The Advisors' Blog

– Broc Romanek

Check out this interview with ISS’ Compensation Team about the latest in compensation issues…

– Broc Romanek

As the 20% discount ends soon – April 5th – act now using this registration information 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 – 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

– Broc Romanek

Here’s the intro from this memo by Willis Towers Watson:

Investors’ growing interest in the median gender pay gap (i.e., the wage difference between the median male employee and the median female employee) is the latest expression of a more granular approach to environmental, social and governance (ESG) investing. They are not only more focused on granularity, building on an initial call for public companies to disclose their gender pay gap, but are also casting a wider net to include more industries and companies.

This trend continues in 2019. Arjuna Capital has once again issued shareholder proposals. What’s different from prior years is that the firm has asked 12 large, publicly-traded financial services and technology companies to disclose the median gender pay gap.

This is an interesting new development in gender pay-related shareholder proposals, as it specifically focuses on demographic representation. Previous shareholder proposals asked for information on the wage gap between male and female workers with directly comparable jobs, factoring in function, job level, geography and more (generally referred to as equal pay for work of equal value). Arjuna’s latest filings ask for the median wage gap, which is a statistically unadjusted figure. Simply put, a gap indicates that male employees as a group are occupying higher-paying positions than female employees, which does not allow female employees’ pay levels to trend upward. The gap is especially troublesome if there is a fair representation of female workers across the company, but not at the higher levels.

– Broc Romanek

Check out these notes for CII’s “Spring Meeting,” which includes a mention of how CII is changing its compensation policy soon. Here’s an excerpt:

Two different panels covered executive compensation, always a popular topic. And when we say “different,” we mean different. One was labeled as “Pay Pioneers,” with two companies describing their innovations in pay. The policies they adopted, including stock options for all employees and paying executives in cash so they can buy stock, with required holding periods, were good ones, relatively speaking, but not especially innovative. At least John Trentacoste, of Farient Advisors, the compensation consultant who moderated the panel, had the candor to admit that the question he gets asked most often is “How do you sleep at night?”

A shareholder-perspective panel on pay was very critical of both the amount and the structure of executive pay plans. CII is currently circulating its draft revised policy on CEO pay to the members for comment. “Pay for performance has not worked,” said Simiso Nzima of CalPERS, a pointed rebuttal to the “innovations” of the previous day’s panel.

– Broc Romanek

Here’s the intro from this Sidley memo:

Glass Lewis announced that it will pilot a new Report Feedback Statement (RFS) service to a limited number of U.S. public companies and shareholder proponents during the 2019 proxy season. According to Glass Lewis, the purpose of the RFS service is to allow companies and shareholder proponents to “more fully and directly express their views on any differences of opinion they may have with Glass Lewis’ research.”

The RFS service is to be used to report on differences of opinion — not factual errors, which companies should continue to communicate to Glass Lewis. Companies and shareholder proponents may submit statements noting their differences of opinion with Glass Lewis’ analysis of their proposals to Glass Lewis’ research and engagement team. That team will then distribute the statements, without editing or modifying the content, directly to Glass Lewis’ 3,000+ investor clients along with Glass Lewis’ response to the RFS.

Participants may submit a request to subscribe to the RFS service; Glass Lewis will accept requests on a first-come-first-served basis. The maximum number of pilot participants will be 12 companies and/or shareholder proponents per week between March and May 2019 (subject to decrease if the statements received in any week are particularly long or complex).

– Liz Dunshee

Here’s a memo from ISS about how – and why – its research reports now include four “Economic Value Added” metrics: Margin, Spread, Sales Momentum, and Capital Momentum (companies can view their EVA calculations in a free “EVA Profile” – here’s a mock-up of what that looks like). Last month, I blogged about using EVA measures in plans. I said:

We don’t know yet whether investors will develop a preference for EVA-based plans. It stands to reason that having the ISS data point will move everyone in that direction – but customization might be necessary.

Well, Pearl Meyer went out and asked companies whether their investors were requesting a strong emphasis on EVA measures – and they’re back with the results: over two-thirds said they’d received no feedback from investors indicating that they prefer EVA concepts to be included in incentive plan design.

Jim Heim adds this color – and suggests things comp committees should be talking about right now instead of EVA (e.g. modeling the impact of a downturn on pay programs):

We believe that EVA is a shortcut that doesn’t consider nuance. A better methodology would tailor the performance lens based on sector-specific, cycle-specific, stage-specific, and even company-specific factors. If EVA actually reflected these dimensions, we would see EVA more widely embraced across sectors.

For example, it would be inappropriate to compare EVA between two comparable organizations where one is engaged in an acquisition strategy or has embarked upon a large capital project. Furthermore, cost of capital is a function of balance sheet management. Therefore, a company that has an acquisition will appear worse from an EVA standpoint in the short term (e.g., three years) as compared to a company that buys back stock.

– Liz Dunshee

We’ve posted the transcript for our recent webcast: “How to Use Cryptocurrency as Compensation.” The agenda included:

1. Defining “Cryptocurrency”
2. Securities Implications
3. Tax Implications
4. Accounting Implications
5. Other Applicable Regulations
6. Why Digital Assets Are Attractive To Entrepreneurs
7. Types of Crypto Compensation Structures
8. Drafting Issues For Plans & Awards
9. Token Plan Administration
10. When Using Crypto Doesn’t Make Sense

– Liz Dunshee

Tune in tomorrow for the webcast — “The Top Compensation Consultants Speak” — to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance discuss these topics:

– Second year of pay ratio
– Evolution of clawbacks
– Adjustments to incentive plan actual performance or goals & goal-setting plans
– Incorporating E&S metrics into plans
– How to handle pay equity & gender/ethnicity pay gaps
– The changing role of the compensation committee

– Liz Dunshee

One of the most frequent questions we get about this year’s pay ratio disclosure is, “How much detail is necessary if you’re not rerunning the ‘median employee’ calculation?” In other words, you’re either using the same median employee – or one of the alternates – that you identified last year. A timely blog from Stinson Leonard Street’s Steve Quinlivan provides examples from four recent filers.

You’ll see that the companies didn’t get too elaborate. All of them basically parrot Instruction 2 to Item 402(u) – i.e. they say they used the same median employee (or an alternate) since there was no change in the employee population or employee compensation arrangements that they believed would significantly change the pay ratio disclosure. And since Steve notes in this blog that he’s found zero Corp Fin comments so far on pay ratio disclosures, that’s probably just fine.

– Liz Dunshee

Even though ISS has delayed till next year its voting policy on excessive director pay, this blog from Pearl Meyer’s Terry Newth is a reminder that, since the policy looks at two years’ of pay, this year’s compensation will still factor in when the policy is implemented. Terry predicts the range of director pay will narrow in the long-term, and we may see more voluntary “say-on-director-pay” votes. He also summarizes the final ISS policy:

– ISS will analyze director compensation in order to identify companies that “consistently” (defined as two or more years in a row) compensate directors at the top 2-3% of all comparable directors. (Note: this is a slightly more limited range than the top 5% previously outlined)

– The nature of the director’s role, specifically non-executive chairs and lead directors, will be taken into consideration in the comparisons

– The frame of reference for comparing directors will be the same two-digit GICS code within the same industry grouping

– The possible index groupings are S&P 500, combined S&P 400 and S&P 600, remainder of the Russell 3000 Index, and the Russell 3000-Extended

– Companies that are identified in this screening process and do not provide a compelling rationale for their pay positioning are subject to potential withhold vote recommendations. The negative vote recommendations will be aimed at the directors that approve the compensation arrangements