We recently shared data from FW Cook showing that most large companies have added or retained more expansive clawback policies that go beyond the requirements of the listing rules. This HLS Blog post from the folks at the AI-powered legal intelligence platform DragonGC assesses what those policies look like and lists these most prevalent voluntary triggers at S&P 500 companies:
– Breaches of Company Policies or Legal Requirements: 51.4%
– Breaches of Fiduciary Duty or Fraud: 48.6%
– Misconduct with Reputational or Financial Harm: 32.9%
– Administrative Enforcement: 28.9%
– Termination or Criminal Resolutions: 23.9%
– Inappropriate Conduct: 20%
Join us at our 2024 Proxy Disclosure & Executive Compensation Conferences on October 14-15 in San Francisco to hear the latest on tricky clawback issues and market practice during our “Living with Clawbacks: What Are We Learning?” panel. You can peruse our agenda to see what else our expert practitioners will cover and register here for in-person or virtual attendance.
Debevoise recently studied the use of ESG metrics in incentive plans by the 100 largest public companies — finding that they were used by 71% of that group (most of which used more than one), and 7% took ESG factors into account in setting compensation. Here are a few interesting takeaways:
– Despite the long-term nature of ESG considerations, they remain popular primarily in annual plans. 65% included them only in annual plans, while 4% included in both annual and LTI plans and no companies included them only in LTI compensation. 2% included them in a special bonus program.
– Social goals remained the most common (68%), with the most popular metrics related to DEI (51%). The article notes that the impact of the Students for Fair Admissions cases was not yet reflected in the 2024 proxy season, given the timing of the opinion (released after most 2023 compensation decisions).
The article makes a few predictions for next proxy season and beyond:
– Companies have revisited DEI metrics after the U.S. Supreme Court’s opinion last year in the Students for Fair Admissions cases. We have seen some companies making changes to DEI goals or the disclosure related to such goals, especially where such goals are quantitative representation goals that may result in a higher litigation risk. We have seen other companies remove DEI goals from their incentive compensation plans. However, we have not seen and do not expect to see most companies walking away from DEI goals altogether given the importance of these goals to workforce strategies and long-term business performance.
– With respect to other ESG-related metrics, we expect companies will continue moving toward quantitative goals and away from qualitative or discretionary measures in the face of investor and institutional shareholder demands.
– We expect to see more specificity around ESG goals in incentive plans, rather than broad or general measures. We also expect that even more companies will use stand-alone weighted ESG metrics rather than scorecards where ESG measures have no defined weighting.
– Finally, we anticipate that more companies will begin to include ESG goals in their long-term incentive plans to align with the inherently long-term nature of their ESG strategy, recognizing that some of these metrics are less suited for short-term objectives.
As Meaghan previewed in June, PVP disclosures in the 2024 proxy season weren’t very different than first-year disclosures. This Pay Governance alert has more detail on what companies changed – or didn’t – in year 2.
Going into the 2024 proxy season, we anticipated that only a few companies would make changes to their disclosures other than the addition of another year of new data. Much effort and thought went into deciding the Company-Selected Measure, TSR comparison group, and the list of Important Financial Metrics last year; those decisions proved to be durable for this year and likely future years, barring a large incentive program change. Below is a summary of disclosure observations for this year compared to last year:
– 96% of companies used the same Company-Selected Measure as last year
– 86% of companies used the same peer group or index as last year for TSR comparisons. Not surprisingly, the large majority of those companies that had a different peer group were those using custom peer groups whose constituents changed from last year
– 87% of companies had the same number of Important Financial Metrics as last year, 7% had fewer metrics, and 6% had more metrics
– Of those that had the same number of metrics, 93% used the exact same metrics, with only 7% changing their metrics between years
I think it tells a great story about the effort companies put into this disclosure in late 2022 and early 2023 that some of these complicated decisions, like the company-selected measure and which peer group to use for disclosure purposes, as the alert says, “proved to be durable.” Despite the short timeframe to prepare incredibly complicated and specific new disclosures, most companies seemed to “understand the assignment” and, where needed, hired supplemental outside help for valuations and disclosure prep.
I don’t think I’m speaking too soon in saying this, although it’s probably worth reminding everyone that we may learn more from 2024 comment letters that could impact 2025 disclosures.
This Cooley blog discusses what private companies need to know about Rule 701, a key rule for private company executive compensation programs that, unfortunately, is responsible for a fair number of foot faults often uncovered during one of the most inopportune times (the IPO process) as counsel diligences past equity grants. The SEC has also been known to conduct periodic audits and assess fines for noncompliance.
Rule 701 is the primary US federal securities law exemption for offers and sales of compensatory awards – e.g., options, restricted stock awards (RSAs), restricted stock units (RSUs), etc. – by a private company to its employees, directors, officers, consultants, advisers, and other individuals providing bona fide services to the company (or any of its subsidiaries), that are issued pursuant to a compensatory benefits plan such as an equity incentive plan.
The availability of Rule 701 comes with certain quantitative limits. Early-stage companies usually operate well within these limits. However, later-stage private companies should understand the limits of the exemption and start monitoring before additional requirements kick in to avoid inadvertently failing to comply with Rule 701.
The blog then breaks down in Q&A format some of the trickiest parts of Rule 701 — particularly for larger and later-stage private companies — including the rule’s quantitative limits.
To rely on Rule 701, the aggregate sales price of securities offered and sold during a 12-month period using this exemption must be at least one of the following:
Less than $1 million in total value.
Less than 15% of the total assets of the issuer (as of the most recent balance sheet date).
Less than 15% of the outstanding amount of the class of securities being offered and sold (as of the most recent balance sheet date).
Note: The 12-month period can begin on any date during the calendar year – it does not need to be tied to the calendar year or the company’s fiscal year. However, once you select a date, you must stick to that date for future analyses. Aggregate sales price means the sum of all cash, property, notes, cancellation of debt, or other consideration received or to be received by the issuer for the sale of the securities.
While compliance should be monitored continuously, the blog points to these factors indicating it’s time for a more detailed analysis:
– You have a high 409A valuation.
– Your company’s valuation is approaching $1 billion.
– Your board is regularly approving large option grant packages or is hiring one or more senior executives.
– You are hiring aggressively and/or making a large number of “refresh” grants.
– You begin issuing RSUs.
– You have conducted a repricing of your outstanding stock options recently.
From a say-on-pay perspective, companies usually expect investors to focus on concerns with CEO compensation, but this Semler Brossy article from earlier this summer noted that “competitive CEO pay alone does not always provide a ‘free pass'” for say-on-pay support and said, “it appears that assessments of non-CEO NEO pay have become more rigorous.” Specifically, in 2024, companies were criticized for these “one-time NEO pay actions that used to fly under the radar”:
– the lack of performance-based NEO equity grants (where the CEO received performance-based grants)
– one-time grants to NEOs (and not to the CEO)
– high average pay for the proxy-disclosed executive group (rather than just elevated CEO pay)
– the acceleration of awards upon an NEO’s retirement
The article notes that increasing levels of executive officer pay at all levels are being more closely scrutinized as the cost of management grows and notes that companies may still be at risk even when the quantitative evaluations of CEO pay and performance are low concern. If you have a one-time non-CEO NEO pay action this year, make sure you’re using your CD&A to explain the purpose and rationale, almost as much (if not as much) as if that one-time pay action was for your CEO!
When companies shift to using a multi-day average stock price to convert target value to the number of shares (a common approach in times of market volatility), I think most recognize the need for clear disclosure to investors of the calculation methodology and reasons for changing approach in the proxy statement. This FW Cook blog highlights the need to consider another type of communication — to program participants.
Use of a multi-day average typically results in a discrepancy between (1) the fair value of awards for proxy tabular disclosure purposes, and (2) the target value communicated to the award recipient. To mitigate potential confusion among recipients, a more detailed internal communication plan may be required to ensure that recipients understand that the discrepancy between their target award value and the value in their stock plan account is due to the design of the program rather than a calculation error.
Certain NEOs are likely to be involved in the change to a multi-day average price, but to the extent the approach represents a change from prior years, you may also need to communicate that change to non-NEO recipients.
While we’re on the topic of things complicating say-on-pay for individual companies, during our recent webcast, “Proxy Season Post-Mortem: The Latest Compensation Disclosures,” Dave discussed a notable trend shown in Semler Brossy’s analysis of say-on-pay in the 2024 proxy season. A number of the companies that received less than 75% support received split recommendations this season — that is, “ISS would recommend one way and Glass Lewis would recommend another way and so you’d have “FOR” the Say-on-Pay vote from one proxy advisory firm, and “AGAINST” the Say-on-Pay vote from the other.” Here’s more from Dave’s commentary:
In fact, the Semler Brossy research identified 80 Russell 3000 companies that received a Say-on-Pay vote below 75% where they had a split recommendation between ISS and Glass Lewis. There’s not a whole lot you can glean from that because, in many respects, it is going to be very dependent on the particular company situations that they’re analyzing.
Obviously, as we all well know, ISS and Glass Lewis do not take the exact same approach to evaluating pay-versus-performance and overall compensation level approaches in their research. That’s something to watch out for. When you do have those split recommendations, it is something you have to think about in terms of how you might approach a company’s response or how you might approach engagement in that situation to try to garner sufficient support so you’re up above that 70% – 75% level.
This Equilar blog takes a data-driven approach to understanding how companies respond to a failed say-on-pay vote using disclosure in 2023 proxies by 77 companies in the Russell 3000 with a failed vote the prior year (defined as less than 50% support). Comparing data from 2023 to 2019 showed that companies facing a failed say-on-pay vote in more recent years may have a harder time narrowing in on how to change their compensation programs and disclosures because shareholders may be looking for some fine-tuning of programs as compared to major changes.
In 2023, metrics or weightings adjustments were the most prevalent with 66% of the failing companies adopting this strategy. However, only 45% of the companies underwent different metrics or weightings in 2019. This suggests a heightened focus on refining performance evaluation frameworks and aligning executive compensation with company performance metrics in the recent year. Additionally, shareholders tend to express more concerns regarding transparency in disclosure, where 36% of the companies made corresponding changes in 2023 but only 29% in 2019.
Conversely, there was a notable decrease in the percentage of companies shifting towards performance equity in 2023 compared to 2019. Only 18% of companies made such changes recently compared to a sizeable 47% in 2019. This suggests that many companies already shifted towards a greater prevalence of performance equity in the past and are now fine-tuning the metrics being used. Overall, the data underscores the dynamic nature of corporate responses to Say on Pay challenges, reflecting evolving governance priorities and shareholder expectations over time.
The blog also noted that the average number of changes made in 2023 remained comparable to 2019 at 2.5 changes per company. Note that the data includes companies that did not have successful say-on-pay votes in 2023 — 80.5% of the surveyed companies passed say-on-pay following the program and disclosure changes. For the most part, there was no magic change or number of changes that allowed companies to pass say-on-pay the subsequent year, leading the blog to conclude that “there isn’t a golden rule that can affect shareholders’ votes to ensure a passing vote. However, the data does show that changes, in most circumstances, can lead to positive effects.”
While a shareholder outreach program will be expected by the proxy advisors in any event, this highlights the importance of being open-minded and actively listening in that outreach so that you can identify the changes that are most likely to help you succeed the next year. This fine-tuning can be challenging — shareholders (& proxy advisors) don’t always agree on appropriate metrics (or even equity award types) — and sometimes requires judgment calls, hopefully made with the help of seasoned advisors who understand your shareholder base.
As John recently shared on TheCorporateCounsel.net, the SEC’s Spring 2024 Reg Flex Agenda was released this month. It showed some rulemaking activity pushed out past the election. This FW Cook blog describes the status of the SEC’s four pending rulemaking actions related to executive compensation in the proposed or final stages:
– Increased disclosures regarding human capital management — timing for SEC action moved from April 2024 to October 2024 (proposed)
– Incentive compensation rules for financial institutions under Section 956 of the Dodd-Frank Act — timing for SEC action on a new proposal moved from April 2024 to October 2024 (proposed) – Increased disclosures about board diversity — timing for SEC action moved from October 2024 to April 2025 (proposed) – Finalizing the 2022 proposed SEC rule regarding grounds for excluding shareholder proposals — timing for SEC action moved from April 2024 to April 2025 (final)
The delay in the rulemaking to implement Section 956 of Dodd-Frank is particularly notable. As we recently discussed, three of the six required agencies already took action in May to repropose the rule. The notice of proposed rulemaking will not be published in the Federal Register until all six agencies propose it.
As a reminder, these dates signify general timeframes. New final or proposed rules could come before or after the dates suggested in the agenda. The Reg Flex Agenda only gives insight into the priorities of the Chair as of the date it was submitted — it’s not a definitive guide for anyone trying to predict SEC rulemaking for purposes of specific board agendas, budgets and workflows.
Put this in the category of “nothing is ever easy.” There’s a new development in the multiple cases challenging the FTC’s broad non-compete ban. As reported by Bloomberg, the US District Court for the Eastern District of Pennsylvania found that the FTC “has clear legal authority to issue ‘procedural and substantive rules as is necessary to prevent unfair methods of competition'” and denied a tree trimming company’s motion for a stay of the effective date and a preliminary injunction.
This decision seems to directly conflict with an early July order by a federal judge in Texas granting a tax services firm’s motion for a preliminary injunction of the ban (which was limited to the plaintiffs and plaintiff-intervenors) — creating a divide in the judiciary. The article says, “a real estate firm in The Villages, Fla., is also pursuing a lawsuit over the rule in the Middle District of Florida.”
This Troutman Pepper alert says, “employers should take steps now to prepare for the possibility of the ban becoming effective right after Labor Day.” While the Texas court plans to issue a ruling on the merits by August 30, that is only four days before the ban’s effective date.