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.”
Even BlackRock isn’t immune to low say-on-pay. According to Reuters, BlackRock narrowly avoided a true say-on-pay failure with only 58% of votes cast supporting the advisory proposal at its annual meeting. Reuters previously reported that ISS and Glass Lewis had recommended against say-on-pay at the company. ISS took issue with “the process used to determine annual cash incentive awards,” and Glass Lewis cited “the structure of the sizable retention awards granted to a handful of executive officers during the year.”
BlackRock’s statement in the article that it “looks forward to engaging with shareholders” tees up a helpful reminder for this time of year. While proxies typically cite a majority of the votes cast standard under state law, there are serious implications to receiving a say-on-pay vote significantly under the close-to-90% norm. Specifically, receiving less than 80% support triggers certain engagement expectations for Glass Lewis and receiving less than 70% support triggers similar expectations for ISS. Failure to engage with shareholders and show responsiveness can result in the proxy advisors recommending against the reelection of compensation committee members or the entire board in subsequent years.
This Spencer Stuart blog discusses the “often-delicate dynamics” that HR professionals need to navigate to succeed in their roles. I think folks on the legal side will agree that the recommendations in the blog’s “navigation checklist” are equally applicable to legal and compliance teams, especially General Counsels. Here are the top four skills that are critical to success, according to the blog:
Business partnership. Do you understand your business and its leaders at a deep strategic and personal level? Do you know the business goals, challenges, strengths and preferences to provide effective and tailored HR solutions?
Trust. Trust is your influence capital. You need to build and maintain trust with your stakeholders, both internally and externally. Trust is the foundation of your credibility, influence and impact as an HR business partner.
Relationships. Your peer relationships are every bit as important as your relationship with the CEO. Your ability to collaborate and coordinate with other HR business partners, specialists and leaders to ensure alignment and consistency of HR policies and practices across the organization is critical. When the going gets tough (and it will), the strength of your relationships is “money in the bank” that you can tap into when you need to deal with difficult or sensitive issues.
Aligning the strategic HR agenda. How well do you communicate and cascade the HR vision, strategy and priorities to your business units? Are you ensuring they are aligned with the organizational goals and values?
I can attest to the importance of these skills from my own experiences with clients. IMHO whether or not HR and in-house legal teams work collaboratively — recognizing the importance of these success factors — is what makes proxy season either (relatively) seamless and productive or a long, hard slog.
In 2022, Liz shared that we were starting to see the “Elon Effect” impact pay decisions at other companies. The WSJ recently reported that this impact has continued. The article says that more CEOs got “outsized” pay packages in recent years:
In the past five years, three dozen CEOs of S&P 500 companies have received pay packages valued at $50 million or more, up from nine in the five years before Musk’s, according to a Wall Street Journal analysis of data from MyLogIQ, a provider of public-company data and analysis. The total cost of those pay packages has also grown rapidly, quadrupling in the past five years from the earlier period, the Journal found. […]
Just one S&P 500 pay package topped $150 million in the five years leading up to Musk’s 2018 blockbuster arrangement. Nine have done so in the five years since.
Notably, these findings are based on data through 2024 proxy statements, so the related pay decisions pre-dated Tornetta.
Here’s a helpful reminder from Locke Lord’s Capital Markets blog that public companies that grant options or similar instruments to executive officers should now be considering whether to avoid windows that would trigger disclosure of the grant timing under new SEC rules:
For calendar year companies, the 2025 annual meeting proxy statement will require disclosure about any grants (of stock options, SARs or similar option-like instruments) to named executive officers that occur in a window beginning four business days before and ending one business day after the filing of the company’s annual report on Form 10-K, quarterly report on Form 10-Q or the filing or furnishing of material non-public information on Form 8-K (typically including each quarterly earnings release).
[T]he company is required to make specific tabular disclosures regarding such grants. That disclosure is required to include the percentage change in the company’s stock price from before disclosure to after.
Given the references in the rules to the 10-K or 10-Q filing (versus the earnings release), the blog says “companies may decide not to avoid the specified windows before 10-Q filings, for example, on the basis that all material information was disclosed in the related earnings release.” And keep in mind that the table may be required even for companies avoiding these periods if a material development occurs later on the grant date.
In a report analyzing equity compensation at software companies, Compensia discussed how investors now consider stock-based compensation (SBC) expense as a percentage of revenue as a critical data point (in addition to gross burn rate) to evaluate equity spend and measure the economic cost of equity compensation to the company’s shareholders — even though this contrasts with the common practice of adjusting earnings to exclude the impact of stock-based compensation.
But this new focus presents a difficulty for companies because “unlike burn rate, addressing high SBC/revenue ratios can take time given that a significant portion of stock-based compensation expense reflects that amortization of grants from prior years. Declining revenue growth also makes it difficult to manage SBC/revenue over a short-term time horizon.”
In light of this, Compensia encourages companies to evaluate their equity budgets taking into account gross burn rate and stock-based compensation expense. However, the report says this focus hasn’t carried forward to plan design.
Despite investors’ focus on managing equity usage, our research showed that the vast majority of executive compensation annual incentive plans do not use metrics that account for stock compensation expense.
Among public companies with full disclosure of annual incentive plan performance measurement, 98% do not account for stock-based compensation. They measure either profitability metrics adjusted to exclude stock compensation or measure only growth and/or cash flow.
Programming Note: Our blogs will be off on Monday for the holiday. We wish each of you an enjoyable Memorial Day weekend.