– Liz Dunshee
We have posted the transcript for the recent webcast: “Termination – Working Through the Consequences.” The agenda included:
1. Think Ahead When Timing Executive Terminations
2. Case Study Facts
3. Accounting Consequences of Award Modifications
4. Termination Arrangements May Change Who Is An NEO
5. Planning Opportunities
6. Corporate Tax Deductions
7. Say-on-Pay Strategies
8. Mitigating Features: Clawbacks & Forfeitures
9. Shareholder & Proxy Advisor Engagement
10. Importance of Modeling
– Liz Dunshee
A recent Bracewell memo notes that – in light of the Delaware Supreme Court’s 2017 Investors Bancorp decision – nearly 75% of surveyed LTIPs now include a director-specific limit on the size of annual grants, with many plans also capping total annual compensation for board members.
That trend isn’t likely to die out any time soon. Last week, the Delaware Court of Chancery reaffirmed that the entire fairness standard applies to most decisions that directors make about their own compensation. The opinion – Stein v. Blankfein – says that director pay decisions can be actionable even if the directors held a “good-faith, Stuart-Smalley-like belief” that they were “good enough, smart enough, and doggone it, they were worth twice—or twenty times—the salary of their peers” (bravo to the Vice Chancellor on the SNL reference – and in this case, it’s not much of a stretch to envision the Goldman Sachs directors holding that belief).
This Stinson blog has the details about the case & its implications – here’s an excerpt:
The following courses of action remain available to public company boards in approving director compensation:
– Have specific awards or self-executing guidelines approved by stockholders in advance; or
– Knowing that the entire fairness standard will apply, limit discretion with specific and meaningful limits on awards and approve director compensation with a fully developed record, including where appropriate, incorporating the advice of legal counsel and that of compensation consultants.
It may also be possible to obtain a waiver from stockholders of the right to challenge future self-interested awards made under a compensation plan using the entire fairness standard. To do so, stockholders would have to approve a plan that provides for a standard of review other than entire fairness, such as a good faith standard. In addition stockholders would have to be clearly informed in the proxy statement that director compensation is contemplated to be a self-interested transaction that is ordinarily subject to entire fairness, and that a vote in favor of the plan amounts to a waiver of the right to challenge such transactions, even if unfair, absent bad faith. Note that the Court did not conclude, because it was not required to do so, that such a waiver was even possible.
– Liz Dunshee
Here’s the intro from this Pearl Meyer memo:
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.
– Broc Romanek
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…
– Broc Romanek
Here’s the annual memo from Compensia about perk & executive benefit practices in the tech sector…
– Broc Romanek
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.
– Broc Romanek
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.
– Broc Romanek
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.
– Broc Romanek
Following up on this blog, here’s a note from Anders Melin’s “The Pay Letter”:
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.)
– Broc Romanek
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.