I’ve blogged about the recent groundswell of interest in the gender pay gap. This Bloomberg article contrasts that with the “ho-hum” reaction to pay ratio disclosures. Here’s an excerpt:
The wave of pay ratio disclosures coincided with a different discussion of inequities in the workplace, one that all but drowned out talk of CEO pay: the #MeToo movement. Although it began as a movement about sexual harassment, #MeToo gave renewed prominence to decades-old discussions about pay inequity between women and men. Among the companies whose images have been tarnished by allegations of gender pay disparities is Google, which last year was sued for pay discrimination, and both Microsoft and Twitter have been sued for favoring male engineers for advancement.
Obviously, gender-based discrimination is a legal and business risk – and shareholders increasingly want information and commitments from companies. But gender pay & pay ratio issues aren’t mutually exclusive. One of the big takeaways from our “Proxy Disclosure Conference” was that, in reality, pay ratio is probably contributing to the trend of gender pay & other human capital disclosure, since companies now have the data to calculate and disclose more information about their workforce.
Some people even speculate that pay ratio will garner more attention over time because the public will track changes to the number. And if shareholders remain focused on human capital issues, a company’s broader pay ratio narrative – who’s in its workforce, how talent is developed & motivated, the impact of income inequality – could become pretty important.
Last month, I blogged about recent changes to GICS classifications that might affect the ISS peer group & pay-for-performance analysis. And although ISS has now issued FAQs on the changes, there’s still some anxiety about how it’ll play out.
In this blog, Pearl Meyer’s Jim Heim says that since proxy advisor assessments don’t drive company performance, they shouldn’t drive pay arrangements – and we should take a deep breath before worrying about those types of external factors. Here’s an excerpt:
To be clear, nothing that is under the control of either management or boards has changed here. And it is extremely difficult at this early stage to predict how an individual company’s scoring will be impacted, because:
– Most ISS assessments are multi-factor
– Many of these assessments are subject to additional changes in methodology as ISS course-corrects to better reflect input from its customers
– Both financial and pay data (for the company being assessed as well as the companies it is benchmarked against) will be refreshed by the time the actual ISS assessment takes place
Jim recommends that advisors guide clients by monitoring ISS FAQs – which have already clarified the impact of this change for some companies – as well as policy changes. In addition, a key “value-add” is to understand what levers are available to the company if the GICS shuffle actually increases the risk of an “against” recommendation from ISS on pay-related items.
When it comes to pay for performance, CalPERS isn’t messing around. In its recent “Corporate Governance Program Update,” the pension fund reports that it voted “against” 43% of executive compensation proposals this year – up from a prior 5-year average of 16%, and 18% last year.
Any way you slice it, that’s a huge increase. CalPERS says that its enhanced voting practices (pg. 21) – implemented in January 2018 – are driving the change. Here’s more detail:
– Failure to align pay with performance was the primary reason to vote “against”
– Other problematic features driving “against” votes included: short-term performance periods for long-term incentive awards (i.e. less than 5 years), poor disclosure, short vesting periods for equity grants, discretionary awards, and similar metrics used for short- & long-term incentive plans
The report also notes that CalPERS conducted 121 shareholder campaigns last year and voted against 438 directors where diversity engagements didn’t result in constructive outcomes. Diversity – as well as environmental and other human capital issues – will remain a big focus next year.
Here’s something I recently blogged on our “Proxy Season Blog” on TheCorporateCounsel.net: CtW Investment Group has announced a new initiative that takes issue with “anti-competitive” terms in employment agreements – including non-competes, no-poach agreements, non-disclosure agreements, and mandatory arbitration. They’ve sent a letter to approximately 30 companies, which asks the boards of those companies to:
– Review their company’s employment contracting practices, including the use of any of the provisions listed above.
– Report the board’s findings to shareholders before the next annual meeting.
– Commit to increased human capital management disclosure going forward.
CtW says the initiative is motivated by its desire for more transparent “human capital” disclosure and a potential lack of board awareness when it comes to the increasing business risks that these widespread contractual provisions may create.
This isn’t the only recent “human capital” initiative. In August, the “ShareAction Workforce Disclosure Initiative” – a 100-member investor coalition – sent this 45-page survey to 500 companies. The heightened interest is causing some companies to broaden their compensation committee charters to include oversight of non-executive employment & cultural issues in the committee’s enumerated responsibilities – and shows why compensation committees may need to become more familiar with emerging environmental, social & governance issues.
Depending on the company, the compensation committee may be best-equipped to make recommendations to the full board on “human capital” proposals and requests to incentivize executives to accomplish ESG goals. This Semler Brossy memo discusses how committee charters can reflect these evolving responsibilities. At our recent “Proxy Disclosure Conference,” one panel noted that some companies are changing the committee’s name to reflect a broader mandate…
Certain ISS policies, procedures, and products rely on GICS classifications, including executive compensation peer group formation, equity compensation plan evaluation, and Environmental & Social QualityScore. ISS has issued FAQs designed to answer the most frequently asked questions regarding how the adjustment to GICS structure will impact ISS analyses, and when those changes will be effective.
The FAQs address the following questions:
– How will the new GICS code affect the evaluation of equity compensation plans under ISS’ U.S. Equity Plan Scorecard?
– How will the new GICS code affect the evaluation of equity plans under ISS’ burn rate policy for France?
– How will the new GICS code affect the evaluation of executive compensation?
– How will the new GICS code affect the evaluation of director compensation?
– How will the new GICS code affect Environmental & Social QualityScore?
– How will the new GICS code affect ISS policies, such as the director performance evaluation policy, that examine a company’s TSR performance relative to its industry?
– When will Question 130 in Governance QualityScore, which examines each covered company’s burn rate relative to its industry, be updated to reflect the new GICS structure?
At our two-day “Proxy Disclosure Conference,” we know how hard it is to sit through so much substance – so we like to mix in a little fun to keep you fresh & focused. This year, Morrison & Foerster’s Dave Lynn & Marty Dunn reprised their popular puppet show – so popular that we have decided to make it freely available, we’ll blog next week with that video archive – but for right now, here’s a teaser:
Today is the “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference”; yesterday was the “Proxy Disclosure Conference” (for which the video archive is already posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Today is the “Pay Ratio & Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Here’s an excerpt from this article from Judith Samuelson of the Aspen Institute:
An unintended consequence of pay-for-performance is we treat companies as if they are in the airline business, except the only person who matters is the pilot—not the grounds crew, nor the quality control tinkerers, nor the guys who wrangled the ore and fuel from the ground, forged the parts, tightened the bolts and soldered the frame.
And especially not those who are served the food in the cafeteria or cleaned the restroom late into the night. This segment of the workforce is now basically hidden, working for contractors who trade in lesser skilled labor where benefits and income security are sacrificed in the name of competitiveness.
Meanwhile, because pay-for-performance is so weighted in stock, it incentivizes senior managers to think more about the shareholders than their direct reports or the labor and talent on which the enterprise depends. In the 1970s, shareholders took out about 50% of a company’s profits, while the rest was reinvested in the productive capacity of the firm, including R&D to employee training and rewards. Today, the shareholder gets over 90% between dividends and share buybacks. Today, a 60% or greater weight on equity or equivalents is the norm in pay packages.
