About a year ago, Broc blogged about ISS’s acquisition of EVA Dimensions – and how it would likely impact the pay-for-performance analysis. Sure enough, in the 2019 updates to its voting policies, ISS said that it would start showing EVA measurements in its research reports and would consider adding them to its quantitative pay-for-performance screens in 2020. This Sullivan & Cromwell memo says that ISS essentially defines EVA as net operating profit after tax, less the cost of providing an acceptable return to capital providers.
We don’t know yet whether investors will develop a preference for EVA-based plans. But if this article is correct in asserting that a focus on economic profit improves long-term results, it stands to reason that having the ISS data point will move everyone in that direction. The article notes that some companies are already starting to incorporate these measures into plans – but customization might be necessary. Here’s an excerpt:
Maximized independently, traditional performance measures – e.g. revenue growth, margins, asset efficiency, and rates of return – can actually destroy value when taken to extremes. Luckily, all of those metrics are captured in economic profit measures such as EVA, where economic profit tells you whether the traditional measures of performance are optimally balanced in a way that maximizes value.
For example, a large capacity investment might drive up asset intensity, driving down rates of return. And the incremental sales growth from increased volumes may come at a lower price and, therefore, lower margins. But the growth from a large capacity expansion can be significant and offset the impact of some of the other measures.
An economic profit measure is the ideal tool to decide if growth is worth it or not. You may still convey it to investors using traditional measures and using statements like, “although margins and returns will come down slightly, the significant new growth potential is so valuable that we expect this investment to drive our share price higher over time.”
I blogged in December about Shell’s decision to link high-level employee pay to carbon reduction targets – following engagement with Climate Action 100+. Now BP, who has decided to support a shareholder proposal from that same coalition, has followed suit – announcing that it will factor greenhouse gas emission reductions into rewards for 36,000 employees worldwide. Here’s how they’ll do it:
In 2018 BP introduced a target to achieve 3.5 million tonnes of sustainable GHG emissions reductions in its operations worldwide by 2025. Progress towards this target has now been incorporated into the assessment of the Group’s performance that is a factor in determining annual bonuses for BP staff worldwide. This will apply to the assessment of BP’s performance in 2019.
Broc’s blogged a couple of times about shareholder proposal campaigns that pressure companies to disclose more info on workforce compensation practices relative to CEO pay – and related settlements. Broc noted that the agreements range from adding “human capital” disclosure, to enhancing workforce benefits, to committing to consider the CEO pay ratio when determining executive pay. This Willis Towers Watson blog takes a closer look at how companies have publicly responded to the shareholder proposals – and outlines things to consider. Here’s an excerpt:
There is no set playbook for how companies respond to shareholder proposals. Some responses are minimalist, while others provide a lot more information about how the company manages its workforce and recent steps taken to ensure pay equality across the workforce. Most piggybacked their responses to planned or completed activities to enhance workforce pay and benefits. It is noteworthy that only one company responded by affirmatively stating that their compensation committee would consider workforce pay levels in establishing CEO pay.
Three key considerations should frame your company’s disclosure:
– What to include
– Where to include it to clearly reflect your compensation committee’s mandate
– How you’ll tell your story so investors truly understand how your organization values its employees
After market close on Friday, Goldman Sachs announced via an Item 8.01 8-K that in light of the ongoing 1MDB investigation, its compensation committee might reduce bonuses to current – and former – senior executives. The board is wise to leave themselves some room, since they’ll likely face shareholder scrutiny for the alleged fraud and all of its fallout. For last year’s annual equity awards, the board added a new forfeiture provision. The 8-K doesn’t go into detail about what types of harm – e.g. strictly financial v. reputational – would result in forfeiture, but simply says:
This provision will provide the Committee with the flexibility to reduce the size of the award prior to payment and/or forfeit the underlying transfer-restricted shares (which transfer restrictions release approximately five years after the grant date) if it is later determined that the results of the 1MDB proceedings would have impacted the Committee’s 2018 year-end compensation decisions for any of these individuals.
For former executives, Goldman’s comp committee decided to defer determinations about LTIP awards that otherwise would’ve paid out in January, since the 1MDB investigation relates to events that occurred during the performance period. This WSJ article reports that the forfeiture wouldn’t apply to former exec Gary Cohn, who was paid out in lump sum when he joined the Trump Administration.
So these aren’t true “clawbacks” – they’re potential forfeitures of unpaid amounts, which are much easier for a company to administer. Remember that a few years ago in a different kind of scandal, Wells Fargo started off with forfeitures – and eventually also clawed back pay.
I blogged last week about the pros & cons of disclosing your “equal pay audit.” There aren’t many US companies doing this…yet. But Citigroup is one of the trailblazers. Last year, similar to the stats in Intuit’s proxy (hat tip Lois Yurow), Citi announced on its website the results of a “pay inequality” analysis – the difference in pay of women & men and US minorities & non-minorities, as adjusted for job function, level and geography. And it’s made some pay adjustments based on the findings.
More recently, Citi announced on its website its unadjusted “pay gap” for women and US minorities – i.e. the difference in median total compensation. Citi agreed to publish the stats in response to a “gender pay equity” proposal from Arjuna Capital – who then withdrew the proposal. Here’s an excerpt from Arjuna’s announcement about what comes next:
Citi’s analysis shows that the median pay for women globally at Citibank is 71 percent of the median for men, and the median pay for US minorities is 93 percent of the median for non-minorities. Citi’s goal is to increase representation at the Assistant Vice President through Managing Director levels to at least 40 percent for women globally and 8 percent for black employees in the US by the end of 2021.
Alongside the median pay disclosure, Citi updated last year’s “equal pay for equal work” analysis to extend across its global operations, reporting that when adusting for job function, level, and geography women globally are paid on average 99% of what men are paid, and no statistically significant difference between what US minorities and non-minorities are paid at Citi. Citi also made pay adjustments following this year’s compensation review.
Last fall, Broc wrote in regards to the Nissan/Carlos Ghosn saga that, yes, you can get caught for not disclosing perks – and deferred comp – in other countries. And after that, Japanese regulators formally indicted Nissan’s former chair – and the company itself – for under-reporting executive pay (this NYT article has details). Now, since Nissan ADRs trade on the Pink Sheets, the SEC is joining the party.
According to this Bloomberg article, the Commission is investigating whether Nissan accurately disclosed its executive pay in the US and whether it had adequate controls to prevent improper payments. This excerpt explains why the SEC might have jurisdiction:
Nissan shares trade in the U.S. via American Depositary Receipts, which generally gives the SEC enforcement authority. U.S. courts have disagreed about whether the regulator has jurisdiction in certain cases where wrongdoing occurred abroad. The activities under scrutiny at Nissan to date took place mostly in Japan and Europe. But the SEC believes it has authority in this instance, according to one of the people familiar with the matter.
This Bloomberg article explains how the carmaker’s reporting of deferred compensation may have violated Japanese reporting laws – and this Nissan announcement about the results of their internal investigation says they’ll consider clawing back all payments to Carlos Ghosn that were the result of misconduct.
During our recent webcast, “The Latest: Your Upcoming Proxy Disclosures,” Dave Lynn noted that Item 402(u) of Regulation S-K allows you to use the same median employee for up to three years – unless there’s been a “significant” change in the employee’s pay arrangements or circumstances or the employee population. Dave explained that “significant” means tectonic shifts that would impact pay ratio – not something like a standard raise, but something so significant that it could actually swing the ratio one way or the other.
This Compensia memo provides even more color – it suggests types of actions or events that would constitute a “significant” change under the rule. And for companies that have decided to use the same median employee this year, it gives an example of disclosure that would comply with Instruction 2 to Item 402:
For example, the company could disclose that there has been no change in its employee population or employee compensation arrangements that it believes would significantly impact the pay ratio disclosure. Of course, where the company has re-identified its median employee, it should say that it has done so, which will be accompanied by a brief description of the methodology that was used to identify the new median employee.
Recently, Willis Towers Watson announced the results from its annual analysis of outside director compensation among the Fortune 500. More companies have now implemented annual compensation limits – since shareholder ratification of those limits might be helpful if there’s a lawsuit (but keep in mind, as I’ve blogged, that a “high-water” limit will likely just be a factor in a court’s entire fairness evaluation, rather than entitling the board to a business judgment review). Here’s where things stand:
– 61% of companies have now adopted director pay limits, compared to 55% in 2016
– 78% of limits are set based on a fixed value rather than a fixed number of shares
– The median fixed-value limit is $600,000
– 32% of limits now cover both stock & cash compensation, which would provide the most protection in litigation
The survey also shows trends in overall pay levels & practices. It has a lot of great charts – including ones that show total pay & pay components at various percentiles. In light of recent director pay litigation and upcoming (but delayed!) changes to ISS voting policies, it’s not too surprising that median pay to outside directors increased by only 3% last year. What did surprise me was that – despite the risk of a shareholder suit or an eventual ISS “no” vote – less than half of companies are reviewing director pay annually. Here’s some other highlights:
– Median total pay increased to $267,500.
– The median value of annual cash compensation increased 4% – to $107,500 – bolstered by a 5% increase in the annual cash retainer to $100,000. The level of variable cash pay for board and committee meetings remained virtually unchanged, but fewer companies provided that form of compensation.
– The median value of annual stock compensation rose 3% to just over $150,000.
– The average mix of pay remained constant at 57% in equity, 43% in cash.
– Lead directors received an average of $30,000 additional compensation
– 94% of companies now have stock ownership guidelines and/or retention requirements for directors (typically based on a multiple of the annual retainer)
– 29% of companies review director pay only “periodically” or “from time to time” (I blogged a few months ago about one reason why this is risky)