The Advisors' Blog

– Liz Dunshee

As I blogged today on TheCorporateCounsel.net – and as noted on their blog – Glass Lewis has posted its 2019 Voting Guidelines. As always, page 1 of the Guidelines summarizes the policy changes – and we will be posting memos in our “Proxy Advisors” Practice Area. Changes include:

– Officer & Director Compensation: In its say-on-pay recommendation, Glass Lewis will consider excise tax gross-ups, severance and sign-on arrangements, grants of front-loaded awards, clawback provisions, and CD&A disclosure for smaller reporting companies. And they’ve clarified their approach to peer groups, pay-for-performance, the use of discretion, director compensation and bonus plans.

– Board Gender Diversity: The policy announced last year will take effect in 2019 – Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members, but they’ll closely examine the company’s disclosure of its board diversity considerations and other relevant contextual factors.

– Conflicting & Excluded Proposals: The policy lays out how Glass Lewis will evaluate conflicting proposals on special meeting rights – for one thing, they’ll typically recommend against members of the nominating & governance committee when a company excludes a shareholder proposal in favor of a management proposal of an existing special meeting right. And in limited circumstances, Glass Lewis may recommend against members of the governance committee if a company excludes any conflicting proposal based on no-action relief, if Glass Lewis believes the exclusion is detrimental to shareholders. See this blog from Davis Polk’s Ning Chiu.

– Diversity Reporting: Glass Lewis will now generally recommend in favor of shareholder proposals requesting additional disclosure on employee diversity and those requesting additional disclosure on the steps that companies are taking to promote diversity within their workforces.

– Environmental & Social Risk Oversight: Glass Lewis has codified its approach to reviewing how boards are overseeing environmental and social issues – if mismanagement of these risks has threatened or diminished shareholder value, Glass Lewis may recommend against the directors responsible for E&S oversight.

– Auditor Ratification: Glass Lewis will consider additional factors for auditor ratification proposals, including the auditor’s tenure, a pattern of inaccurate audits, and any ongoing litigation
or significant controversies which call into question an auditor’s effectiveness. In limited cases, these factors may contribute to a recommendation against auditor ratification.

– Virtual Shareholder Meetings: The policy announced last year will take effect in 2019. For companies opting to hold their annual meeting by virtual means, and without the option of attending in person, Glass Lewis will examine the company’s disclosure of its virtual meeting procedures and may recommend voting against the members of the governance committee if the disclosure does not ensure that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting.

– Written Consent Shareholder Proposals: In instances where companies have adopted proxy access and a special meeting right of 15% or lower, Glass Lewis will generally recommend against shareholder proposals requesting that companies adopt a shareholder right to action by written consent.

– Clarifying Updates: No changes here, but Glass Lewis has codified its approach to director and officer indemnification, quorum requirements, director recommendations on the basis of company performance, and OTC-listed companies.

– Liz Dunshee

Earlier this week, I blogged about typical terms for incentive plans that are based on relative total shareholder return. This blog from Hunton Andrews Kurth dives into another issue that pops up with these plans: how to handle payouts when relative TSR is good, but absolute TSR is negative. Should management still get a payout? Here’s some ideas:

– Elimination: Eliminate payouts when absolute TSR is negative over the measurement period (consider whether the reverse should apply – trigger a payout when absolute TSR is high but relative TSR is low).

– Cap the Opportunity: Implement a cap to the payout opportunity when absolute TSR is negative over the measurement period (consider whether the reverse should apply – same as above). When absolute TSR is negative, a cap would typically limit the payout at the target level.

– Downward Adjust the Payout: A modifier could be implemented to downward adjust the payout when absolute TSR is negative (consider whether the reverse should apply – trigger an upward adjustment to the payout when absolute TSR is positive).

We might be heading into a down market – and these alternatives can help you avoid the perception that you’re rewarding management for low returns, just because the company didn’t do as poorly as its peer group. But they do shift some general market risk back to executives. Also, keep this in mind:

It is common for compensation committees to initially denominate an executive’s award in dollars (e.g., the executive is awarded a target TSR equal to $300,000 as of the date of grant), and then convert that dollar amount into a number of shares covered by the relative TSR award. A design issue is whether the dollar amount should be converted into shares on the basis of grant date stock price or grant date “fair value” (the latter determined using a Monte Carlo simulation).

If the number of shares issued to your executives is calculated using the grant date fair value of the award, implementing any of the above design considerations will decrease the “fair value” of the award, thus having the direct result of increasing the number of shares subject to the award.

– Liz Dunshee

A recent study from The Conference Board, Gallagher & MyLogIQ shows that full-value stock awards represented almost half of total CEO pay last year – compared to 32% in 2010. That’s not too surprising in light of the market highs we experienced – Broc predicts that everyone will leap back into stock options in a bear market. Here’s more detail from the study:

– Companies continue the trend towards granting two or more types of long-term incentive plans (LTIs): All three major LTI vehicles (appreciation awards, time-based awards, and performance-based awards) have increased in prevalence from 2016 to 2017. There has been a slight uptick in appreciation award usage from 2016 to 2017, with prevalence increasing slightly to 46 percent in 2017.

– Both time & performance-based awards are trending: Time-based awards exploded in 2017, increasing in prevalence to 74 percent after falling from 66 percent in 2014 to 64 percent in 2016. In the same period, the use of performance-based awards, mostly performance shares, rose from 64 percent in 2014 to 77 percent in 2016, and have again grown in usage in 2017 to 80 percent. This continues the impetus of companies to demonstrate to their investors that longer-term incentives are more focused on strict performance measurement. Stock options have come under fire recently, with many commentators viewing performance awards that measure achievement over three years as midterm incentives. Stock options vesting over three to five years, and retained beyond that before exercise in many cases, are more often viewed as longer term. In addition, with retention clauses being added to many different types of equity awards—restricted stock, in particular—these are also viewed as longer term.

– Contrary to popular belief, CEO pay at larger companies is stable or even declining, while smaller firms are playing catch-up with double-digit raises for their chief executives: Companies with revenues less than $100 million saw increases for their CEOs at more than 20.5 percent, while CEOs in the next bracket up, $100 million to $999 million, had increases of 14.4 percent. However, CEOs in the largest companies ($25-49.9 billion and $50 billion plus) received, respectively, a decrease in pay (-7 percent) and a relatively modest raise (1.4 percent). Among financial services firms, several asset value brackets saw total compensation declines, and there was no real pattern to the changes in contrast to the analysis by revenue. In the lowest asset value bracket (less than $500 million) total compensation fell by more than 8 percent, while in the next bracket up ($500-$999 million) total compensation increased by more than 80 percent.

– 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.