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.
Tune in at 2 pm Eastern today for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Goodwin & Ron Mueller of Gibson Dunn discuss the ins and outs of compensation disclosures during the 2024 proxy season. They’ll cover:
The State of Say-on-Pay During the 2024 Proxy Season
Highlights and Tips from this Year’s CD&As
Best Practices for Disclosing Incentive Compensation Adjustments and Outcomes
Trends in Disclosure Regarding Operational and Strategic Metrics
Pay-versus-Performance: SEC Staff Guidance Issues and Year 2 Enhancements
Perquisites Disclosure and Recent Enforcement Focus
Shareholder Proposals – Company Strategies; No-Action Trends; Activists and Universal Proxies
Proxy Advisory Firms – Is Their Influence Starting to Wane?
Rule 10b5-1 Plan Disclosure Developments
Pending SEC Rulemaking
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
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In what I suppose was an unsurprising development, shareholders ratified Elon Musk’s $56 billion 2018 Tesla pay package late last week. Even less surprising, folks have plenty of opinions about it. This is the latest installment in the saga related to Musk’s potentially gargantuan comp payout and it likely isn’t the last.
A quick summary of how we got here: Earlier this year after many years in the court system, the Delaware Court of Chancery ordered Musk’s performance equity grants rescinded. Then, as Meredith flagged in April, Tesla included an unusual proposal for its AGM requesting that shareholders ratify Musk’s 2018 pay package. In its proxy statement, Tesla acknowledged that the practical effect of the vote was unclear under Delaware law. Nevertheless, at the AGM, the proposal passed with what a quick read suggests as over 70% of shares (excluding Musk and his brother, Kimbal) voting in favor.
The New York Times reported on the competing reactions to this development—ranging from “relief to Mr. Musk’s admirers, who feared that rejection would prompt him to spend less time managing Tesla or even quit” to concerns from investors that this does not set the right precedent for high CEO pay packages. Vanguard also issued a statement explaining its change of heart on the 2018 package:
Given the strong alignment of executive pay with shareholder returns since 2018 and the benefits the board asserted related to the motivational value for the CEO in preserving the original deal (which was approved by a majority of shareholders in 2018), the Vanguard-advised funds voted for the ratification of the CEO’s 2018 option award at the 2024 annual meeting.
Despite the shareholder approval, it’s still an open question about whether this resolves the matter under Delaware law. Since my crystal ball is broken at the moment, we’ll just have to all stay tuned to see how this eventually plays out.
During our webcast “The Top Compensation Consultants Speak,” Jan Koors of Pearl Meyer said, “I do think that by virtue of the fact that [AI is] going to change how all companies do their jobs, who does their jobs and their workforce needs, it’s going to impact compensation structure and human capital management over time.” That got me thinking that, at the rate AI is developing, some HR professionals and compensation committees, at least at companies that are already developing or significantly leveraging AI, should already be considering how their HCM strategies need to shift in the face of this disruption.
I have a feeling that much ink will be spilled on this topic in the near future, but I haven’t seen much written on the intersection of HCM and AI, or about AI considerations for HCM yet. So I was excited to stumble on this blog post by the executive vice president for people operations and the chief talent and organization effectiveness officer at Mastercard highlighting five ways they’re leveraging AI to improve the way their employees “work, grow and manage their careers.” Here are short excerpts from the blog on each of the five ways — check out the full blog for more.
AI as career coach. We’re using AI in Unlocked, our internal talent marketplace, to match employees to opportunities, including short-term projects, volunteering, open roles, mentors and learning pathways, recommending them based on both skills they have and skills they want to build. Today, 90% of our workforce is on the platform, with 500,000 project hours and counting.
AI as wellbeing guide. To understand what employees think and feel about the company and what matters most to them, we need to synthesize a lot of data and extract the most meaningful insights. We use AI sentiment analysis to help us understand key themes and areas of opportunity, and to deliver personalized insights to our employees on how to optimize their working habits.
AI as workflow assistant. AI is being built into the flow of work for everyday moments — nudging a manager to approve a team member’s vacation request, for example. Our automated interview-scheduling tool uses AI to coordinate and, when needed, reschedule interviews with hiring managers.
AI as copilot. AI can be a personal digital assistant, improving productivity by reducing repetitive tasks and creating capacity for innovation. We’re using AI to make meetings more productive with real-time summaries and action items directly in the context of the conversation.
AI as workforce planning partner. AI can be an advisor for intelligent decision-making, helping understand demand and supply for skills in a local market. Using Unlocked, we can see skills across our employee base, learn where we have gaps and develop learning paths or hiring plans to address them.
The blog also has this word to the wise:
AI is an exciting tool, and that’s important to remember — it’s a tool that people use. […] We host ongoing discussions about the trends, technologies and safeguards we’ve put in place to ensure our employees know our AI strategy and the current use cases for AI that create value for our business. To drive general AI proficiency, we’ve set up self-paced learning opportunities with customized content depending on an employee’s level or expertise in the area. This training is coupled with our commitment to ethical AI and avoiding bias in AI through education of our data privacy and responsibility principles and AI guidelines.
On TheCorporateCounsel.net, I recently blogged about this Semler Brossy article that addresses four common scenarios in CEO transitions. That blog discussed the prevalence of each scenario among S&P 500 companies in 2022 and 2023. The Semler Brossy article also delves into the pay implications of each scenario.
When the outgoing CEO transitions to an executive chair role: Executive chairs often see a reduction in cash compensation (base and bonus) following transition — often in the range of 50%. Eligibility for, and the design of, future equity grants varies considerably with timeline and role. Roles with a longer runway and more substantive responsibilities will often receive additional equity awards. In either case, continued service generally allows for continued vesting of prior grants received as CEO and, in select cases, other ancillary benefits or perquisites (e.g., office space and administrative assistant).
When the outgoing CEO transitions to a senior advisor role: Pay is typically structured as a consulting agreement with either a defined hourly, weekly or monthly rate payable in cash. Eligibility for an annual bonus or future long-term incentive grants is very rare, but continuous service typically allows for continued vesting of prior grants received as CEO.
When the outgoing CEO transitions to a board member: Compensation for the transitioning CEO will almost universally follow the standard program for board pay during the individual’s tenure and, again, offers the opportunity for continued vesting in outstanding equity awards.
When the outgoing CEO has no continuing affiliation with the company: Such transitions often lack future pay considerations and require careful messaging to shareholders to avoid misinterpretation.
Microsoft is the latest high-profile company to announce that it plans to base some of its senior management’s compensation on cybersecurity “plans and milestones.” I previously blogged about media reports that this practice is “inching up” among the biggest U.S. companies, but the media coverage may be overselling the use and utility of these metrics.
As consumers, we might like to hear that companies are putting their money where their mouth is and taking security — including of our data — seriously, but the panelists on our recent “The Top Compensation Consultants Speak” webcast noted that cyber metrics may not make sense as a shared goal. Here’s more commentary from Blair Jones of Semler Brossy during the webcast:
There was some literature and discussion in the press earlier this year that some companies might be adopting cybersecurity metrics and that cybersecurity might gain more prevalence as a metric. We haven’t seen that trend happening. Looking at the S&P 100, about 13% of companies have a metric like that. Clearly, cybersecurity is a huge issue for all companies, but there are many reasons we have seen its prevalence remain pretty low.
One is that while the whole organization needs to be vigilant, cybersecurity policy and systems are managed by a smaller group of people. Those individuals might have specific goals in their individual goals related to cybersecurity, but we don’t frequently see cybersecurity as a shared goal across the whole population. Where we do see cybersecurity goals showing up is in industries where you might expect, like some of the payment companies where cyber is a huge threat, and a huge part of their reputation is being a safe marketplace.
So we might see companies that find themselves in similar situations to Microsoft look to these goals to emphasize their security commitment, but for now, they otherwise make the most sense as individual goals for certain employees.
The FTC’s non-compete ban, set to be effective September 4, but the subject of pending litigation, presents a number of complications for employers. This Morgan Lewis blog, the fourth in a series on compensation-related implications of the ban, addresses potential impacts on the timing of taxation under Sections 83, 3121(v), and 457(f) of the Code.
Here’s an excerpt discussing Section 83:
Under Section 83 of the Code, transfers of property in connection with the performance of services, including certain equity awards, are generally included in the gross income of the person performing the services at the then-fair market value of the property in the first taxable year in which the property is not subject to a substantial risk of forfeiture (i.e., when it is substantially vested) or is transferable. A person may make an election to accelerate the taxation to the date of grant, based on the fair market value of the property at grant, if such person makes an “83(b) election” within 30 days of the date of grant.
If no 83(b) election is made, based on a facts and circumstances test set forth in the Treasury regulations promulgated under Section 83, a substantial risk of forfeiture can in some circumstances be supported by an enforceable requirement that the transferred property be returned to the employer in the event that the employee breaches his or her postemployment noncompete covenant (without any continuing employment condition required).
Currently, if an enforceable noncompete covenant is used to support a substantial risk of forfeiture as permitted under the regulations, the result is that taxation of the property subject to Section 83 would be postponed until the noncompete covenant lapses (or until the property becomes transferable, if sooner).
If the Final Rule becomes effective, companies should reevaluate their reliance on noncompete covenants to create a substantial risk of forfeiture for purposes of postponing taxation on Section 83 transfers. To the extent that the Final Rule invalidates a noncompete covenant that was used to support a substantial risk of forfeiture, such property would cease to be subject to a substantial risk of forfeiture and would become immediately taxable under Section 83.
We’ve posted the transcript for our recent webcast “Top Compensation Consultants Speak” with Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer. They discussed:
– Year 2 of Pay vs. Performance
– Incentive Plans – Setting Goals and Considering Adjustments
– Trends in Strategic and Operational Metrics
– Clawback Policies – What HR Teams and Compensation Committees Are Focusing on Now
– Human Capital Management – Recent Considerations and Disclosure Trends
– Potential Impact of the FTC’s Noncompete Ban
During the program, Jan shared this tip on using strategic and operational metrics:
The real test is: “can you look to those nonfinancial metrics to be leading indicators?” One of the shortcomings of financial metrics is that they are, by definition, backward-looking because they are reporting what has already happened. The beauty of marrying financial metrics with nonfinancial metrics in incentive plans, if you do it wisely, is that you can pick nonfinancial metrics that are leading indicators that you can show will result in those financial results two, three, five years from now.
Members of this site can access the transcript of this program for free. If you are not a member of CompensationStandards.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
In the latest 15-minute episode of the “Pay & Proxy Podcast,” I’m joined by Paul Hodgson of ESGAUGE (Paul is also a freelance writer and researcher for ICCR and Ceres). Paul shares data on 2024 proxy statement disclosures regarding DEI metrics in compensation plans — particularly in light of the 2023 SCOTUS decision in Students for Fair Admissions v. Harvard. Specifically, Paul discusses:
How DEI metrics are used in compensation programs generally
How 2024 disclosures compared to 2023 disclosures among Russell 3000 companies that use DEI metrics
Examples of companies that made disclosures more precise
Why the 2025 proxy season may show more dramatic changes
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at mervine@ccrcorp.com!
Thanks, I assume, to the “Marvel Cinematic Universe,” sci-fi concepts from the big screen are popping up all over now, and even public company board members aren’t immune. This Equity Methods blog says that, for restatements covering the grant date of an award, some board members have been asking some hypothetical, divergent timeline-type “what if” questions:
When a restatement spans many fiscal years, it may encompass not only when performance was measured, but also the grant date. Naturally the question will arise as to what the grants would have looked like if the stock price was lower at the issuance date—in other words, how liberal can the analysis be in the parallel universe constructed? For example, if the adjusted stock price is 20% lower, then ostensibly one or more of the following applies:
– More stock could have been granted at a fixed value – The starting price point would have been lower – The hurdle prices may have been set lower
But the Equity Methods team says, “while the logic makes sense, and board members often ask about it, we don’t believe it’s actionable. The intent of the rule is to accept the grant as is and to focus on the outcomes. Consistent with this, the language in the rule doesn’t permit an open-ended construction of a parallel universe. Rather, it hones in on the calculations performed at the time compensation was received.”
So, sorry, folks, the multiverse isn’t going to save us this time. The blog says, “the parallel universe produced by a recovery analysis applies only to the exercise of measuring final performance and payout outcomes.”