The Advisors' Blog

– Broc Romanek

Here’s news from this Bloomberg article:

Attacking CEOs! Shining a light on boards’ shortcomings as independent overseers! Girding for proxy battles! To do those kinds of things, activists often focus on executive compensation. Pay has become even more important in the years since the financial crisis, which underscored how poorly thought-out incentive structures can motivate bad behavior.

Shareholder votes on executive compensation have focused the attention of some of the world’s largest institutional shareholders on the link between pay and company performance. That’s opened an additional avenue for activists to shore up support for their proposals, says Steven Balet, a managing director and activism expert at FTI Consulting Inc. “Activists don’t necessarily have an issue with the quantity of pay, which makes sense coming from a hedge fund that charges 2 and 20,” Balet says, referring to the standard 2 percent of assets and 20 percent of profits that funds typically collect. Instead, he says, they view pay as “a means of driving behavior.”

Consider the campaign by New York-based hedge fund Starboard Value LP against Darden Restaurants Inc. In late 2013, Starboard disclosed it had acquired a 5.6 percent stake in Darden, the ¬operator of the Olive Garden and Red Lobster restaurant chains. The next year the activist investor came out with a 294-page presentation, which famously said that Darden had stopped salting pasta water to get an extended warranty on its cooking pots.

Starboard also argued that Darden’s incentive structure had fueled bad decisions by executives. Because it focused on total sales and net earnings per share, management had tried to expand the business regardless of cost, the hedge fund said. And after the board suddenly shifted compensation targets to link some awards to same-restaurant sales growth, Darden five months later moved to sell off Red Lobster, a poor performer under that metric. According to Starboard, the pay program “encouraged excessive spending as the answer to every problem,” regardless of whether it would create or destroy value.

The activist’s pitch was persuasive. In October 2014, Darden’s shareholders voted to oust the entire slate of incumbent directors and handed the reins to Starboard Chief Executive Officer Jeffrey Smith and his handpicked team. The new board sped up improvements to the pay program that Darden had begun after Starboard disclosed its stake. They linked bonuses to adjusted per-share earnings and same-restaurant sales. And they changed long-term awards to pay out mainly in shares tied to return on invested capital and stock return relative to a group of about 50 other restaurant companies. They also cut stock-option grants.

Gene Lee, who stepped into the CEO role after the vote, was awarded $5.8 million for his first year, according to the Bloomberg Pay Index. Since then his pay has risen to $10 million; Darden’s shares returned 150 percent through Jan. 23, more than double the gain of the S&P 500 for the same period.

You can get the details on executive pay on the Bloomberg terminal. Head to {PAY } to see who the highest-paid public company executives are in the U.S. based on awarded pay, which values equity at each company’s fiscal yearend. Click on the ¬Analysis tab for a new enhancement that lets you review pay details for more than 1,000 U.S. CEOs. The Performance vs Non-¬Performance Pay enables you to see which executives have the greatest percentage of their compensation tied to company results. The Performance Metrics Matrix and the Performance & Vesting Periods tabs let you explore what overarching goals awards are tied to, their time frames, and when executives will be able to pocket the pay. You can also narrow your queries to a specific industry to compare the compensation plans with their peers’.

Taking that a step further, you can run searches on the Equity Screening (EQS) function using the new pay metrics or data on say-on-pay, which refers to shareholders’ right to vote on management remuneration. To see Russell 1000 companies with the lowest support on pay, for example, go to {EQS }. In the Add Criteria field, enter RIY and click on the Russell 1000 Index match. Next, enter Say on Pay, click on the Say on Pay Support Level item, and press . Click on the See Results | WATC button for a list of companies in the benchmark that you can sort by the percentage of shareholders supporting management on pay.

That kind of search may help you spot the next target. Pay will remain an important metric in activist campaigns, according to Balet. “They use it to show that a board is beholden to management,” he says. “And it’s effective because it’s a direct way to attack a CEO.”

– Broc Romanek

Here’s a blog from Ed Hauder of Exequity:

Just a quick word of warning to executive compensation professionals to take a long, hard look at both short-term incentive and long-term/equity incentive plans (and their associated proxy proposals ) that include Section 162(m) language. The reason is not so much the question of whether such Section 162(m) language is still needed (it might be if your company is putting forward a plan amendment and there are outstanding awards that may qualify for the Section 162(m) transition relief under the Tax Cuts and Jobs Act), but rather what justifications are given for seeking shareholder approval of the proposed plan.

If the proxy proposal indicates that one reason for requesting shareholder approval due to qualifying compensation paid under the plan under Section 162(m), then the plaintiff’s bar is ready to file suit. I have been working with one company that filed its proxy early in 2018 and was requesting shareholder approval for both its annual and equity plans. The company was on a fiscal year and the changes in Section 162(m) wrought by the Tax Cuts and Jobs Act will not fully apply until later in calendar 2018–after the company’s annual meeting. But, the proposals did not indicate this and the plaintiff claimed that the disclosures were misleading and sought an injunction.

So, practitioners should carefully evaluate the rationale given for seeking shareholder approval of any incentive plan being proposed in a company’s proxy statement. If Section 162(m) is mentioned, then be sure to address the changes wrought by the Tax Cuts and Jobs Act and explain how the changes will impact the plan and awards under the plan going forward, as well as why shareholder approval would be needed in light of the changes to Section 162(m).

Finally, if the proposal is for a completely new plan, and there is no possibility that any of the Section 162(m) transition relief will apply to awards under the proposed plan, you may be tempted to eliminate all references to Section 162(m). Of course, even though certain elements of equity plans are no longer needed by Section 162(m), ISS has already said that it will be reviewing the elements included in plan documents. So it may not make complete sense right now to eliminate things like annual (or other period) limits on awards, especially to directors, or a list of potential performance metrics, and other elements that used to be included solely for Section 162(m) compliance reasons.

– Broc Romanek

Here’s news from this “Financial Times” article:

State Street Global Advisors is to get tough on executive pay — and it will signal its displeasure over lavish packages by refusing to back them. Previously, the $2.8tn-in-assets manager voted “for” or “against” on pay. Now the Boston group, the manager of the world’s largest passive investment fund, will indicate its unhappiness by abstaining.

Rakhi Kumar, head of corporate governance at SSGA, said that last year the group had voted against nearly 600 of 5,200 pay proposals. It had concerns over 300 more, which it classed as “qualified support”. In this year’s round of shareholder meetings, SSGA will make clear its unease by abstaining. “Sometimes you have a concern on structure, sometimes there could be a one-off payment that . . . makes us uncomfortable,” Ms Kumar said. “It’s something typically we supported with a heavy heart. That will be more transparent now.”

Passive investment groups are increasingly using their influence after trillions of dollars flowed into exchange-traded and index-tracking funds. Unlike traditional mutual funds, passive funds cannot sell shares if they think a management or board is doing a poor job. With many institutional investors adopting environmental, social and governance principles, it has increased the pressure on the big three, BlackRock, Vanguard and State Street, to take a more active approach.

Some corporate governance experts say an abstention does not go far enough. They argue that votes against pay packages are more powerful. Larry Fink, BlackRock chief, last month sent a letter to corporate executives arguing that “every company must not only deliver financial performance but also show how it makes a positive contribution to society”. He also promised to double the number of people in the asset manager’s “shareholder stewardship” team. “The time has come for a new model of shareholder engagement,” Mr Fink wrote.

SSGA has tried to take a lead before. It made a splash a year ago with “Fearless Girl”, a sculpture that appeared to be staring down the charging bull in lower Manhattan. The group followed that with a promise to unsettle companies with all-male boards. In 400 instances it voted against the re-election of the chair or most senior member of a board’s nominating and governance committee.

Ms Kumar said that SSGA’s abstention drive would begin with votes on pay but could cover other management proposals. She said that talks had started with big companies about how they should interpret such a vote. This kind of engagement should be routine for companies that effectively manage “permanent capital”, said Cyrus Taraporevala, SSGA chief executive.

The firm launched the first US-listed ETF – the SPDR S&P 500 ETF – 25 years ago; it currently has more than $302bn in assets and is the most-traded security in the world, with an average daily trading volume of $25bn. He said: “We don’t have the luxury of saying, ‘we’ll deliver to you the S&P 499, because we didn’t like this last company so we sold it out’. “This is a huge focus for us, and it’s something our clients increasingly want us to do.”

– Broc Romanek

Here’s a note from Anders Melin:

As if the change to 162(m) didn’t give comp folks enough extra work, ISS said Monday it had bought EVA Dimensions, which presumably will impact on its pay-for-performance analyses. The timing and scope of any changes are unclear, but the best guess right now is that changes, if any, will be made starting with 2019 policies. This of course raises a bunch of interesting questions: If included, how much weight will EVA take away from TSR? Is it time to follow Ball Corp.’s model and add EVA, or economic profit, to incentive plans? And will there be pushback among issuers?

– Broc Romanek

We’ve posted the transcript for the recent webcast: “Tax Reform: What’s the Final Word?”

– Broc Romanek

Here’s the intro from this Equilar blog:

Over the past few years, relative total shareholder return (TSR) has continued to be the most widely used executive long-term incentive (LTI) plan metric, even though its usage is leveling off to some degree at the CEO level as other incentive plan metrics become more popular. That said, due to its clear connection to shareholder value, TSR will likely remain a fixture among executive incentive plans for years to come.

Of course, all uses of relative TSR are not created equal. Because companies are becoming more sophisticated when it comes to their pay design, the ways in which they structure incentive plans is also becoming more varied and complex. This blog aims to take a deeper look at how exactly the metric is being used. The data herein will examine the prevalence of weighted metrics vs. modifiers, performance targets and performance leverages. On the whole, this combination of charts demonstrates the variety of practices when it comes to implementing relative TSR LTI plans. All the data comes from a study of Fortune 100 company incentive plans that Equilar completed this year.

The first analysis looks at whether TSR is most commonly a weighted metric or a modifier. The study also looked at the prevalence of an absolute TSR “modifier cap.” This type of absolute TSR metric is included in the chart below because it is very commonly used in relative TSR plans as well. A typical modifier cap will limit (or cap) the LTI award payout at 100% if absolute TSR is negative. There are a number of other variations that appear as well.

– Broc Romanek

Tune in tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be.” The jam-packed agenda includes:

1. Pay ratio – last minute items
2. The tax reform bill eliminates the 162(m) exemption – what impact will that have on executive pay design, structure and governance (e.g., salaries and positive discretion on incentive payouts)?
3. Calculation of existing performance awards under tax reform
4. Director pay is continuing to get additional attention from the proxy advisors and the plaintiff’s bar. What will this attention mean for how director pay is structured & administered?
5. Clawbacks aren’t just for restatements anymore. What is the latest thinking on applying clawbacks to a broader range of activities and a broader population?
6. Goal-setting and performance adjustments remain major discussion points at the C-suite level: what are some best practices that can be helpful in this regard?
7. Investors, the SEC and proxy advisors are all still looking for the best way to assess pay & performance? What is the best thinking about how companies can kick the tires around their own pay & performance?

– Broc Romanek

Here’s the intro from this blog by Globoforce’s Derek Irvine:

During the last couple of years, I’ve had the opportunity to host executive forums with CHROs, EVPs, and other senior leaders looking to evolve (and sometimes revolutionize) the foundations of HR – compensation structures, performance processes, and more. In many ways, it’s been enlightening to be a facilitator of these sessions to hear how some of the most innovative minds in human resources, talent management, compensation and benefits think about a process that has been in place for decades – the annual performance review, especially the performance rating.

Performance management is evolving. That evolution is taking many forms and directions as organizational leaders are seeking the most effective ways to give employees the feedback they need (both positive and constructive) to grow their careers. As part of this evolution, the performance rating is coming under deeper scrutiny. Most companies have some kind of rating scale for employees. Some have thrown it out entirely. Others tried to eliminate it, only to add it back again. Many hedge the discussion on performance ratings, believing that process to be the best justifier of pay raises or distribution of annual merit increases.

– Broc Romanek

This pay ratio disclosure is on page 10 of Gencor’s proxy statement:

Mr. John Elliott had fiscal 2017 total compensation of $463,138, as reflected in the Summary Compensation Table included in this Proxy. We estimate that the median annual compensation for all Gencor employees, excluding our CEO, was $50,975 for 2017. As a result, Mr. John Elliott’s 2017 annual compensation was approximately 9 times that of the median annual compensation for all employees.

– Broc Romanek

In this article, Steve Kline & Tatjana Ricketts of Willis Towers Watson summarize best practices to help companies take the guesswork out of setting performance targets and ranges and addresses head-on the rising demand for proper pay-for-performance alignment – providing five key steps on this crucial topic…