It’s not uncommon for a company’s stock price to drop when a successful CEO departs, even if you’ve previously disclosed the succession plan. This NACD blog says you should anticipate the market reaction to these events – and there’s an easy way to avoid penalizing the new CEO. Here’s an excerpt:
There’s an important executive compensation point to interject here: as you set up pay plans for a new CEO, structure equity incentives so they are based on the stock price after the market has absorbed the bulk of the hit to the share price. There have been numerous circumstances where options are granted immediately upon a promotion, yet within a few days, the value of those options are 10-15 percent underwater. This is demoralizing to the successor and does not achieve the supposed aim of your incentive plan.
This Pay Governance memo has some nice charts that compare current incentive practices to potential alternatives, which could better motivate executives when the company is going through a strategic change. Don’t be afraid to depart from “market practice” when a different approach will drive shareholder value.
Recently, ISS Analytics published this summary of equity plan trends. The biggest news is that there were 40% fewer equity plan proposals from Russell 3000 companies, due to the repeal of Section 162(m) – with some companies also removing individual grant limits and other “performance-based” provisions from their plans. Here are a few other takeaways:
– Shareholder-friendly plan features are gaining traction year over year – 44% now require one-year minimum vesting, fewer companies permit liberal share recycling, 61% prohibit paying dividends on unvested equity
– Specific aspects of equity plan proposals lead to higher levels of shareholder opposition – High dilution, high burn rate, repricing provisions, and evergreen provisions are associated with higher levels of shareholder opposition to equity compensation plan proposals
– Pharma & tech companies grant the most equity – Available data indicate that the median three-year average burn rate in these industries is more than double most other industries
Farient Advisors offers these “7 Deadly Sins” for comp committees to avoid in 2019 (in other words, make sure these items are on your meeting agendas):
1. Not re-evaluating your clawback policies
2. Not having a pay structure that will adapt to disruptive business changes
3. Thinking about director pay disclosure the same way
4. Doing a perfunctory review of the compensation committee charter
5. Ignoring the war for talent
6. Disregarding the elephant in the room – the potential for a downturn
7. Failing to understand economic value added (EVA)
In this blog, Stinson Leonard Street’s Steve Quinlivan lists a couple of recent Section 162(m) disclosures pulled from recent proxy statements. This new disclosures reflect how the Section 162(m) deduction limit for performance-based compensation was repealed by the “Tax Cut and Jobs Act,” effective for taxable years beginning after December 31, 2017, subject to transition relief…
This memo by McCarter & English’s Joe Bachelder explains the reasons why CEO pay has grown over the years. Compare that to my own “An Open Letter to All Journalists,” which also lists a bunch of factors…
In our “Say-on-Pay” Practice Area, we have a bunch of memos about how to handle a negative recommendation from proxy advisors – including this new memo from Davis Polk and Semler Brossy
Tune in tomorrow for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about your upcoming pay ratio & say-on-pay disclosures – including the new hedging rules and the latest SEC positions, as well as how to handle the most difficult ongoing issues that many of us face.
This blog by ExeQuity’s Ed Hauder is interesting because it gives a “deep dive” into one company’s decisions about how to better construct an LTIP. Also see this comprehensive memo by FW Cook about the LTIP practices for the top 250 companies…