full-timer in the U.S. making $35,878, about 25% less than his or her 2017 counterpart.
I will say, companies are making the most of what they have to work with (thanks in large part to the flexibility the SEC incorporated into the rule). And for better or worse, the “median employee” data point might illustrate to people how company policies & strategies play out in the workforce. But a single data point can’t tell the whole story – and the pay ratio itself remains pretty useless.
Here’s something I blogged yesterday on TheCorporateCounsel.net: Beginning next year, CalPERS will likely vote “against” compensation committee members in the same year that the compensation plan fails its pay-for-performance quantitative model. That’s according to recommendations in a recent staff report to the pension fund’s Investment Committee. Here’s more detail on the executive compensation initiative that’s underway:
– Move from a 3-year to a 5-year quantitative model (developed in collaboration with Equilar) to assess pay-for-performance, and vote “against” bottom quartile of universe
– Vote “against” Compensation Committee members in the same year the compensation plan fails the pay-for-performance quantitative model (effective 2020 proxy season)
– Additional qualitative components will continue to be used to assess compensation plans – e.g. insufficient disclosure of goals, lack of clawback policy
– For this year, CalPERS expects its say-on-pay voting outcomes to be similar to 2018, where CalPERS voted against 43% of pay programs
The report also summarizes the status of CalPERS’ voting & engagement efforts with Climate Action 100+, and its push for board quality, board diversity and majority voting in director elections. Here’s the staff’s recommended enhancements for overboarding and refreshment policies:
– Vote “against” non-executive directors who sit on more than 4 boards. The current practice is to vote “against” non-executive directors who sit on more than 5 boards
– Vote “against” Nominating/Governance Committee members if the Board has more than 1/3 of directors with greater than 12-year tenure AND less than 1/3 of directors were appointed in the last 6 years
ISS research reports now include four “Economic Value Added” metrics in the pay-for-performance analysis. I’ve blogged a couple of times about whether investors are using that info – and how to incorporate the metrics into plans (if at all). This latest ISS memo – which is posted on the proxy advisor’s “EVA Resource Center” – gives more context on how these metrics are defined and why ISS thinks they’ll help shareholders better evaluate the alignment between pay & performance. Here’s an excerpt:
At its essence, EVA is a simple three-line calculation – it is sales, less all operating costs, including taxes and depreciation, less a full weighted-average cost-of-capital charge on all the capital, or net assets, used in business operations.
EVA recognizes investors’ needs by deducting a required return on capital before it counts profit. To increase EVA, managers must increase profits above the opportunity cost of funding any new capital investments. EVA naturally holds managers accountable as stewards of investor money.
NOPAT (Net Operating Profit After Tax) and Capital also incorporate the standard set of adjustments. For example, they exclude excess cash and the related investment income, and reflect writing off R&D over time instead of expensing it. EVA is thus a better indication of how well a company’s business is performing from a strategic perspective.