This memo from Farient Advisors is interesting. Here’s an excerpt:
Even when companies are careful about plan leverage in the performance range between threshold and maximum awards, they often plant a big incentive land mine right at the threshold. One of the most common compensation structures in the corporate world is to have between 25 percent and 50 percent of target awards suddenly cut in when a threshold level of performance is achieved. At this point, the pay-for-performance curve is not just steep, it is vertical. To managers, that might mean millions of bonus dollars for hitting their number, or zero if they fall a dollar short.
Here’s an excerpt from this Compensia memo about how technology companies fared when seeking shareholder approval of stock plans:
In 2018, the number of employee stock plans proposals in the technology sector declined from prior years. Only 17% (26 of 150 companies) of the Tech 150 submitted employee stock plan proposals to their shareholders in the past 12 months (based on a review of definitive proxy statements filed for companies with fiscal years ending during the period from June 1, 2017 through May 31, 2018). This number is significantly lower than the practices of representative publicly-traded technology companies that we reviewed in each of the prior three years (26% in our Bay Area Tech 120 reviews in both 2015 and 2016 and 31% in our Tech 150 review in 2017).
This article from Semler Brossy’s Blair Jones outlines four ways in which the compensation committee can foster strategic diversity initiatives (also see Calvert’s 32-page “Diversity Report”):
2. Succession planning – including CEO direct reports and the long-term talent pipeline
3. Oversee annual compensation actions – this blog describes how some companies are now linking pay to diversity goals
4. Lead the company’s process to address gender pay equity – shareholders and employees are very interested in this topic, and you don’t want to be caught flat-footed
Beginning in 2019, ISS will recommend a vote against members of the board committee responsible for setting non-employee director pay if the pay has been “excessive” for two or more years and there’s not a “compelling rationale” or other mitigating factors for that arrangement. This Exequity memo charts director pay stats for the S&P 500 and the Russell 3000 so that you can know what amount of compensation will be problematic.
The memo notes that if you come within 10% of the 95th percentile, you should be cautious about director pay increases and your director pay disclosures. It might make sense to clearly explain in the proxy statement why the pay levels are appropriate. I’ve also blogged about factors & program features that could lead to unexpected outcomes in the ISS evaluation…
I blogged last month about whether you can use the same “median employee” for your second year of pay ratio disclosure. This Pearl Meyer blog lists some other things to think about for Year 2 – but the main takeaway is to keep it simple. Here’s an excerpt:
Should you change your disclosure? After reading those nearly 4,000 other proxies, you may find yourself with a case of pay ratio disclosure envy and want to change the way your disclosure reads or is presented. Again, absent a compelling reason to do so (see our next two considerations), we would recommend retaining the same format and flow from 2018. With the SEC issuing zero comment letters on this disclosure requirement last year, it appears that every registrant has so far made a good faith attempt to comply and did (at least in the eyes of the SEC). Even proxy advisors and institutional investors didn’t complain about the disclosures, and if anything, said there was too much information. Why open yourself up to scrutiny by changing what has already worked?
We might be seeing the end of the TSR heyday. More and more investors are focused on long-term value creation and the alleged evils of earnings forecasts – and there’s buzz around the idea that return on invested capital is the primary driver of value creation. So it’s no surprise that ROIC is becoming a preferred metric for performance plans.
This Forbes blog (from an ROIC-focused research firm) says that almost a third of companies are now using this performance metric. It provides some case studies – and explains the trend:
ROIC has become a more common word in corporate America over the past three years. In 2016, The Wall Street Journal declared ROIC “The Hottest Metric in Finance.” Proxy advisor Institutional Shareholder Services recently bought EVA Dimensions so that it could offer more than just unscrubbed accounting metrics. JPMorgan Chase (JPM) CEO Jamie Dimon called out ROIC as a key driver of value in his 2018 letter to shareholders. From 2014 to 2016, the percentage of companies that tied executive pay to capital allocation measures rose from 21% to 30%. And a 2016 Rivel Research survey of buy-side investors found that ROIC was their favorite metric to link management pay to company performance.
Companies that focus on hitting quarterly earnings targets instead of driving long-term improvements in shareholder value should not be surprised to find themselves targeted by activist shareholders – like the ones that forced General Motors to adopt ROIC as a key performance metric in 2014.
Despite these improvements, there’s still a large disconnect between CEOs and investors regarding the importance of ROIC. 77% of buy-side investors favor ROIC as a performance metric while only 30% approve of EPS. Meanwhile, 63% of companies link long-term executive compensation to earnings while only 30% link compensation to ROIC.
As noted in this Bloomberg article, Rite Aid received a 84% vote ‘against’ on its say-on-pay. I was pretty sure that was a record low…but surprisingly, it’s not even the leader in the clubhouse for 2018! For example, Nuance Communications got only 10% in favor. Some bigger names also got clobbered – Wynn Resorts was at 20%, and Bed, Bath & Beyond was at 21%. We post reports with say-on-pay results for each proxy season in our “Say-on-Pay” Practice Area…
Here’s the news from this blog by Steve Quinlivan (also see this Bloomberg article):
In Stein v. Blankfein, the Delaware Court of Chancery considered a proposed settlement of litigation against directors of Goldman Sachs. The related complaint contained two counts for derivative relief for breach of fiduciary duties related to the payment of excessive compensation awards to non-employee directors and issuing stock-based awards that were void because of uninformed shareholder votes. The complaint also included two direct claims for breach of fiduciary duties for failure to disclose material information to stockholders when compensation plans were approved and for partial disclosures in proxy statements concerning the tax deductibility of cash-based incentive awards to named executive officers.
The Court described what the Company would give up by settling the claims. The Court noted the claims compromised were allegations that the Company’s directors are liable to the Company for excessively compensating themselves and for issuing stock-based incentive awards in reliance on stock incentive plans that were void at the time of the award. These claims are assets of the Company. The settlement, if confirmed, would release all stockholders’ and the Company’s rights to assert these and related claims going forward.
The Court than analyzed what the Company would obtain by settling the claims. According to the Plaintiff and the Director Defendants, the quid pro quo arose from the settlement of the Plaintiff’s direct claims against the Director Defendants. Those claims were composed of allegations that the Director Defendants breached fiduciary duties in failing to make required disclosures in connection with the Company’s recent stock incentive plans and proxy statements. The Director Defendants also agreed to cause the Company to do certain beneficial things, including making certain disclosures in the future and continuing certain practices, already implemented, with respect to executive compensation for at least three years. The Plaintiff alleged that the disclosures would bring future stock incentive plans into compliance with the Plaintiff’s interpretation of federal law, thus conveying a large but hypothetical monetary benefit on the Company.
However the Court declined to approve the settlement because it did not find the release of the derivative claims fair to the Company. According to the Court, in return for a release of the monetary claims against them, the Director Defendants give up nothing. Instead, the Director Defendants only agreed to cause the Company to take or refrain from certain actions that were largely mandatory given the Director Defendants’ fiduciary duties. Even if the undertaking of the Defendant Directors had merit, they were unrelated to claims for conflicted overpayment that were at the heart of the derivative claims.