– Liz Dunshee
Relative total shareholder return is still the most popular performance metric for long-term awards. This Exequity memo says it’s used in way or another by more than half of companies. In this article, Willis Towers Watson benchmarks specific “Relative TSR” provisions – so you can see how your plan compares. Here are 10 takeaways (check out the article for visuals & more detail):
1. Threshold performance: most commonly set at the 25th percentile – but 30% of companies use a higher threshold
2. Threshold payout: most commonly set at 50% of target
3. Target performance levels & vesting: almost always set at 50th percentile performance with target vesting at 100%
4. Maximum performance level: most commonly the 75th percentile – but there are plenty of plans above that
5. Maximum vesting: two-thirds of companies use 200% and a quarter of companies use 150%
6. Impact of absolute TSR: 25% of companies cap vesting if absolute TSR is negative or below target, even if relative performance is above target
7. Overall payout caps: used by only 4% of surveyed companies
8. Stock price averaging mechanism: used by 85% of plans – typically 20-30 trading days
9. Size of peer group: typically 10-25 companies
10. Dividend equivalents: more than half of surveyed companies offer dividend protection during the performance period – paid at the end based on vesting outcome
– Liz Dunshee
If your company conducts “accelerated share repurchases” (ASRs), you should (tactfully) share the findings of this study with your compensation committee. An ASR is a privately-negotiated alternative to a traditional open-market buyback program, and can be completed more quickly. But ASRs are leading to some questionable bonus payouts:
– 29% of companies conducting ASRs would’ve missed EPS targets if they hadn’t conducted the buybacks – compared to 14% of companies that conducted regular open-market repurchases
– CEOs of companies conducting ASRs were more likely to have EPS-contingent bonuses
– When calculating payouts, compensation committees adjusted EPS for the ASR at only 3 of the 239 companies
This Cooley blog gives more detail about the study and why compensation committees should carefully consider the timing and impact of any accelerated share repurchase.
– Broc Romanek
Yesterday, ISS opened its “Annual Policy Survey.” For the US, the two main areas open for comment are board gender diversity – and financial performance assessment methodology.
As always, this is the next step for ISS as it formulates its 2019 voting policies. Comments are due by November 1st. Final policy changes are expected in mid-November…
– Broc Romanek
We just wrapped up “Lynn, Borges & Romanek’s 2019 Executive Compensation Disclosure Treatise” — and it’s been printed. This edition has the latest insights from the first year of pay ratio disclosure – as well as Corp Fin’s recently-updated proxy CDIs. All of the chapters have been posted in our “Treatise Portal” on CompensationStandards.com.
How to Order a Hard-Copy: Remember that a hard copy of the 2019 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1620-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.
– Broc Romanek
During the keynote of our recent “Proxy Disclosure/Executive Compensation Conference,” Steven Clifford noted that the pay ratio in the US military is less than 5:1. And this Labrador blog covers our conference including these pay ratio stats:
– Average ratio for S&P 500 companies was 160:1
– For the Fortune 1000, it was 158:1
– For the Russell 3000, it was 71:1
– Median employee pay was $69,000 for S&P500 versus $108,000 for the tech industry
– Highest ratios were in retail, consumer discretionary and consumer staples and materials
– Lowest ratios were in financials, healthcare and utilities
– 19% of the Russell 3000 provided some sort of supplemental pay disclosure such as adjusted workforce, full-time only employees used to find median or adjusted CEO pay due to one-time awards
– Some companies noted a low pay ratio this year due to caveats to prepare for higher ratios in the future
– Broc Romanek
At our recent “Proxy Disclosure/Executive Compensation Conference,” the keynote by Steven Clifford – a former CEO that recently wrote a book about executive pay practices – was so well received that we decided to make his remarks freely available.
Steven’s book (“The CEO Pay Machine“) is an easy-to-read & entertaining dissection of how we got to where we are – and how we can fix it. His book is laden with stories that really “tell it like it is.” Please check it out & tell others that can help make a difference…
– Broc Romanek
With a season of pay ratio disclosures in the books, the debate whether the ratio should be calculated continues. Here’s an excerpt from this ValueEdge blog:
As the dawn follows the night, so must the “investors don’t know what they want” be followed by the “it’s too expensive” argument. Others have suggested pay ratio disclosure sheds a light on income inequality. Yes, but existing disclosure of executive pay already shows how much executives are paid. If the goal is to highlight income inequality, couldn’t we do it in a less costly way? For example, we could disclose the ratio of a CEO’s pay to the median salary of a worker in the company’s industry. The Bureau of Labor Statistics provides plenty of industry data for comparison.
If companies don’t know what the median pay is for their employees, we suggest that what is expensive is their ignorance. They should want to know. They should have the capacity to know.
We find it material. We believe journalists, securities analysts, board comp committees, and scholars will as well. We look forward to developing many years of pay ratio data to help us understand better the ROI of the management and boards of our portfolio companies. In the meantime, we suggest that firms like Pearl Meyer spend more time telling clients what they need to hear instead of what they want to hear and leaving the determination of what shareholders need to know to shareholders themselves.
– Liz Dunshee
This 26-page memo from Willis Towers Watson is full of graphics about this season’s executive pay votes, including:
– Trends in say-on-pay failures & average support
– Correlation between proxy advisor recommendations & say-on-pay outcomes
– Reasons for negative say-on-pay recommendations
– Impact of say-on-pay failures on director elections
– Stats for equity plan recommendations & votes
– Typical say-on-golden-parachute outcomes
– Liz Dunshee
At our recent “15th Annual Proxy Disclosure/Executive Compensation Conference” there was a lot of discussion about how to prepare for Year 2 of pay ratio. The biggest decisions are whether you’ll use the same median employee – some analysis is required to determine whether there’s been a material change to your workforce – and whether to elaborate on the details of that decision-making process and year-over-year changes to the ratio. This Willis Towers Watson memo explores the factors you need to consider for these issues. Here’s an excerpt:
You may be required to identify a new median employee if there were changes to the employee population or the median employee’s compensation arrangements or circumstances (e.g. if they left the company) – and you’ll need to determine whether to disclose recalculations, changes to circumstances and/or the methodology to identify a “substantially similar” Year 2 median employee. In addition, your disclosure will be different if you change your approach to including personal and non-discriminatory benefits in the “total pay” calculation.
The application of statistics to pay demographics may help determine whether organizations must use the same median employee for Year 2, regardless of whether they used statistical sampling in Year 1. Some companies may be disappointed to discover they can’t use the same employee they selected in Year 1, while others will discover that differences in that employee’s Year 2 Summary Compensation Table pay will influence the pay ratio.
– Liz Dunshee
It was a surprisingly rough year for say-on-pay (especially for small-caps, according to pg. 14 of this Willis Towers Watson memo). And even if you’ve achieved majority approval, you could still run into problems with proxy advisors & shareholders if your approval level was below-average. This Exequity memo covers what ISS & Glass Lewis want to see after a low vote, and also recommends taking these 14 steps to bounce back:
1. Assess the SOP vote itself and try to determine which shareholders did not support the SOP proposal.
2. Assess the ISS and GL proxy reports to see which items caused ISS or GL to recommend against your company’s SOP vote.
3. Convene a team to help guide shareholder engagement efforts and identify shareholders, and applicable contacts, for outreach.
4. Prepare for shareholder meetings/calls to discuss the SOP vote and points raised by proxy advisory firms, as well as the company’s perspective.
5. Determine what changes (if any) could be made to address issues raised by ISS and/or GL (this Willis Towers Watson memo (pg. 18) suggests creating more rigorous metrics, adjusting the pay mix, clarifying the CD&A, etc.)
6. Have a core team engage with shareholders and listen to what drove shareholders to not support the SOP vote and, even among shareholders that supported the SOP vote, any critical comments they raise about the company’s pay programs.
7. Discuss the findings of the shareholder engagement effort with the broader team, discuss possible courses of action, and come up with recommendations.
8. Discuss shareholder engagement efforts with the compensation committee/board of directors, issues raised, and possible courses of action.
9. Decide what action(s) (if any) to take to address issues raised by shareholders and/or ISS and GL.
10. Prepare a mock-up of next year’s proxy disclosure detailing engagement efforts and discussing action(s) taken as a result and the rationale.
11. Review mock-up disclosure and see what comments the team or committee/board have.
12. Enact any changes that were approved and prepare for next year’s proxy.
13. Monitor and test how proxy advisory firms and shareholders may react to the next proxy statement.
14. Prepare next year’s proxy, being sure to include information detailing shareholder engagement efforts and the changes made by the company as a result (even if it was keeping things as they were), along with a compelling rationale for such actions.