At the end of this month, previously-announced changes to the “Global Industry Classification Standard” (GICS) will shake up the codes for many tech, media, communications & e-commerce companies. This Compensia memo says it’s the biggest reclassification of companies in the history of the GICS – and explains the impact that it could have on compensation peer groups & ISS pay-for-performance assessments. Here’s an excerpt:
Although it is difficult to predict how the pending reclassifications will affect the analysis of a given company’s specific situation, we envision that changes could occur in these areas of ISS focus:
– Summary of a company’s total shareholder return performance (on a one-, three-, and five-year basis) relative to companies with similar GICS classifications;
– Construction of peer groups for purposes of pay benchmarking and relative “pay-for-performance” comparisons;
– Review of the relative alignment of the compensation of a company’s CEO as part of its quantitative screen for evaluating an executive compensation program in connection with formulating Say-on-Pay proposal voting recommendations;
– Review of the compensation arrangements for the non-employee members of a company’s Board of Directors relative to the competitive market for purposes of identifying “excessive compensation” practices;
– Review of new or amended employee stock plans to determine the shareholder value transfer and gross burn rate relative to companies with similar GICS classifications; and
– Calculation of a company’s “QualityScore,” which considers specific corporate governance and executive compensation-related policies and practices relative to GICS-based industry norms.
Today’s the effective date for the new $250 million “smaller reporting company” threshold. This Pearl Meyer blog summarizes how newly-eligible companies can benefit from “scaled disclosure” on executive compensation topics (also see this blog from Mike Melbinger). Here’s an excerpt:
– No CD&A (but some scaled narratives are required);
– Fewer NEOs (just the PEO and next two highly compensated officers, and up to two former officers if applicable);
– Two years (vs three) in the Summary Compensation Table;
– Certain tables not required (e.g., GPBA, Option Exercises/Stock Vesting, Pension, NQDC);
– No CEO Pay Ratio;
– No discussion of compensation risk policies; and
– No description of retirement benefit plans.
Companies can choose to use scaled disclosure on an item-by-item basis – so you can still provide more information if you want. See this blog from Mark Borges for an approach to “intermediate” disclosure that provides more than the bare minimum.
Lastly, remember that many newly-eligible smaller reporting companies will continue to be “accelerated filers” – with all that status entails (e.g. the deadlines for Exchange Act filings haven’t changed).
I can only speculate about what it’s like to be a VIP tech CEO. One part that doesn’t sound too appealing is having a personal security detail. Because if someone is attacking Mark Zuckerberg, they’re probably after more than his $350 t-shirt. But if there’s a bright side, it’s that you don’t have to pay your bodyguards out of your own pocket – they’re pricey! This article looks at how much a few well-known companies spend on security & travel for high-profile executives – and how they describe those “perks” in their proxy statements:
1. Facebook – $7.3 million for CEO security & $1.5 million for CEO use of private aircraft ($2.7 million for COO)
2. Amazon – $1.6 million for CEO business & travel security
3. Oracle – $1.5 million for Executive Chair home security ($104k & $0 for the co-CEOs)
4. Salesforce – $1.3 million for CEO security
5. Google – $636k for CEO security and $48k for CEO use of chartered aircraft
6. Apple – $224k for CEO security and $93k for air travel
7. Qualcomm – $138k for Chair’s “insurance premiums, security & home office” and $153k for Chair use of corporate aircraft
8. IBM – $178k for CEO use of corporate aircraft
A member emailed to point out that there’s a reason security is expensive:
I met an executive’s bodyguard once. Former cop & one of the friendliest, most down to earth people I’ve ever met. He was very devoted to the executive, for whom he’d worked for nearly 30 years. However, it was also clear to me that this guy knew 6 ways to kill you with a paper napkin.
Remember that our recently-updated “Executive Compensation Disclosure Treatise” has a chapter devoted to perks – with comprehensive guidance on disclosure of airplane use & personal security, among other topics.
This article from Meridian Compensation Partners makes the case for building “preventative care” into the compensation committee’s calendar & agendas. The idea is that companies can avoid major overhauls by reviewing short- & long-term programs every 2-3 years – even in the absence of a low say-on-pay or changes to management & compensation committee members. Here are six tasks to include in this regular review:
1. Review market data on program design in order to understand competitive practices & describe reasons that the company’s programs differ.
2. Evaluate whether annual bonus metrics remain aligned with business strategy.
3. Consider the goal-setting process to ensure that it yields goals that are appropriately rigorous.
4. Determine whether the mix of long-term awards remains aligned with business objectives – e.g. retention, pay-for-performance.
5. Examine termination provisions to make sure they’re appropriate & consistent among the company’s various agreements & plans.
6. Evaluate pay-for-performance to identify and fix any misalignment.
Compliance, best practices & flexibility: according to this blog from Exequity’s Ed Hauder, these are the three keys to a “good” equity plan. This isn’t groundbreaking advice – but it can be easier said than done. Here’s an observation from Ed:
I listed the keys for a good plan in order of their applicability. In order to have a viable equity plan, it has to comply with the applicable rules, i.e., compliance. To have a better equity plan, it should reflect current best practices in its provisions (vesting, CIC, award limits, share limits, etc.).
Finally, to be a good plan, an equity plan needs to have sufficient flexibility to allow the company to address issues that arise, even if not expected. In my experience, the hardest thing for an equity plan to do is to incorporate adequate flexibility and reflect current best practices.
We’ve blogged about how activist shareholders increasingly want companies to disclose how they analyze & address gender pay gaps – and about mandatory gender pay reporting for companies with a UK presence. But companies also need to prepare for employee questions. A new Pearl Meyer survey shows that 62% of companies are – or expect to be – fielding gender pay gap & gender pay inequity questions from their workforce. Some think that the #MeToo movement has been the “tipping point” to elevate discussions that have been brewing for years.
The survey also shows that employee understanding of pay practices is mediocre at best. Only 8% of respondents believe the quality of their pay communications is “excellent.” Here’s some other key findings:
– In the last two years, almost half of the companies surveyed (48%) have increased compensation communication
– A majority of companies (52%) don’t share information about base salary ranges with all employees
– About two-thirds of managers are trained to have formal compensation conversations with their direct reports, but the majority (70%) of those surveyed believe those conversations are not effective
– Less than a quarter of respondents believe employees can appropriately compare their compensation to colleagues (21%) or compare their compensation to similar positions in other organizations (22%)
– Of the 62% who are or expect to receive questions about gender pay equity, a majority have clear and detailed information ready to share or are currently drafting their responses.
This Semler Brossy memo advises on how to structure executive pay before & after a deal closes. To get to the finish line, most deal lawyers & comp consultants know that it’s common to supplement existing bonuses & severance with deal-specific retention & transition incentives – with award size and terms tailored to the deal timeline and executive’s role. But in the post-closing integration phase, things can get trickier. Here’s 4 tips:
1. Adjust or redesign pay philosophy as necessary to reflect new strategic objectives
2. Confirm or adjust peer group and increase pay gradually if executives are handling new responsibilities
3. Consider trade-offs from both companies’ legacy programs
4. Analyze wealth accumulation when evaluating significant post-closing equity awards
For more thoughts, see our blog from last year – “Post-Merger Pay Programs: Better to Optimize Than Harmonize.” And for those of you who are also members at DealLawyers.com, check out the transcript from our recent webcast: “Retaining Key Employees in a Deal.”
This primer from Cleary Gottlieb & PwC takes a close look at the workings of compensation committees – in particular, things the chair and members can do to make the committee more efficient & effective. Here’s the intro:
The work of a compensation committee is much more than just deciding how much money executives make. Many investors see pay decisions as a reflection of the company’s strategy. They know it can have an impact on the company’s culture. And they use it as a window into the board’s oversight role.
How can compensation committees ensure they are supporting long-term shareholder value? By reviewing the internal workings of the committee, and examining the committee members, the meeting agendas, materials and how the meetings are run. And, just as importantly, by looking at how the committee interacts with others. This includes compensation consultants, the full board, other committees and shareholders—as well as with management.
Covered topics include appropriate skill-sets for members and the chair, how to plan the meeting calendar & agenda (with a sample calendar!), best practices for committee procedures & documentation, approaches to shareholder engagement, working with other committees, committee assessments and how to measure intangibles.
According to research described in this MarketWatch article, CEOs average a pretty quick cut in base & incentive pay after an activist takes a stake in the company – to the tune of $350,000 less within one year. After the activist’s exit, pay goes back up. Here’s a hypothesis about why this happens:
“Since stock awards help align managerial interests with firm value, it is surprising to find a reduction in the level of stock awards in target firms after the activist has entered,” said one of the researchers. “We think this is because the activist joins the board and closely monitors the CEO. Therefore there is less need for performance pay, which is risky and quite expensive for the firm.”
“Once an activist exits the firm, there is a renewed need for performance pay to provide incentives to a CEO. In other words, the close scrutiny of firm management by activists is a substitute for performance-oriented stock incentives.”
We’ve gotten a few questions about whether companies that have “grandfathered” performance-based awards are continuing to adhere to Section 162(m)’s five-year reapproval requirement for performance criteria. On Tuesday, the IRS issued initial guidance about the operation of the “grandfather” rule (see this blog from Mike Melbinger).
While the guidance provides some good insight into the definitions of a “written binding contract” (beware any “auto-renew,” “negative discretion” or “contingent-on-approval” provisions) and a “material modification” (you can’t increase pay through a supplemental agreement) – it doesn’t squarely address the shareholder approval question. This Debevoise memo suggests that it’s a good idea to reapprove the performance criteria if awards are contractually promised but not yet granted:
Grandfathered arrangements that rely on the performance-based exception must continue to comply with the formal procedures previously applicable to performance-based compensation. For example, if an executive had a contractual right as of November 2, 2017 to receive a performance-based award in the future, the performance criteria applicable to such award may need to be re-approved by shareholders if, when the award is granted, five years have passed since the last shareholder approval.
But this Covington memo notes that Section 162(m) proposals have been pretty rare this year, at least among the S&P 100. It’s a small sample size, but it appears that the “promised but not granted” fact pattern isn’t very common – and at least some companies decided that shareholder approval of performance criteria is no longer necessary. Here’s an excerpt:
Based on our review of the S&P 100, fourteen companies had last submitted the performance criteria in their equity incentive plans to a shareholder vote in 2013, and two had last submitted criteria for their cash-based plans in 2013, meaning that prior to the TCJA, section 162(m) generally would have required these plans to be put to another shareholder vote in 2018 to allow the company to continue to exclude performance-based compensation from section 162(m)’s deduction limit.
After reviewing these companies’ 2018 proxy statements, we found that only four of the fourteen companies submitted their equity plans to a shareholder vote in 2018. Nine companies did not do so, while one company has not yet held its annual meeting. Of the cash-based plans, neither was submitted to a shareholder vote.