In a memo published last week, Compensation Advisory Partners analyzed how the CEO pay of 50 “early filers” compared to the companies’ financial results. The companies in CAP’s sample – which had fiscal years ending between August and October 2023 – spanned several sectors and reported revenues ranging from $1.4 billion to $383 billion (median revenues of $11.9 billion), and median fiscal-year-end market capitalization of $16.4 billion.
Overall, CAP found that year-over-year financial performance was flat, but median total CEO pay was up. However, that increase was primarily due to the grant date fair value of LTI awards that were made early in fiscal 2023, at a time when the overall market was high and companies were coming off strong 2022 performance. This was offset by a decline in median bonus payouts. Here’s more detail:
Approximately 50% of companies in our sample had an annual incentive payout that was at or above target in 2023 (median payout of 129% of target). These higher performing companies saw modest growth at median for revenue, EBIT and EPS growth, and had strong TSR performance. For companies with below target performance (median payout of 61% of target), median revenue growth was down slightly (-2.6%) while EBIT and EPS performance was down double digits (-15.6% and -11.4%, respectively). Median TSR increased for both groups. TSR was up significantly (+17.8%) for at or above target performers and up slightly (+2.3%) for below target performers.
In 2023, annual incentive payouts had a normal distribution with companies nearly evenly split in receiving payout either above or below target. This is a change from the prior two years when a majority of companies paid out at or above target. The distribution of payouts coupled with the median incentive payout around target suggests the difficulty in setting goals amid unpredictable macroeconomic factors.
The report goes on to discuss how some companies are incorporating metrics relating to a CEO’s individual performance, which I found especially interesting after reading about Boeing’s recent decision to reduce an element of executive pay in the name of “individual accountability” (although in Boeing’s case, the focus was on LTIs). Here’s what CAP found:
Approximately one-third of Early Filers incorporate individual performance in the annual incentive payout for the CEO. This means that the CEO’s payout as a percentage of target may be higher or lower than that of the corporate funding factor (i.e., the percentage at which the annual incentive funds based on company performance). 70% of companies in our sample provided a payout to the CEO that was +/-5 percentage points from the corporate funding factor in 2023.
Nearly 15% of companies reduced the CEO’s payout from the corporate funding factor in 2023, which is up from 2022 (4% of companies) and 2021 (7% of companies). However, the average reduction in payout was lower in 2023 than in prior years. On average, companies that lowered the CEO payout in 2023 reduced it by 30 percentage points compared to 39 points in 2022 and 102 points in 2021. The number of companies that increased the CEO’s payout by more than 5 points above the corporate funding factor was up slightly from last year (17% in 2023 vs. 11% in 2022) but down from 2021 (when it was 33%). However, the increase in payout was more modest, with companies raising the CEO’s payout by, on average, 15 points in 2023 compared to 20 points in 2022 and 34 points in 2021.
Every night before I go to sleep, I say a little prayer that none of my clients will discover the need for any financial statement corrections that would border anywhere close to what would be considered a “restatement.” Not only does a restatement (especially a “Big R” restatement) trigger a string of difficult decisions & disclosures, but there is now the added consequence of having to sort through the Dodd-Frank clawback policy and potentially recover compensation from Section 16 officers. I am sleeping just a little better knowing that tomorrow at 2 p.m. Eastern, there will be an expert discussion of the steps involved with this analysis – so don’t miss our webcast, “Clawbacks: Navigating the Process After a Restatement.” It always helps to have a playbook!
We’ll be hearing from WTW’s Richard Luss and Steve Seelig, Gibson Dunn’s Ron Mueller, and Latham’s Maj Vaseghi. They’ll be covering these topics:
– Coordinating with the Audit Committee
– Engaging the Right External Advisors & Internal Resources
– What is an Event Study? How Does it Work?
– Sources of Clawed Back Compensation & High-Level Tax Implications
– Managing Litigation Risk
– Communications with Impacted Executives
– Support & Documentation
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Last month, the WSJ and several other outlets reported that Boeing would overhaul its employee & executive compensation program in order to incentivize a commitment to safety. The change comes after years of speculation about whether the company’s emphasis on financial returns would affect its products. I was very interested to see how these changes would be described in Boeing’s proxy statement, which is now on file for the company’s May 17th AGM (the company shifted its meeting back by about a month compared to last year’s meeting date).
In the CD&A, after describing the 2023 program and payouts, the company includes a section on “Early 2024 Compensation Decisions” – which first describes changes to the annual incentive program:
Changes to our 2024 Annual Incentive Plan
In January 2024, following the Alaska Airlines Flight 1282 accident and our assessment of performance against our operational product safety metrics of stability and quality during 2023, we initiated a comprehensive review of our annual incentive plan design to determine if changes were warranted. In this effort, we were informed by feedback from shareholders. Following this review, we made the following changes to our annual incentive plan for 2024:
• Weightings of financial and operational performance for Commercial Airplanes. In 2023, the Company Performance Scores for all three business units were weighted 75% towards financial performance and 25% towards operational performance. In 2024, the score for our commercial airplanes business will be weighted 60% towards operational performance, and 40% towards financial performance.
• Operational performance metrics. In recognition of the progress towards safety and quality that must be made across our enterprise, our operational performance metrics will be focused entirely on quality and safety goals. For Commercial Airplanes, these metrics will include reduction in rework and traveled work, completion of 787 join verification rework, delivery of 737 MAX inventory built prior to 2023 and reduction in employee injury rates.
• Financial performance metrics. In 2023, the financial performance component of our design was weighted 67% towards total Company performance and 33% towards business unit performance. In 2024, total Company and business unit performance will be equally weighted, in order to drive greater accountability for financial outcomes at the business unit level. Free cash flow will be the sole metric measured at the total Company level. At the business unit level, performance in revenue and operating earnings will contribute to incentive payouts, except for our defense business, where operating earnings will be the sole financial metric.
The company then discusses how safety metrics are incorporated into the long-term incentive program:
Changes to our 2024-2026 Long-Term Incentive Program
In early 2024, the Compensation Committee approved a long-term incentive award structure similar to that first implemented in 2023, comprised 45% of time-vested RSUs and 55% of PRSUs that will pay out between 0% and 200% of the target number of units granted based on the achievement of free cash flow goals over the 2024-2026 performance period. New for 2024, our PRSUs incorporate a product safety downward modifier, under which the NEOs’ calculated payout following the end of the three-year performance period may be reduced by 25% or down to 0% if two product safety operational goals are not timely completed. These two goals require (1) the design and deployment of an employee culture survey aimed at assessing how deeply and effectively our Safety Management System is inculcated in our workforce, and (2) the development and implementation of operational control limits for several programs (including the 737 program) that include measures for determining when a safety risk assessment is required before a product can move past a specified point in our production system. Unless these goals are both completed by or before year-end 2024, the 2024-2026 PRSU payout will be subject to either 25% reduction (if goals are completed in 2025) or reduction to 0% (if goals are completed after 2025). Progress towards completion of these two goals will be overseen by the Aerospace Safety Committee and subject to final certification by the Compensation Committee.
In accordance with its normal process, the Compensation Committee also set long-term incentive targets for each executive officer. However, after approving the long-term incentive targets for our senior executives, the Board and the Compensation Committee made the decision to reduce each executive’s long-term incentive award by the percentage decline in the Company’s stock price between January 5, 2024 (the day of the Alaska Airlines Flight 1282 accident) and the grant date. This decision was implemented to hold our leadership team accountable for the decline in our stock price following the accident, and resulted in an approximately 22% reduction in long-term incentive grant values as compared to target values for our senior leadership team. The impact of this decision process on our CEO’s 2024 long-term incentive award, and a comparison against his 2023 award, is shown below.
The graphic shows that in 2023, the CEO’s award was $21.25 million. The 2024 award target had been set at $17 million, which was reduced by 22%, down to $13.25 million – a 38% reduction compared to the 2023 award.
There will no doubt be a lot of attention on the company’s say-on-pay outcome and other AGM results. If say-on-pay garners high support, these program changes and the related disclosure could be a good playbook for other companies dealing with product & PR challenges.
In the current uncertain economic landscape, stock option repricing and exchange programs have once again resurfaced as commonly explored alternatives to alleviate the competitive compensation and retention headwinds faced by companies with a significant number of underwater options. However, the inherent complexities and potential limitations of these programs often create roadblocks or require commercial compromises that impair the program’s effectiveness in achieving the desired incentive and retention goals.
Specifically, the memo goes on to address tender offer considerations for traditional stock option repricings and exchanges:
An option exchange program typically requires option holder consent and constitutes a tender offer under applicable US securities rules because option holders are required to make an investment decision when electing whether to participate in the exchange. An option repricing can also trigger the tender offer requirements where option holder consent is required, such as if the repricing is tied to the imposition of additional or extended vesting conditions on the repriced options.
The memo notes that companies “grappling with these issues may want to consider a novel approach to addressing underwater options,” and describes the “premium” approach, which “delays the availability of the repricing unless and until certain new exercise conditions are satisfied (e.g., continued employment through a later date).”
[A]n alternate approach to option repricing is available through which repriced options remain subject to a higher exercise price (or a “premium” exercise price) applicable to exercises occurring prior to the expiration of a specified vesting or retention period (the “premium period”), which may be longer than the original vesting period and/or contain other new vesting conditions.
As with a traditional option repricing, under this approach the exercise price of an underwater option is reduced to the fair market value of the company’s stock on the effective date of the repricing (thus locking in the availability of the repricing-date fair market value). However, if the option holder exercises the repriced option or terminates service, in either case, prior to the expiration of the premium period, the option holder does not benefit from the repricing and must instead pay the premium exercise price per share (i.e., an amount up to the original exercise price) upon exercise.
This approach effectively imposes a new vesting schedule on the repriced option, but typically can be implemented by the plan administrator unilaterally since it conveys only a benefit (i.e., the reduced exercise price after the satisfaction of the premium period) and has no material adverse impact on the option as it currently exists.
If you’re still looking for resources to do one last compliance check on your proxy statement, check out Goodwin’s 2024 Year-End Took Kit, updated in March to include proxy form check resources. These tools are all the more important as pay-versus-performance and clawbacks have only complicated the compensation-related disclosure requirements for proxy statements. The actual form check table has helpful callouts noted in red for any newly added rows and reminds companies to confirm that the CD&A narrative is consistent with PvP and clawback disclosures.
When the new clawback listing standards came out, there was a lot of discussion about how companies would go about the necessary calculations for stock price or TSR-based awards. While event studies were identified as the likely standard, advisors were recommending that the clawback policy not identify the calculation methodology in advance and instead allow the compensation committee to select a methodology based on the facts and circumstances.
This recent WTW memo, 4 Steps for Executing Clawbacks After Your Restatement, agrees — noting “not all stock plans or total shareholder return-based plans will require an event study for every restatement.” If you’re wondering how a compensation committee would go about making the decision of whether to commission an event study, a helpful table addresses several factors that will influence whether one is needed. The listed factors include inflection points in the comp plan, the quantum of stock price movement, market volatility, percentage of pay impacted and the magnitude & cause of the restatement.
For more on the complexities of implementing a clawback, tune in for our upcoming webcast “Clawbacks: Navigating the Process After a Restatement” on Wednesday, April 17, at 2 pm Eastern to hear from two of the authors of the memo, Steve Seelig & Rich Luss, who will be joined by Gibson Dunn’s Ron Mueller and Latham’s Maj Vaseghi. They’ll discuss how to run a thoughtful, thorough and organized process if you find yourself in mandatory clawback territory.
The 2024 update to Skadden’s Compensation Committee Handbook is now available — now in its 10th edition, it reflects key developments since last spring, including updates for the clawback rules and developments in pay-versus-performance disclosures. In the discussion of clawbacks, it briefly touches on the interplay with other legal requirements, including SOX and state laws:
Committees should keep in mind that certain states, such as California, have laws that generally prohibit the recovery of wages that have already been paid. While the Dodd-Frank clawback rules are currently expected to preempt conflicting state law, litigation activity may be on the horizon to definitively confirm this.
CEOs and chief financial officers (CFOs) remain subject to the clawback provisions of the Sarbanes-Oxley Act of 2002 (SOX), which provide that if a company is required to prepare an accounting restatement because of “misconduct,” the CEO and CFO are required to reimburse the company for any incentive or equity-based compensation and profits from selling company securities received during the year following issuance of the inaccurate financial statements. To the extent that a Dodd-Frank Clawback Policy and SOX cover the same recoverable compensation, the CEO or CFO would not be subject to duplicative reimbursement. Recovery under the Dodd-Frank Clawback Policy will not preclude recovery under SOX to the extent any applicable amounts have not been reimbursed to the issuer.
PLI’s “SEC Speaks” program continued yesterday, with an emphasis on enforcement. As I noted yesterday, all Staff remarks were made subject to the standard disclaimer that they are made in the person’s official capacity and don’t represent the views of the Commission, the Commissioners or other Staff members.
In yesterday’s program, Stacy Bogert, Associate Director of the Division of Enforcement, noted that Sarbanes-Oxley Section 304 clawbacks are a continued issue of focus for the Enforcement Division. The Division has issued several warnings about this – and the DOJ is also interested. If the Staff is talking about it at a conference, we should pay attention.
Stacy noted that the enforcement approach is guided by the policy underlying the statute: to incentivize CEOs and CFOs to implement robust internal controls designed to detect and prevent misconduct in financial reporting and encourage an appropriate tone at the top. So, you can expect the Commission to seek recovery in these cases beyond the “fraud delta” (the amount of executive enrichment that resulted from the misconduct at issue). It’s likely that they’ll pursue reimbursement to the company of the full amount of all forms of compensation – including profits that the executives received upon the sale of equity. Stacy also gave a reminder of the view that the clawback can apply regardless of whether the CEO or CFO personally engaged in the misconduct that caused the restatement.
These remarks send a “deterrence” signal that may cause many companies to take (yet another) look at their controls & trainings….
At yesterday’s SEC Speaks, the Corp Fin Staff noted that they are still getting a lot of questions about the new(ish) checkboxes on the Form 10-K cover page that may be triggered by correcting financial reporting errors and a clawback analysis. As a reminder, the Form now says:
– If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
– Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Jessica Barberich, who is Assistant Chief Accountant in Corp Fin, shared some color about the Staff’s views on interpretive questions. Here are key takeaways (with the caveat that the standard Staff disclaimer applies and this summary is based on our real-time notes):
– The first box is required to be checked by listed issuers when the financials included in the filing reflect the correction of an error to previously issued financial statements.
– The Staff looks to the definitions in US GAAP when considering whether a change to previously issued financial statements is an “error” – and companies should do the same.
– The term “error” can include mathematical errors, mistakes from the application of GAAP, or oversight or misuse of facts that existed at the time the financials were issued. Examples of things that are not errors include: Adoption of new accounting standard that requires retroactive application; disaggregation of financial statement line items; or a change in account principle (including a change in the method of applying the principle, as long as the prior application wasn’t an error in US GAAP). See the adopting release for other examples.
– For judgment questions – things like fixing a typo, or a change to a prior-year footnote disclosure – your accountants should be involved to help you analyze whether this is considered an “error” under US GAAP.
– The most common question is whether this first checkbox really applies to all corrections. The answer is yes. It must be checked for all restatements: “Big R” restatements, “little r” restatements, as well as restatements that were made voluntarily by the issuer.
– What’s a “voluntary” restatement? Jess gave this example: If the error is immaterial to the prior year, and correction in the current year would also be immaterial, the company is permitted to correct the financials through an out-of-period adjustment to the current year, and the company isn’t required to restate the prior year. If the company chooses to correct the error via a restatement of the prior year, it will need to check the box. If the company instead uses an out-of-period adjustment to the current year, it does not need to check the box, because it hasn’t revised previously issued financial statements.
– The second checkbox has a narrower scope than the first. It indicates whether a recovery analysis is triggered by any of the restatements indicated in the first checkbox.
– It won’t be checked for voluntary restatements that don’t trigger a recovery analysis.
– If there is a “Big R” or a “little r” restatement, a recovery analysis will be triggered under the company’s clawback policy. However, the extent of the analysis will vary. For example, although there would be no recovery amounts to determine if no financial-based incentive compensation was received during the relevant period, the box would still need to be checked, because the analysis was triggered.
Jess noted that both checkboxes only relate to restatements of prior years, not current-year errors corrected in the same year. She also highlighted one other question they’ve been receiving, that is unrelated to scope:
If the 2023 10-K was amended in 2024 for a restatement of errors related to 2023, and the company properly checked boxes in the 2023 Form 10-K/A that it filed, does the company need to check in the 2024 Form 10-K (since it still includes FY 2023 financials)? Jess noted that assuming no other restatements occurred, the company would NOT need to check the box on the 2024 cover in this situation.
Lastly, the Staff noted that the Disclosure Review team will be monitoring filings to ensure that the clawback policy is correctly filed as an exhibit and that the checkboxes are correctly completed if a restatement occurs.
I blogged last month about the “aircraft audit” initiative that the IRS recently launched. In the latest 20-minute episode of the “Pay & Proxy Podcast,” Meredith interviewed Cooley’s Brad Goldberg and Jet Counsel’s Stewart Lapayowker about this development – and all the latest ins & outs of corporate aircraft compliance & disclosure. They covered:
1. The demand for aircraft by corporations and executives, during and coming out of the pandemic
2. Tax issues for companies and executives
3. What we know about the IRS audit plans
4. The complicating factors of commuting benefits and remote work
5. The recent trend of individual executives or directors purchasing aircraft
6. Related party transaction considerations when a company charters an executive or director’s plane
7. Confirming & improving your controls and record keeping
If you have an executive compensation topic that would be good for a podcast, reach out to Meredith! She’s at mervine@ccrcorp.com.