I recently blogged about ESG “overperformance” — specifically, a research paper alleging that ESG targets are set at low enough levels that executives “reap their rewards even if ESG performance is not particularly strong.” The paper seemed to justify investor concerns about the lack of rigor and transparency surrounding these goals.
At the end of last month, a group of professors released a new research paper. Even though this paper was focused on companies in Europe — where ESG incentives seem to be farther along — it similarly concluded that they are often “largely discretionary, carry immaterial weights in payout calculations, and contribute little to executive pay risk” and focused on the companies’ “most visible executives.” They allege that this isn’t just a pay issue — and that it could be greenwashing — or at least evidence of greenwashing. They suggest that “[f]irms might engage in such “greenwashing” of executive pay if meaningful (that is effective) ESG incentives would conflict with shareholder value maximization but, at the same time, firms face public pressure by third parties (governments, customers, some investor groups, proxy advisors, etc.) to become more ESG-friendly.”
This approach to ESG metrics isn’t across the board for the European companies in this dataset, however. They found that this was common in financial firms and large companies, while companies in sectors with a large environmental footprint are more likely to employ “binding ESG metrics with significant weights, which have potential to influence incentives.”
Here in the US, it seems that companies are beginning to shift in this direction. The latest Semler Brossy report on ESG incentives has this to say:
Companies appear to be shifting their focus from adoption to refinement of ESG metrics, with prevalence in annual incentive plans (AIPs) and long-term incentive plans (LTIPs) remaining relatively consistent since FY2021 as companies continue to prioritize the use of short-term ESG goals. However, companies continue to adjust existing plans away from discretionary incentives and towards weighted metrics. In FY2023, 87% of companies with ESG metrics in incentives reported using weighted metrics, up from 72% in FY2021.
Most prominent shifts in metric structure were i) discretionary to scorecard (+6 companies year over year) and ii) scorecard to discrete weighted (+17 companies year-over-year), which is the typical path companies take as ESG metrics become more prominent in their programs.
We’ve speculated with some podcast participants about the insurance market that might develop in the wake of the Dodd-Frank clawback listing standards. As this Latham alert reminds us, “companies are not permitted to indemnify or insure any person against losses under the SEC Clawback Rules, nor are they permitted to directly or indirectly pay or reimburse any person for any premiums for third-party insurance policies that such person may elect to purchase to fund such person’s potential obligations under the SEC Clawback Rules.” However, insurance coverage may be purchased and funded by an individual executive, who must pay their own premiums out of pocket.
This Woodruff Sawyer blog discusses the key features of those policies in their current form:
Limits: As of this writing, primary insurers are offering relatively low limits, ranging from $500,000 to $1 million for each individual executive at a company. Higher limits will require additional carriers to participate on an excess basis. The amount of excess limit available will depend, in part, on interest in this type of insurance over time. We should also expect carriers to impose a per-company cap, at least in the near or medium term, depending on how many executives at any one company decide to purchase this insurance.
Simplified Application Process: The application process for this insurance should generally be streamlined. Insurers will review the company’s public filings and disclosures. This will often include evaluating the company’s compensation clawback policy, governance practices, any recent material weaknesses in internal controls over financial reporting, and any existing legal or regulatory disputes that might impact the company’s risk profile. Because the underwriting process relies heavily on publicly available information, there should be minimal administrative burden placed on the executive during the application phase.
Coverage for Compensation Repayment and Defense Costs: This insurance can cover both the compensation amounts an executive must repay and the defense costs associated with compensation clawback claims. As previously mentioned, compensation repayment can range from cash bonuses to equity awards based on the company hitting several metrics. This makes the insurance attractive not just for executives whose compensation is performance-based, but for all executives.
No Duty to Defend: One distinct feature of current forms of this insurance is they are not “duty-to-defend” policies. This means the policyholder (i.e., the executive) retains the right to select their own counsel rather than being constrained to the insurer’s panel of attorneys. This is important for executives who value autonomy and wish to retain counsel familiar with their individual circumstances in addition to having deep industry expertise.
The blog also notes that coverage is not limited to financial restatements and may also apply to non-financial triggers that companies may include in voluntary clawback policies. But it also notes that coverage won’t cover every scenario — for example, coverage won’t be available if an executive is found guilty of fraud or if reimbursement is prohibited by law.
Yesterday, ISS announced that for companies with annual meetings between February 1, 2025 and September 15, 2025, its peer group review & submission window will open at 9:00 AM ET on Monday, November 11, and close at 8:00 PM ET on Friday, November 22. Submissions should reflect peer companies used by the submitting company for pay-setting for the fiscal year ending prior to the company’s next upcoming annual meeting (so for your 2025 annual meeting, this would mean peers used for the 2024 fiscal year).
As a reminder, these submissions are requested semi-annually and are just one input for ISS’s own peer group construction methodology. Companies are under no obligation to participate. If you have made no changes to your previously disclosed comp peers or do not wish to provide this information in advance, you don’t need to do so. When no peers are submitted, the proxy-disclosed peers from the company’s last proxy filing will automatically be factored into ISS’ peer group construction process.
In February of 2023, Corp Fin released a number of PvP CDIs, including this Question 128D.11:
Question: Can the Company-Selected Measure included in the Pay Versus Performance table required by Item 402(v)(1) be measured over a multi-year period that includes the applicable fiscal year as the final year, similar to the use of multi-year measurement periods for calculating total shareholder return under Item 402(v)(2)(iv), as long as such performance period is used consistently for all years in the table?
Answer: No. Under Item 402(v)(2)(vi), the Company-Selected Measure is the measure which in the registrant’s assessment represents the most important financial performance measure (that is not otherwise required to be disclosed in the table) used by the registrant to link compensation actually paid to the registrant’s named executive officers, for the most recently completed fiscal year, to company performance. [February 10, 2023]
At the time, this CDI came as a surprise to some and, in those cases, required companies to pivot and change their CSM at the last minute. A PvP comment letter posted on EDGAR last week clarifies Corp Fin’s position on this further. This CDI is not only intended to limit the use of a metric with a multi-year measurement period, but also a metric with a measurement period that spans “across” multiple years, even if it doesn’t exceed one year. In the comment, the Disclosure Review Program staff took issue with a CSM with year-long measurement periods that start and end in September. Here’s a snippet from the company’s response:
[T]he Company originally interpreted Regulation S-K Compliance and Disclosure Interpretation 128D.11 to prohibit the use of a Company-Selected Measure with a measurement period that exceeded one year. In reaching this conclusion, the Company took note of the analogy in the interpretation to Company TSR, which will ultimately be measured over a period of five years. The Company thanks the Staff for clarifying that Regulation S-K Compliance and Disclosure Interpretation 128D.11 prohibits the use of a Company-Selected Measure with a measurement period that spans “across” multiple years, even if the measurement period does not exceed one year. The Company will ensure that, going forward, its disclosed Company-Selected Measure will not span across multiple years.
Our webcast earlier this week included a lot of practical tips & experiences from folks who have been in the trenches to respond to (or anticipate & avoid) low say-on-pay votes. It’s also useful to consider what the data shows, and a recent study from Amit Batish, David Larcker, Lucia Song, Brian Tayan & Courtney Yu – of Stanford’s Rock Center for Corporate Governance – does just that.
Using disclosures from 77 companies in the Russell 3000 that implemented compensation changes in 2023 in response to a failed say-on-pay vote in 2022, the paper identifies patterns that anyone advising on compensation should be aware of, such as the primary factors that drove negative votes, according to the company:
– 30 percent of the companies cited criticism of a special award (its size, term, or performance criteria for vesting equity grants) as the main reason for the negative vote.
– 18 percent cited too little (or no) performance-based awards in the long-term incentive program.
– 13 percent said their shareholders believe the overall pay level was too high.
– 12 percent said shareholders objected to the performance metrics used in the short-term bonus.
– 10 percent cited criticism of a discretionary action the company took to award a bonus payment (short- or long-term) when it would not otherwise have been merited.
– Less frequently, the primary objection was pay mix, disclosure practices, the choice of companies in the peer group, or governance practices (apart from its compensation structure—see Exhibit 6).
This excerpt summarizes the steps that companies took following the say-on-pay failure:
– Companies made 2.5 changes, on average, to their compensation program.
– 66 percent made changes to the performance metrics or weightings in their short- or long-term incentive programs.
– 36 percent increased disclosure.
– 19 percent changed a performance measurement period.
– Actions less frequently made include compensation caps, modifying peer groups, ownership guidelines, ESG incentives, eliminating overlapping metrics, or changes to the compensation consultant or compensation committee members.
– 5 percent of companies committed not to awarding special awards in the future (see Exhibit 7).
The study found that following these changes, say-on-pay support rebounded significantly, to levels achieved prior to the failing vote. That said, the post-correction support levels averaged 76%, which still fell short of Russell 3000 average support. The data showed that post-correction support was somewhat correlated to the number of changes the company made to its pay plan, and the biggest jump in support came at companies that were able to win a positive recommendation from ISS in the year following the failure. Specifically:
The number of changes did not matter nearly so much as whether these changes were in line with ISS criteria (see Exhibit 11). This finding is consistent with recent scientific research showing that proxy advisory firm recommendations contribute to standardization in CEO compensation.
The study poses a few key questions that warrant follow-up. It asks whether this process reflects a healthy dynamic of market correction or simply a standardization process that doesn’t substantively improve managerial incentives. It also observes that while special awards are the biggest drivers of a negative say-on-pay vote, it isn’t outside the realm of possibility that special awards may be appropriate in some circumstances, and it’s unclear from the high-level data whether shareholders are distinguishing between appropriate vs. inappropriate situations. I’ll leave you with this excerpt, which hits the nail on the head regarding the complexity of executive pay programs:
It is very difficult for third-party researchers to understand and digest the pay structure and issues regarding pay among even a relatively small sample of companies. How can a portfolio manager analyze pay across an entire portfolio and make informed decisions? In theory, proxy advisory firms serve this market need. However, it is also not clear that proxy advisory f irms can digest and analyze this information. How effective are proxy advisory firms at identifying companies with “inappropriate” pay practices? Are the companies that fail their say-on-pay votes the most egregious offenders, or “unfairly” caught up in somewhat arbitrary compensation guidelines?
A recent write-up from Fintool maps the latest proxy statement disclosures from every NYSE and Nasdaq-listed company in order to determine compensation consultant market share. Nearly one-third of listed companies didn’t disclose the name of a compensation consultant. Here are a few other takeaways:
The compensation consultant market in 2024 shows both concentration and diversity. While a few large firms dominate across various indices, there also a long tail of specialized or boutique consultants serving specific market segments.
Key observations include:
– The S&P 500 and Nasdaq 100 show higher concentration among top firms compared to the broader Russell 3000 index.
– There are notable differences in consultant preferences between NYSE and Nasdaq-listed companies, possibly reflecting differences in company profiles and industries.
– Some consultants show particular strength in specific indices or exchanges, suggesting potential specialization or targeted market strategies.
If you’re curious, Fintool is an “AI copilot” that applies a large language model to EDGAR filings. So, you can quickly search, analyze and slice & dice the results. For example, with the comp consultant data, you can dive into market share categorized by exchange and major index.
Earlier this month, ISS issued an off-cycle update to its FAQs on executive compensation policies (another update will be published in December). The release adds two Q&As, which relate to:
– Will there be forthcoming changes to ISS’s realizable pay methodology for 2025 meetings? Yes, but only for companies that have experienced 2 or more CEO changes within the applicable 3-year window. For those companies, ISS will no longer display a realizable pay chart.
– What is needed in order for ISS to consider a clawback policy “robust,” as displayed in the “Executive Compensation Analysis” section of the resource report? In order to receive credit for a “robust” clawback policy in the “Executive Compensation Analysis” section of the research report, a company’s clawback policy must extend beyond minimum Dodd-Frank requirements and explicitly cover all time-vesting equity awards. A clawback policy that adheres only to minimum Dodd-Frank requirements will not be considered robust, because those requirements generally do not cover all time-vesting equity awards.
This Cooley alert takes a closer look at the implications for the clawback FAQ. Here’s an excerpt:
Many companies do not go beyond the minimum Dodd-Frank requirements. Regardless, it appears that – going forward – a clawback policy that does not apply to time-based awards will be viewed negatively by ISS in determining its SOP vote recommendation, though it is not clear how much weight will be given to this factor.
We continue to think that while companies should periodically revisit their clawback policies and take this new ISS position into account as another factor in the overall calculus, the guiding principle should be to ensure that the policy remains appropriate and best serves its purpose in the company’s particular circumstances.
The Cooley team points out that the new FAQ is consistent with ISS’s existing position under its Equity Plan Scorecard, where an equity plan will not receive points under the clawback policy metric unless the policy applies to both time- and performance-based awards. But now this concept applies to say-on-pay recommendations as well.
Even though say-on-pay support was generally high this year, most companies face an uphill battle at one point or another – some even face legal challenges on compensation arrangements. Tune in tomorrow – Tuesday, October 29th – at 2 pm Eastern for our webcast, “Surviving Say-On-Pay: A Roadmap for Winning the Vote in Challenging Situations.” Get practical tips for scenarios that companies frequently encounter – from D.F. King’s Zally Ahmadi, Compensia and CompensationStandards.com’s Mark Borges, Orrick’s JT Ho, Foot Locker’s Jenn Kraft, and Tesla’s Derek Windham.
Members of this site are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE, which require advance notice) for this 60-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.
As calendar-year companies finalize and file their third-quarter 10-Qs, here’s a timely reminder from the team at Perkins Coie addressing a common client question: When do shares withheld upon the vesting or exercise of equity awards need to be disclosed under Item 703 of Regulation S-K?
Item 703 of Regulation S-K requires, among other things, tabular disclosure of any purchase made by an issuer of shares that are registered under Section 12 of the Exchange Act. For context, Question 149.01 of the Regulation S-K C&DIs makes it clear that if an employee utilizes a “net” option exercise to cover taxes due upon exercise of a stock option, Item 703 tabular disclosure is not required. The idea is that with “net” exercises, Item 703 disclosure is not required because the underlying shares were never issued under the option.
In contrast, with respect to restricted stock, the SEC staff has said that shares withheld to cover taxes due upon vesting of a restricted stock award do require Item 703 disclosure because the restricted shares were already outstanding at the time of the vest.
What about RSUs and PSUs, though? The blog continues:
RSUs (and PSUs), like options, are not outstanding shares. At a high level, these securities represent a contingent right to receive shares in the future. Therefore, shares withheld to cover taxes in connection with an RSU vesting do not require Item 703 disclosure.
Thanks to this Troutman Pepper insight for alerting me that the FTC has filed a notice of appeal of the Northern District of Texas’s decision to set aside the non-compete ban. Here’s a reminder of the status of the various challenges to the rule:
This is the second case appealed by the FTC, following its earlier appeal of a Florida federal court’s decision enjoining the FTC rule with respect to the individual Florida plaintiff. A third case challenging the FTC’s rule in Pennsylvania federal court was voluntarily dismissed by the plaintiff in early October. For now, the rule will remain on hold as the appeals make their way through the Fifth and Eleventh Circuits.
Like many things at the moment, though, the insight reminds us that the future of these appeals is subject to the political winds.
Regardless of which candidate wins the presidential election, a new administration will decide the leadership of the antitrust agencies and whether to continue the FTC’s appeals in the Fifth and Eleventh Circuits. Further, the timing of the appeals is unclear, and so is whether one or more appeals will eventually go to the Supreme Court. The FTC also has suggested that its appeals might not focus solely on the merits and has questioned whether the Texas court had the authority to set aside a rule or issue an injunction on a nationwide basis. Accordingly, an appeal could be decided on a number of different grounds.