Earlier this month, ISS launched its Annual Global Benchmark Policy Survey. The survey is open for comment until Thursday, September 5th – and it represents a key step in the proxy advisor’s formulation of voting policies for 2025 AGMs.
As Dave pointed out on TheCorporateCounsel.net, this year’s survey includes several questions relating to executive compensation matters, including questioning whether ISS should continue to look for a high ratio of performance-conditioned equity awards in its qualitative pay-for-performance assessment, versus also giving “credit” for time-based equity awards with extended vesting periods. It would be a big step for investors to recognize that performance conditions aren’t always the “be all, end all” – although Norges and a few other investors have been pushing for time-based compensation for several years.
A new blog from Meridian Compensation Partners takes a deeper dive into this and the other compensation-related questions. Here are the key takeaways:
– Time-Based Equity Awards with Lengthy Vesting Period: The Survey asks respondents to identify whether ISS should consider the use of time-based equity awards with extended vesting terms as a positive mitigating factor in its pay-for-performance assessment, similar to performance-based awards. The Survey also asks whether ISS should consider equity awards with a meaningful post-vesting holding period as a positive mitigating factor in the context of a pay-for-performance misalignment.
– Discretionary Annual Incentive Programs: The Survey asks respondents to identify whether largely discretionary annual incentive programs, such as those adopted by some large financial sector companies, are problematic, even if the program structure is consistent with industry and/or peer practice.
– Shareholder Proposals on Workforce Diversity: Currently, ISS will evaluate, on a case-by-case basis, shareholder proposals requesting that a company report on: (i) pay data by gender, race or ethnicity, or (ii) policies and goals to reduce any gender, race or ethnical pay gap taking into account certain factors. The Survey asks respondents to identify whether certain human capital management metrics or disclosures should be considered by investors in evaluating a shareholder proposal on workforce diversity (e.g., EEO-1 data, promotion velocity data, retention rates, hiring rates, adjusted gender pay gap disclosure, unadjusted gender pay gap disclosure, board oversight, etc.).
Meridian notes that ISS’s survey questions could signal incremental changes to policies that apply to executive compensation and human capital matters in 2025. It’s also worth noting that Glass Lewis recently launched its annual survey, which, like ISS, includes some executive compensation topics.
Don’t miss the opportunity to hear from representatives from both proxy advisors at our “Proxy Disclosure & 21st Annual Executive Compensation Conferences” – coming up October 14-15th in San Francisco (with a virtual option also available)! They will be discussing what worked & what didn’t during 2024, as well as sharing some expectations for 2025 based on what they are hearing from clients. Check out the agendas – 16 fast-paced panels over two days – and the great speaker lineup. Register online or by calling us at 800-737-1271. I am very excited to see everyone and hope that many of you can make it!
Late last week, a federal district court in Florida ruled against the non-compete ban that the Federal Trade Commission adopted earlier this year, which is scheduled to go into effect on September 4th. The decision follows two other district court decisions – one from Texas that barred enforcement of the rule and one from Pennsylvania that said the FTC had acted within its authority. This Faegre Drinker memo summarizes the case and gives a recap of where we stand:
– In Properties of the Villages, Inc. v. Federal Trade Commission, U.S. District Court Judge Timothy Corrigan enjoined the FTC from implementing or enforcing the Noncompete Rule against the plaintiff, and was careful to note that he was granting an injunction against the FTC only for the plaintiff, and was not entering a nationwide stay of the Noncompete Rule.
– As such, all eyes remain on the Northern District of Texas, where the Ryan court has promised a final decision on or before August 30 as to whether it will issue a permanent injunction and a nationwide stay of the Noncompete Rule.
Without clear guidance one way or the other, it’s a good idea to consider whether your existing non-competes will operate the way you expect them to if the ban does go into effect. This FW Cook blog points out that if that happens, the FTC rule could render unenforceable non-compete forfeiture provisions that are contained in senior executive equity award agreements entered into after September 4th. Here’s an excerpt:
For example, we often see equity arrangements where certain types of terminations, for example, a qualifying retirement, result in favorable vesting, but the equity payout is delayed until the normal payout date. For example, the employer may issue performance share units with a three-year performance period. If the executive has a qualifying retirement during the performance period, he or she will be entitled to payout at the end of three years, based on the degree to which the performance metrics have been satisfied over the three-year period. In these situations, it is not uncommon for the employer to require the executive to refrain from competition during the performance period and/or the remainder of the normal vesting period in order to receive the payout.
Here’s the issue. Will a forfeiture-for-competition provision be valid if the award agreement is issued after September 4? This may depend on which document contains the noncompete provision. In particular, an arrangement we have often encountered is where the noncompete provision for each year’s award is embodied in that year’s award agreement. So, the 2023 award agreement contains a noncompete provision with post-employment vesting for that year’s award (and a corresponding forfeiture provision for competition), the 2024 award has similar provisions pertaining to the shares subject to that award, etc.
The blog says that if you act quickly, there may be a way to get a valid non-competition commitment that applies to future awards issued to current executives:
Assuming an employer faces this particular issue, there may be ways to solve the problem, so long as the appropriate arrangements are in place before September 5. For example, subject to state contract law requirements pertaining to sufficiency of consideration, one approach would be for the employer and the executive to agree today that, in consideration for the potential issuance of future equity awards, the executive agrees that such awards will be subject to a provision that any shares that would otherwise be delivered post-employment will not be delivered if the executive competes during the post-employment period.
As always, your mileage may vary – so it’s important to consult your own legal advisors about your specific scenario. Because September is rapidly approaching and invalidation of the rule remains uncertain, there is not much time to waste.
The late January decision by the Delaware Chancery Court that the 2018 compensation package awarded to Elon Musk was not fair to Tesla’s shareholders set in motion a complicated chain of events resulting in Tesla’s shareholders ratifying the 2018 award and Tesla reincorporating in Texas. The whole thing, award and all, may seem too Tesla-y to have many takeaways for other public companies that approach CEO compensation in a measured way with more typical annual packages. But, while the circumstances may be (somewhat) unique to Tesla, the court’s decision still has some important takeaways for other public companies (especially those with a controlling shareholder). In fact, I chatted with Paul Hodgson of ESGAUGE about some of them back in March in this podcast.
This Compensation Advisory Partners article takes a new look at the decision and lists some takeaways that may be more widely applicable to other public companies and compensation committees. Here are some pointers from the alert:
– Consider the retentive value of existing equity ownership
In its opinion, the Court points to Musk’s ownership of 21.9% of Tesla at grant as evidence that Musk was already significantly incentivized to drive Tesla’s performance. Testimonials also suggested that Musk had no immediate plans for leaving the Company, further putting the rationale for the grant in question.
– Carefully consider the board’s personal and professional relationships with the CEO and the impact of the company’s non-employee director compensation packages on the directors
Two directors out of the four Compensation Committee members had close personal and professional relationships with the Musk family, including the Chair of the Compensation Committee. The other two directors were found to have a significant portion of their wealth tied to their compensation as a Tesla director, which would sum to several million dollars. Such outsized director compensation was judged as atypical by the Court, and added to the question of whether the Committee members could truly be considered independent decision-makers.
– Ensure the compensation committee has control over the process and timing
When the initial schedule planned for the grant to be approved within two months, the Compensation Committee’s independent advisors asked for an extension but were denied. However, when Musk asked to pause the process from July to November 2017, the compensation process stopped entirely. The Board also found that Musk proposed new terms prior to six out of the ten Board or Compensation Committee meetings when the grant was discussed.
ESG metrics have grown in popularity despite the fact that many institutional investor policies still don’t expect or push for non-financial metrics in incentive plans. What is driving companies to include them? This recent CLS Blue Sky blog discusses a study that suggests that the “choice to include non-financial metrics in executive incentive plans is a strategic response to heightened regulatory scrutiny and reputational concerns within a firm’s industry.”
Using a sample of “corporate non-financial violations and executive annual bonus plans with available vesting metric details in S&P 1500 firms between 2006 and 2019,” the study compared rates of non-financial violations to rates of companies incorporating at least one non-financial metric into annual bonuses.
Our further analysis indicates that firms are more likely to include non-financial metrics in annual bonuses when there is a higher frequency of non-financial violations within an industry. Specifically, these adjustments are primarily driven by responses to ESG violations, especially environmental and social, rather than other types of non-financial violations. These results support our prediction that firms tailor their pay-for-performance policies to promote executive accountability on responsibility targets and demonstrate a commitment to responsible management.
We’ve seen some prominent examples of the adoption of ESG metrics following direct regulatory scrutiny just this year — I immediately thought of Microsoft and Boeing.
Earlier this month, I shared this Semler Brossy article noting that say-on-pay assessments have gotten more rigorous for non-CEO NEO pay. The article pointed to the “increasing levels of executive pay for roles other than the CEO” as one potential reason for the heightened attention.
A recent Compensation Advisory Partners insight that spotlights compensation actions for CFOs – using 2023 data from 132 companies with median revenue of $14.6 billion – provides supporting evidence. The report compares compensation changes between CFOs and CEOs in 2023. Here are some highlights:
– The median change in base salary in 2023 was 4.0% for CFOs, similar to last year’s 3.8% increase. For CEOs, the median salary change was 0%, well below last year’s 2.9% median increase. Among executives who received salary increases, the median increase was 5.0% for CFOs and 4.0% for CEOs.
– Median target bonus opportunities remained consistent for CEOs at 160% of salary and for CFOs at 100% of salary. 32% of CFOs and 27% of CEOs had an increase in target bonus for 2023.
– LTI awards increased at a higher rate in 2023 than 2022, reflective of competitive pressures to deliver market competitive pay. LTI awards increased 11% for CFOs and 9% for CEOs (vs. 7% and 5% last year, respectively). The increase in LTI awards in 2023 is not driven by special one-time awards, which we found very low prevalence of in our sample. LTI awards have increased 6% for both CFOs and CEOs annually, on average, between 2013 to 2023.
– CFO turnover is higher than CEO turnover. In 2023, median CEO tenure is 7 years versus 5 years for CFOs.
We recently shared data from FW Cook showing that most large companies have added or retained more expansive clawback policies that go beyond the requirements of the listing rules. This HLS Blog post from the folks at the AI-powered legal intelligence platform DragonGC assesses what those policies look like and lists these most prevalent voluntary triggers at S&P 500 companies:
– Breaches of Company Policies or Legal Requirements: 51.4%
– Breaches of Fiduciary Duty or Fraud: 48.6%
– Misconduct with Reputational or Financial Harm: 32.9%
– Administrative Enforcement: 28.9%
– Termination or Criminal Resolutions: 23.9%
– Inappropriate Conduct: 20%
Join us at our 2024 Proxy Disclosure & Executive Compensation Conferences on October 14-15 in San Francisco to hear the latest on tricky clawback issues and market practice during our “Living with Clawbacks: What Are We Learning?” panel. You can peruse our agenda to see what else our expert practitioners will cover and register here for in-person or virtual attendance.
Debevoise recently studied the use of ESG metrics in incentive plans by the 100 largest public companies — finding that they were used by 71% of that group (most of which used more than one), and 7% took ESG factors into account in setting compensation. Here are a few interesting takeaways:
– Despite the long-term nature of ESG considerations, they remain popular primarily in annual plans. 65% included them only in annual plans, while 4% included in both annual and LTI plans and no companies included them only in LTI compensation. 2% included them in a special bonus program.
– Social goals remained the most common (68%), with the most popular metrics related to DEI (51%). The article notes that the impact of the Students for Fair Admissions cases was not yet reflected in the 2024 proxy season, given the timing of the opinion (released after most 2023 compensation decisions).
The article makes a few predictions for next proxy season and beyond:
– Companies have revisited DEI metrics after the U.S. Supreme Court’s opinion last year in the Students for Fair Admissions cases. We have seen some companies making changes to DEI goals or the disclosure related to such goals, especially where such goals are quantitative representation goals that may result in a higher litigation risk. We have seen other companies remove DEI goals from their incentive compensation plans. However, we have not seen and do not expect to see most companies walking away from DEI goals altogether given the importance of these goals to workforce strategies and long-term business performance.
– With respect to other ESG-related metrics, we expect companies will continue moving toward quantitative goals and away from qualitative or discretionary measures in the face of investor and institutional shareholder demands.
– We expect to see more specificity around ESG goals in incentive plans, rather than broad or general measures. We also expect that even more companies will use stand-alone weighted ESG metrics rather than scorecards where ESG measures have no defined weighting.
– Finally, we anticipate that more companies will begin to include ESG goals in their long-term incentive plans to align with the inherently long-term nature of their ESG strategy, recognizing that some of these metrics are less suited for short-term objectives.
As Meaghan previewed in June, PVP disclosures in the 2024 proxy season weren’t very different than first-year disclosures. This Pay Governance alert has more detail on what companies changed – or didn’t – in year 2.
Going into the 2024 proxy season, we anticipated that only a few companies would make changes to their disclosures other than the addition of another year of new data. Much effort and thought went into deciding the Company-Selected Measure, TSR comparison group, and the list of Important Financial Metrics last year; those decisions proved to be durable for this year and likely future years, barring a large incentive program change. Below is a summary of disclosure observations for this year compared to last year:
– 96% of companies used the same Company-Selected Measure as last year
– 86% of companies used the same peer group or index as last year for TSR comparisons. Not surprisingly, the large majority of those companies that had a different peer group were those using custom peer groups whose constituents changed from last year
– 87% of companies had the same number of Important Financial Metrics as last year, 7% had fewer metrics, and 6% had more metrics
– Of those that had the same number of metrics, 93% used the exact same metrics, with only 7% changing their metrics between years
I think it tells a great story about the effort companies put into this disclosure in late 2022 and early 2023 that some of these complicated decisions, like the company-selected measure and which peer group to use for disclosure purposes, as the alert says, “proved to be durable.” Despite the short timeframe to prepare incredibly complicated and specific new disclosures, most companies seemed to “understand the assignment” and, where needed, hired supplemental outside help for valuations and disclosure prep.
I don’t think I’m speaking too soon in saying this, although it’s probably worth reminding everyone that we may learn more from 2024 comment letters that could impact 2025 disclosures.
This Cooley blog discusses what private companies need to know about Rule 701, a key rule for private company executive compensation programs that, unfortunately, is responsible for a fair number of foot faults often uncovered during one of the most inopportune times (the IPO process) as counsel diligences past equity grants. The SEC has also been known to conduct periodic audits and assess fines for noncompliance.
Rule 701 is the primary US federal securities law exemption for offers and sales of compensatory awards – e.g., options, restricted stock awards (RSAs), restricted stock units (RSUs), etc. – by a private company to its employees, directors, officers, consultants, advisers, and other individuals providing bona fide services to the company (or any of its subsidiaries), that are issued pursuant to a compensatory benefits plan such as an equity incentive plan.
The availability of Rule 701 comes with certain quantitative limits. Early-stage companies usually operate well within these limits. However, later-stage private companies should understand the limits of the exemption and start monitoring before additional requirements kick in to avoid inadvertently failing to comply with Rule 701.
The blog then breaks down in Q&A format some of the trickiest parts of Rule 701 — particularly for larger and later-stage private companies — including the rule’s quantitative limits.
To rely on Rule 701, the aggregate sales price of securities offered and sold during a 12-month period using this exemption must be at least one of the following:
Less than $1 million in total value.
Less than 15% of the total assets of the issuer (as of the most recent balance sheet date).
Less than 15% of the outstanding amount of the class of securities being offered and sold (as of the most recent balance sheet date).
Note: The 12-month period can begin on any date during the calendar year – it does not need to be tied to the calendar year or the company’s fiscal year. However, once you select a date, you must stick to that date for future analyses. Aggregate sales price means the sum of all cash, property, notes, cancellation of debt, or other consideration received or to be received by the issuer for the sale of the securities.
While compliance should be monitored continuously, the blog points to these factors indicating it’s time for a more detailed analysis:
– You have a high 409A valuation.
– Your company’s valuation is approaching $1 billion.
– Your board is regularly approving large option grant packages or is hiring one or more senior executives.
– You are hiring aggressively and/or making a large number of “refresh” grants.
– You begin issuing RSUs.
– You have conducted a repricing of your outstanding stock options recently.
From a say-on-pay perspective, companies usually expect investors to focus on concerns with CEO compensation, but this Semler Brossy article from earlier this summer noted that “competitive CEO pay alone does not always provide a ‘free pass'” for say-on-pay support and said, “it appears that assessments of non-CEO NEO pay have become more rigorous.” Specifically, in 2024, companies were criticized for these “one-time NEO pay actions that used to fly under the radar”:
– the lack of performance-based NEO equity grants (where the CEO received performance-based grants)
– one-time grants to NEOs (and not to the CEO)
– high average pay for the proxy-disclosed executive group (rather than just elevated CEO pay)
– the acceleration of awards upon an NEO’s retirement
The article notes that increasing levels of executive officer pay at all levels are being more closely scrutinized as the cost of management grows and notes that companies may still be at risk even when the quantitative evaluations of CEO pay and performance are low concern. If you have a one-time non-CEO NEO pay action this year, make sure you’re using your CD&A to explain the purpose and rationale, almost as much (if not as much) as if that one-time pay action was for your CEO!