Pay-for-performance is currently the “Holy Grail” of executive compensation. But a growing number of people are questioning whether we’re making things too complicated. In his keynote address at last year’s “Proxy Disclosure/Executive Compensation Conference,” former CEO Steven Clifford recommended reductions to CEO base pay and restricted shares that vest sometime after the executive leaves the company.
Similarly, this Bloomberg article reports that the world’s largest sovereign wealth fund – which owns 1.4% of the world’s stock – favors pay caps and time-based restricted shares that can’t be sold for 5-10 years (Broc’s blogged about this fund before). And although pay caps might be a bridge too far (for the three reasons described in this blog from Dan Walter) – there are some points to consider. Here’s more detail:
Following a string of corporate scandals in the century’s first decade and the 2008 financial crisis, several large institutional investors — including BlackRock, Vanguard and State Street — began pressuring companies to link compensation more closely with firm performance. The Norwegian fund, by comparison, questioned the very idea of using incentives for “complex undertakings such as managing a listed company.”
“Designing a robust set of CEO targets is notoriously difficult on a multiyear horizon,” the fund said in its position paper, adding that “engineered incentives crowd out the intrinsic motivation of the CEO.” It also pointed to research that suggests there’s currently no definitive correlation between overall levels of executive pay and firm performance.
Here’s a note from a member that I received in response to the panel discussion excerpted from this blog recently:
ARGH! Ms. Mulcahy could not be more wrong. Time and again, companies prove that if management’s compensation is not tied to a goal, it will not be achieved. It took say-on-pay to get companies to actually focus on performance – 20 years after 162(m) was adopted. It took the heavy hand of ISS to force companies to reduce equity spend. If we tied CEO pay to diversity, we could accelerate the time to equality to five to 10 years, instead of two generations from now.
Did you know the class of future BigLaw partners that will be the first class to experience a truly diverse board reflective of gender balance has yet to be born? That is, at the current rate of growth in females as equity partners, it will take until 2059 to reach parity. So the 35-year old lawyer who makes partner in 2058 won’t be born for another four years. Outrageous that my seven-year old daughter will still be a “diverse” lawyer should she choose to go to law school.
Recently, a member asked this in our “Q&A Forum” (#1276):
My recollection is that it is not permissible to revise the captions for the columns of the Summary Compensation Table (or any of the other supplemental tables) to better reflect the dollar values disclosed in that column. In our case, we don’t need to disclose any above-market or preferential earnings on non-qualified deferred compensation in the column captioned “Change in Pension Value and Non-Qualified Deferred Compensation Earnings” and disclose in a footnote that the number represents the change in pension value for the previous year. Hence my question: Are we permitted to change the caption for that column to read only “Change in Pension Value”?
John gave this answer:
I don’t think that’s permitted. I think the advice in the old telephone interps still represents Corp Fin’s position on changing the language of the tables:
“The compensation disclosure rules do not, as a general rule, permit registrants to deviate from the highly formatted tabular presentations required except to omit any column or table otherwise not applicable. A limited exception has been made for the caption of column (b) in the Option/SAR Exercise table. The caption to that column may be modified to read: “Number of securities underlying options/SARs exercised.” In all cases, the gross number of securities underlying the options/SARs exercised should be reported in this column.”
Here’s a teaser from this blog by Rosanna Landis Weaver of “As You Sow”:
Votes against pay packages have inspired responses that address problematic practices, but this year I’m seeing some indications they might cause boards to address quantum as well. One company’s executive chairman asked for his pay to be cut in half. Also, Disney made a very last minute contract change before its annual meeting. Was that done to move specific shareholders from a no to a yes on pay?
Rosanna mentions the lag & opacity in knowing how big shareholders vote. Note that Jim McRitchie recently submitted a rulemaking petition to the SEC regarding real-time disclosure of proxy votes…
Broc blogged a couple weeks ago that Glass Lewis is piloting a new “Report Feedback Statement” that will allow companies & shareholder proponents to express how their opinion differs from what’s in Glass Lewis’ research. Glass Lewis has now published FAQs – and this Morrow Sodali memo highlights how much you’ll have to shell out for the service:
Companies and/or shareholder proponents do not have to be Glass Lewis clients in order to use the RFS service. However, both issuers and shareholder proponents must purchase the relevant annual meeting report (at a cost ranging from $750 to $5,000, depending on size of the issuer) and pay a $2,000 fee for the distribution of the RFS comments.
And if you’re going to participate, don’t forget to also check out the Glass Lewis “Etiquette Guide,” which clarifies that only publicly available & legally vetted info should be shared in the RFS. In addition, it instructs everyone to use the “appropriate level of decorum & civility” – ah, the times we live in.
As this NYT article shows, the results of “equal pay audits” aren’t always predictable. Maybe that’s another reason to do them – and to take a look at the “big picture” when evaluating the results. Pearl Meyer surveyed 256 companies about their approaches to gender pay equity, the gender pay gap and D&I practices, and here’s what the teaser results show (the full report is available for purchase):
– 90% of companies are doing equal pay assessments – the most prevalent methodology used to evaluate gender pay equity is conducting an assessment that groups comparable/like jobs and analyzing pay variations by gender. As explained in this short memo, that helps evaluate “gender pay equity” but not necessarily the more complicated “gender pay gap”
– 57% of companies are reporting to the board on gender-related issues – e.g. management, leadership and overall representation
DLA Piper has been running a series of memos on “proxy season hot topics.” Among other topics (diversity disclosure, perks, etc.), this installment recaps last year’s IRS guidance on grandfathered arrangements under Section 162(m) – and confirms these things to do & watch going forward:
– Keep a database to track all “covered employees” for tax years beginning in 2017 – particularly in connection with corporate transactions
– Make sure this year’s proxy disclosure reflects any changes to arrangements or philosophy and tax treatment
– Prior to changing any employment agreements with “covered employees,” carefully review and consider the Section 162(m) consequences
– Foreign private issuers, recent IPO companies who are relying on the “IPO transition” rule under the old 162(m) rules, and entities involved in M&A corporate transactions affecting compensation paid to “covered employees” should be on the watch in 2019 hopefully for additional guidance from the IRS
We can grumble all we want about pay ratio – but the requirement probably isn’t going anywhere. And this blog from Margaret O’Hanlon suggests that companies may even be able to benefit from the data they’ve gathered. Here’s an excerpt:
Who are your median employees, and how have your pay policies affected them? Step back and consider whether the picture you’ve painted is optimal, given current business operations and results. Consider other ways the “median employee” can be used as an analytic for your company in the coming years.
What about the future? In three years, based on your projected talent strategy, what title should qualify as median employee? Is it the same job title as today? How will your pay strategies affect this evolution?
I’m guessing that this type of analysis would offer insights that would be valuable for both strategy and communications. Strategy, in that there are bound to be insights that lead to practical adjustments. Communications, in that there are bound to be details that can be helpful in explaining pay and business priorities, and how they have evolved/are evolving.
Last week, economists & investors were buzzing about whether an inverted yield curve and Fed actions were cause for concern. And while the consensus among that set seems to be that nobody knows exactly when a slowdown will happen or how severe it will be, that doesn’t mean comp committees should ignore the possibility that it’ll happen. As I’ve recently blogged – and reiterated – preparing for a downturn would be time well-spent. When it comes to protecting the value of equity compensation programs, this “Compensation Cafe” blog suggests a couple of ways to get started:
It is not too soon to plan for a recession. Performing an equity compensation risk assessment is a good place to start. Review both your strategy and tactical processes for granting stock options and RSUs. Evaluate whether your award features, vesting schedules and exercisability are optimally situated to weather the transformation. Most importantly, prepare now for the possibility of making an extreme course change in 2020 or 2021. Building a new approach, educating your board and getting approval from your shareholders takes more time than you may expect.
There are also ways to “recession-proof” your equity compensation programs. Most of these techniques are outside of common market data and boiler-plate plan documents. They also require a new understanding of the potentials and realities of stock-based compensation. Terms may need to change. Vesting may need a new look. Your entire program may need to be refitted and replaced. Regardless of the new approach, it will require some deep expertise.