A recent Semler Brossy article examines data from 30 activist campaigns from 2021 to 2023 with a focus on understanding the relationship between the core activist campaign objective and the company’s compensation programs. The data showed that “70% of campaigns cited executive compensation as an issue, and 43% of these campaigns recommended specific changes to current compensation practices or program design.” Surprisingly, the team wasn’t able to identify advance warning signs to boards through proxy advisor recommendations or prior say-on-pay vote results. However:
[A]ctivist campaigns still considerably impacted vote results in the subsequent year after initiation of a campaign. Controlling for the impact of adverse proxy advisor recommendations, our analysis indicated that votes were 12% lower on average in the year following an activist campaign. With a notable decline in average vote results and an increase in failure rates following campaign initiation, it’s evident that activist concerns can manifest in other areas, even if the overall campaign is not successful.
Considering the weight of these campaigns on future say-on-pay results, the article makes this recommendation to boards:
In the same way that the full board might allocate a meeting every year to address broader shareholder and strategic issues, the compensation committee should dedicate one meeting per year, usually in quarter two or quarter three, to reviewing the pay program.
These meetings should focus on how well the program supports business priorities, alignment of pay and performance, congruence of metrics with externally communicated goals and strategy and assessment of the rigor of the goal-setting process. The committee should also evaluate areas where the program could make the company more susceptible to unwanted attacks by activist shareholders, such as consistently low incentive payouts over time.
A Texas federal judge on Wednesday granted a tax services firm’s motion for a preliminary injunction of the Federal Trade Commission’s nationwide ban on noncompete agreements in employment contracts and has stayed its effective date for the plaintiffs.
As noted, this injunction is limited to plaintiffs and plaintiff-intervenors, but the Court intends to issue a ruling on the merits by August 30, 2024 (before the September 4 effective date). The judge said there’s a “substantial likelihood” that the rule will be found arbitrary and capricious.
This blog from the Freshfields team summarizing their very comprehensive report “Trends and Updates from the 2024 Proxy Season” notes that annual meeting and proxy season compensation considerations are “expanding beyond say-on-pay and approval for company equity plans” since “this year a variety of executive compensation proposals emerged.” Pages 77 to 80 of the report describe the over 65 known compensation-related proposals submitted as of mid-June:
– 33 proposals requested shareholder approval of termination pay for executives exceeding 2.99x the sum of the executive’s base salary plus target short-term bonus
– 12 proposals requested the company broaden the scope of existing management and executive clawback policies
– 6 proposals requested companies adopt policies requiring named executive officers and certain others to retain a percentage of stock acquired through equity programs until reaching retirement age
Liz previously blogged about a proposal uniquely structured as a binding bylaw amendment (rather than a precatory request) that sought to fix director compensation at $1* absent shareholder approval. Michael Levin of The Activist Investor recently discussed how this proposal fared — it was either omitted from the proxy or received single-digit support, with an average support rate of 2% — and the limited feedback the proponents received from various parties during the process. We recently connected with Aon’s Karla Bos on this topic, and she shared these thoughts with us:
Given the binding nature, there have to be significant concerns before many institutional investors will take that level of flexibility away from a company, especially on a prospective basis and as directors are taking on more and more oversight.
I strongly believe that many institutions do not relish the idea of spending their already too limited time considering and engaging on another recurring ballot item when they believe they have adequate and even more appropriate recourse to address areas of concern.
That said, the binding proposal approach at well-targeted companies could still be something to watch in general as investors continue to seek new ways to make themselves heard, especially since companies may well respond to vocal messaging and engagement even when support for the associated proposals has not been high.
*Has anyone else only recently noticed that $1 won’t even pay for a single item from a fast food “dollar” menu anymore!?! The things I learn during summer road trips…
In a recent speech at an Americans for Financial Reform event in mid-June, Commissioner Lizárraga lamented (subject to the standard disclaimer) that federal financial regulators have yet to promulgate the joint rulemaking required by Section 956 of the Dodd-Frank Act that would prohibit any type of incentive-based compensation arrangement that encourages inappropriate risks by a covered financial institution. As I shared this spring, the FDIC, OCC and Federal Housing Finance Agency adopted a notice of proposed rulemaking to implement Section 956 of Dodd-Frank in early May, but the notice of proposed rulemaking will not be published in the Federal Register until all six agencies (including the SEC) propose it.
Commissioner Lizárraga used this speech to make counterarguments to those who say this rule is no longer needed today. He starts by reminding listeners that Congressional mandates are, as named, mandatory, and notes:
Of 330 rulemaking provisions in the Dodd-Frank Act, only 148 were mandatory. And of those, only 22 had a deadline of less than a year after enactment. Section 956 was one of them.
He also argues that last year’s regional banking crisis illustrated that this rule remains necessary, saying:
The Federal Reserve Board’s April 2023 report examining the factors that contributed to SVB’s failure found that its compensation packages for senior management were tied to short-term earnings and did not include any risk metrics, which may have contributed to an excessive focus on growth and short-term profitability at the expense of effective risk management.
He concludes by acknowledging that joint rulemaking with several sister agencies requires a lot of cooperation and coordination, but he’s encouraged to see this rule on the SEC’s short-term agenda.
We’re giving everyone more time to lock in our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate). This rate now ends July 26 — extended to align with NASPP! We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts!) so you won’t miss out on the practical takeaways our speaker lineup will share. (Also check out our discounted rate options for groups of virtual attendees!)
You can register now by visiting our online store or by calling us at 800-737-1271.
As Meredith blogged about earlier this year, the use of relative TSR remains a popular method for awarding exec comp and not just for tech companies. Willis Tower Watson found in its latest LTI Policies and Practices Survey Report that TSR is the predominant performance metric in long-term incentive (LTI) awards.
Last week, WTW published an article concluding that, for TSR-based LTI awards, “[t]here almost always is a fair value premium over the underlying stock price for each target unit granted, and it often can be significant.” This is important for compensation accounting and disclosure purposes. WTW looked into why those premiums exist and ran a simulation to test whether the Monte Carlo method used to value the awards is working appropriately. Here’s what they concluded:
As relative TSR prevalence in LTI award designs continues, valuation questions and skepticism inevitably will continue among companies and executives. This analysis supports the theory that valuation premiums for TSR-based awards are appropriate. The Monte Carlo method is working as intended to capture the true value of these award designs. If your organization is concerned about the level of valuation premium, consider exploring plan design alternatives to evaluate the tradeoff between a plan’s potential value and the associated accounting value.
Fair warning: This article gets deep into the math around fair value premiums. Despite being a (super cool) former high school mathlete, I found it rather hard to follow in a quick read and was thankful for the TL;DR of “The Monte Carlo Method is working” at the end.
In a memo published earlier this month, Willis Towers Watson analyzed pay versus performance year 2 trends. WTW reviewed the disclosures of ~530 sample organizations in the S&P 1500 and found that year 2 disclosures were consistent with year 1:
– The majority of organizations continued to use profit or income measures for their company-selected measure. This comes as no surprise, as a short list for determining the company-selected measure was to review the measures used in company executive incentive plans, which tend to rely heavily on profit or income measures, especially in annual incentive plans.
– In terms of the total shareholder return (TSR) comparator group, the market pointed to the use of an industry index, with 80% of organizations opting for that route.
– The locations of the PVP disclosure continues to be near the CEO pay ratio, and graphical descriptions of PVP were heavily favored over narrative descriptions.
Additionally, WTW analyzed the disclosures of individual companies to see if companies changed their PVP disclosure–and 31% of them did.
Of the types of revisions and changes WTW examined, alterations to disclosed pay or performance values were more common than revisions of PVP disclosure decisions. PVP disclosure decisions include determining the company selected measure or TSR comparator group.
In case you missed it, earlier this month, the NY Times engaged Equilar to help with a more specific PVP analysis of executive pay (specifically CEO pay) comparing “traditional pay” (Summary Compensation Table and CEO Pay Ratio disclosure) and new-ish “Compensation Actually Paid”. The article named names and summed up its findings as “So now we have two complete data sets using distinct and complementary analytical methods, both demonstrating what we’ve always known: It’s good to be the boss.” If naming names is of interest, the WSJ also analyzed 2023 exec comp data–but for CFOs.
While a recent research report from Pay Governance on incentive plan design focuses on companies in the industrial and energy sectors, there are helpful insights for any company that’s looking to avoid “performance goals that are either overly challenging (and, in some cases, unachievable) or quite the opposite, lacking rigor and just plain too easy in hindsight.”
The report provides considerations for both annual and long-term compensation, with the following practices highlighted for annual incentive plans:
Performance Metric Considerations: More metrics to measure performance. Use of a greater number of metrics reduces the focus on one or two metrics and therefore reduces the likelihood of a zero or maximum bonus payout. In addition, use of non-financial measures—such as operational, safety, and environmental metrics.
Performance Range Considerations: Wider performance ranges to accommodate swings in commodity prices and economic volatility, thus reducing the frequency of maximum or zero payouts.
Performance Measurement Considerations: Using partial year performance goals when the business outlook for the full year is uncertain. This typically involves the implementation of two shortened performance periods, or “First Half” and “Second Half” goals, to mitigate the uncertainty of setting full-year goals while still maintaining a single annual payout.
Performance Goal Setting Considerations: Use of a “target performance range.” Under this method, a company establishes a range around the target performance goal reflecting insights regarding expected commodity price volatility or economic performance.
Given the recent turbulence in the tech space, I wouldn’t be surprised if research would bear out that many have also used these levers to appropriately incentivize and retain exec talent in a rapidly changing environment.
This is how most companies create compensation programs: Determine the company’s strategy and then figure out a way that best incentivizes folks (from execs to rank-and-file workers) to advance that strategy. The first installment of a three-part series (kicked off last month from Semler Brossy) looks into 3 situations where the opposite happened:
[S]ometimes—quite surprisingly—the process works in reverse, and compensation discussions uncover gaps in underlying premises, leading to important and deep discussions that clarify strategic intent.
What’s notable in all three of these case studies is that the conversations around comp metrics were exposing areas where the board did not have enough or the right information to determine key objectives for compensation for the next year given the current state of the business. As described in the “Healthcare Hustle” case study:
As the conversation progressed, it became clear that there was insufficient clarity in their strategic planning discussions on how the activities could be coordinated to achieve profitability. The renewed focus led to discussions about how the company could improve its processes . . . to reduce costs, improve payments and increase profitability. It also led to productive discussions about where to focus new membership growth and how to integrate new members into the organization to drive higher margins.
The rest of the series will cover how compensation impacts talent decisions and compensation’s impact on changing how work is done. As someone who finds human motivation deeply complicated and fascinating (and as a proponent that intrinsic motivation (vs. extrinsic) is the way to get sustainable results), I’m looking forward to seeing what they have to say on the matter.
In this week’s CS webcast, our panelists held an insightful post-mortem on the 2024 proxy season, including Say-On-Pay results. Back in 2022, we saw a dramatic dip in support for Say-On-Pay proposals for the Russell 3000 and S&P 500. In 2023, we saw support increase and 2024 continues that trend. While giving an update on the 2024 Say-on-Pay results, Dave Lynn opined that this trend is perhaps expected given that there were no big changes in ISS and Glass Lewis frameworks & voting guidelines and the market continues to improve since a low in 2022 (and thus, there is less hostility toward exec comp packages).
Tracking those observations, Semler Brossy’s mid-season report shows approvals at levels unseen since 2019. It summarizes preliminary 2024 results as follows:
2024 year-to-date Say on Pay failure rate is well below historical average halfway through the proxy season. Nine Russell 3000 companies (0.8%) have failed Say on Pay thus far in 2024 [compared to 19 companies at this time last year]. Average Say on Pay support for Russell 3000 companies (91.6%) thus far in 2024 is 50 basis points higher than the average support at this time last year.
This Sullivan & Cromwell post on the HLS Blog also delves into preliminary results with the following key observations:
Say-on-pay performance improved overall. Across both the S&P 500 and the broader Russell 3000, say-on-pay proposals are passing at a higher rate than in 2023 and are passing with higher support.
ISS recommendations were impactful. ISS recommended in favor of a higher percentage of say-on-pay proposals. ISS recommendations appear to have a high correlation with voting outcomes. Every proposal that ISS supported in 2024 passed, while every failed proposal received a negative or do not vote recommendation from ISS. Even if an ISS negative recommendation did not result in a failed vote, they corresponded to significantly lower than average votes.
For 2024 failed votes, ISS focused on perceived pay-for-performance issues and lack of rigor/transparency. 2023 failed votes generally were not “sticky”, and none of the companies that had a failed vote in 2024 also had a failed vote in 2023. The key criteria underlying the ISS’s negative recommendations in failing 2024 proposals include pay-for-performance and compensation rationale issues, such as non-rigorous performance goals and lack of transparency.
Failed votes focused on a narrower set of industries. The only S&P 500 companies with failed votes in 2024 were industrial and technology companies, whereas companies in the healthcare, real estate and financial sectors also received failing votes in 2023.