FW Cook has released its 2023 survey of severance & change-in-control practices, which looks at trends among 200+ companies. We’ve been tracking severance as a shareholder proposal topic this past year or two, so it’s useful to also keep an eye on common practices. Here are the key takeaways:
– About 85% of companies provide CEO CIC severance, while about 75% provide CEO Non-CIC severance
– About 85% of companies providing CIC severance define cash severance as a multiple of salary plus bonus. This drops to about 60% for companies providing Non-CIC severance.
– 90% of companies fully accelerate all unvested time-based equity, while ~70% do so for performance awards (includes both single and double trigger provisions).
– The prevalence of double trigger CIC equity acceleration is 86%, up from 70% in 2016.
– For Non-CIC severance, majority practice is for time-based and performance-based equity to be forfeited (~55%), with only about 10% of companies fully accelerating outstanding equity.
Meredith blogged last week about the SEC’s fresh round of “Pay vs. Performance” CDIs. One of the CDIs reversed course from an earlier interpretation about how to value awards that accelerate upon retirement. This WTW blog explains the impact:
In the September C&DIs the SEC appeared to entertain this view and suggested that, for the purpose of determining compensation actually paid, an award that vests on an accelerated basis at retirement with no other substantive vesting conditions could be deemed vested at the date of grant for the purposes of PVP too. In effect, this approach meant that subsequent stock price changes for such awards would no longer impact compensation actually paid beyond the retirement eligibility date. This seems to contradict the intent of PVP disclosures. It also ran the risk of creating significant complexity for companies with pro rata accelerated vesting treatment of equity awards on retirement. We raised these concerns with the SEC, particularly given that the C&DIs remained unclear on this issue, and were pleased to see revised guidance reflected in the November C&DIs release.
The latest guidance says that “other substantive conditions” must be considered, in addition to retirement eligibility. These include a market condition, actual retirement, or the satisfaction of the requisite service period. While the language remains ambiguous, it does appear now to distinguish between retirement eligibility and actual retirement. Accordingly, for awards that provide for accelerated vesting on retirement, issuers can now value awards during the vesting period through to the date of an actual retirement rather than merely the retirement eligibility date.
WTW points out that this interpretation is more consistent with the methodology that companies used for Year 1 disclosures, better aligned with the rule’s intent, and less burdensome. This FW Cook blog agrees that while the CDI provides welcome clarification, it doesn’t fully resolve the disclosure questions, and delves into the ambiguity that remains:
The CDI now appears to indicate that for purposes of calculating CAP the concept of retirement eligibility is no longer an issue in the typical case where the holder must actually retire to be “vested.” This would be the result, for example, where the award contains an explicit service period and also states that vesting of the award will accelerate upon a termination due to retirement. In other words, even if there were no barrier to the holder retiring immediately, the act of retiring is itself treated as a substantive condition.
However, the CDI may leave open one potential situation where the interpretive issues noted in our October 24th blog could still apply. The issues previously noted may arise if the award agreement explicitly states that a holder is vested upon the earlier of the requisite service period or meeting the definition of “retirement” (as opposed to actually having to retire). We also recognize that there will be some award agreements that do not clearly fit into one category or the other, due to nuanced differences in drafting.
We note that the specific language used for the CDI is unusual and could have been more precise as to its intent and impact, but we cannot think of any other interpretation, and other practitioners with whom we have discussed have reached the same conclusions. As such, in light of the revised CDI, companies should yet again review their equity award agreements to assess the specific language around retirement favorable vesting, in order to determine how they may be impacted by this guidance.
According to a recent 12-page recap from WTW, this year has been relatively quiet when it comes to say-on-pay failures, with only 49 this year, compared to 69 last year and 60 in 2021. However, votes on equity plans indicate eroding support on that front. Here’s an excerpt:
We have observed some headwinds for equity plan share requests. We have observed one failure within the S&P 1500, similar to last year at this time (two failures at this time in 2021); however, ISS opposition is the highest at 17% compared with 13% at this time in 2022 and 2021. Support is at 89% compared with 91% at this time in 2022 and 2021.
Companies should monitor their investors’ voting guideline updates and engage with stakeholders to address proactively any potential issues anticipated ahead of planned stock plan proposals. With talent pressures continuing, companies should manage share pools to avoid unexpected surprises and factor any potential headwinds into their incentive programs.
WTW notes that these challenges come at the same time that companies may be needing to use more of their share pool to attract talent. This off-season will be a good time to monitor investor sentiment on dilution and provisions that are considered “problematic.”
Some of the largest US companies are implementing (or considering) cybersecurity metrics in comp programs — and specific metrics may be appropriate in certain cases (for example, after a cyber event or when upgrades are planned) — but this Semler Brossy article highlights an important cybersecurity-related consideration for comp programs at all companies. That is, whether the board has the flexibility to make compensation adjustments when a cyber event occurs.
The article argues that boards should have the freedom to adjust earned compensation based on a qualitative assessment that considers whether the related cyber risk was avoidable, the level of communication to the board, whether mitigation plans were implemented and the appropriateness of management’s situation-specific judgment calls. For example, this WSJ article highlighted one company with no cybersecurity metrics in its executive compensation programs whose board canceled short-term incentive bonuses for certain top executives after a significant cyber event.
Clawbacks may play a role here as well. Here’s an excerpt from the Semler Brossy article:
In addition to developing a framework for determining adjustments to current-year compensation, boards should review the clawback language to assess where there is flexibility to claw back compensation, if appropriate (e.g., the breach was caused by gross negligence or reasonable mitigation steps were not taken to limit damage after the breach). In considering whether to add such a clawback, and the appropriate language, a review of risk clawbacks added by many large financial institutions after the financial crisis may also be informative.
Liz recently shared that ISS’s peer group review & submission window is open until next week Tuesday, December 5th. Glass Lewis has also opened its peer group submission window for companies with meetings from March 2024 to September 2024, and it runs until Friday, December 15th. Glass Lewis walks through how and why to submit your peer group on its website. If you’re looking for a resource to share internally that’s a “one-stop-shop,” check out this Compensia alert with info on the process for both ISS and Glass Lewis.
Last month, the Latham team released a client alert with 24 frequently asked questions on the SEC’s final clawback rule and the related listing standards. In the latest Pay & Proxy Podcast, I’m joined by Keith L. Halverstam & Maj Vaseghi, Global Chair and Vice Chair, respectively, of Latham’s Public Company & Board Representation Practice, to discuss some of the FAQs related to the implementation of a clawback policy. In this 24-minute podcast, Keith and Maj cover the following topics:
– “Little r” restatements & the SEC’s expansive interpretation of what constitutes “material noncompliance with any financial reporting requirement” – Steps a company needs to take under a clawback policy following a determination that a restatement is required – “Difficult” financial metrics where the erroneously awarded compensation can’t be determined by a simple mathematical recalculation – Challenges with collecting erroneously awarded compensation
– Planning ahead for policy implementation
– When erroneously earned shares have been sold at a gain
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.
Just before Thanksgiving, the SEC gave us even more to be thankful for — eight new and two revised CDIs on the pay-versus-performance disclosure requirements. I’ve paraphrased each new CDI and linked to the full text below.
1. New Question 128D.23 – Dividends or dividend equivalents paid that are not already reflected in the fair value of stock awards or included in another component of total compensation must be included in the calculation of executive compensation actually paid.
2. New Question 128D.24 – If a registrant uses more than one published industry or line-of-business index for purposes of Item 201(e)(1)(ii), the registrant may choose which index it uses for purposes of its PvP disclosure and should include a footnote disclosing the index chosen. If the registrant chooses to use a different published industry or line-of-business index from that used by it for the immediately preceding fiscal year, it is required to explain the reasons for the change in a footnote and provide a comparison against both the newly selected peer group and the peer group used in the immediately preceding fiscal year.
3. New Question 128D.25 – A registrant may not use the broad-based equity index it uses to determine the vesting of performance-based equity awards based on relative TSR as its peer group for purposes of Item 402(v)(2)(iv).
4. New Question 128D.26 – Market capitalization-based weighting is required for purposes of Item 402(v)(2)(iv) only if the registrant is not using a published industry or line-of-business index pursuant to Item 201(e)(1)(ii).
5. New Question 128D.27 – If a registrant uses a benchmarking peer group and adds or removes companies, is it required to footnote the changes and compare its cumulative total shareholder return with that of both the updated peer group and the peer group used in the immediately preceding fiscal year. However, if an entity is omitted solely because it is no longer in the business or industry or the changes were made pursuant to pre-established objective criteria, presenting both comparisons is not required, but a specific description of the change and the basis for the change must be disclosed, including the names of the companies removed. This is consistent with CDI 206.05 regarding disclosure under Item 201.
6. New Question 128D.28 – The staff will not object if a registrant that loses SRC status as of January 1, 2024 continues to include scaled disclosure under 402(v)(8) in its proxy filed not later than 120 days after its 2023 fiscal year end, forward incorporated into the 10-K. The PvP disclosure must cover fiscal years 2021, 2022, and 2023.
Unless the registrant subsequently regains SRC status, any other proxy filed after January 1, 2024 must include non-scaled PvP disclosure. However, a registrant generally is not required to revise disclosure for prior years to conform to non-SRC status, and the staff will not object if the registrant does not add disclosure for a year prior to those included in the first filing with PvP disclosure. But the registrant should include peer TSR — measured from the market close on the last trading day before the registrant’s earliest fiscal year in the table — and its numerically quantifiable performance under the Company-Selected Measure for each fiscal year in the table, and disclosure provided for all fiscal years must be XBRL tagged.
7. New Question 128D.29 – The registrant is required to include PvP disclosure in any proxy or information statement filed after it loses its EGC status, but may apply the transitional relief in Instruction 1 to Item 402(v) (that disclosure may be provided for three years instead of five in the first filing with PvP disclosure and an additional year in each of the two subsequent annual filings).
8. New Question 128D.30 – When multiple individuals served as PFO during one covered fiscal year, for purposes of calculating average compensation for the NEOs other than the PEO, the registrant may not treat the PFOs as the equivalent of one NEO. Each must be included individually in the calculation of the average, but additional disclosure regarding the impact on the calculation should be considered.
I’ve also included marked versions of the revised CDIs.
Question: In each of 2020 and 2021, a registrant provided the same list of companies as a peer group in its Compensation Discussion & Analysis (“CD&A”) under Item 402(b) but provided a different list of companies in its CD&A for 2022. With respect to a registrant providing initial Pay versus Performance disclosure in its 2023 proxy statement for three years (as permitted by Instruction 1 to Item 402(v) of Regulation S-K), may the registrant present the peer group total shareholder return for each of the three years using the 2022 peer group?
Answer: No. In this situation, the registrant should present the peer group total shareholder return for each year in the table using the peer group disclosed in its CD&A for such year. In the 2024 proxy statement, if the registrant uses the same peer group for 2023 as it used for 2022, the registrant should present its peer group total shareholder return for each of the years in the table using the 2023 peer group. If it changes the peer group in subsequent years, it must provide disclosure of the change in accordance with Regulation S-K Item 402(v)(2)(iv).
Question: Some stock and option awards allow for accelerated vesting if the holder of such awards becomes retirement eligible. If retirement eligibility was the onlysole vesting condition, would this condition be considered satisfied for purposes of the Item 402(v) of Regulation S-K disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible?
Answer: Yes. However, for awards with additional substantive conditions, in addition to if retirement eligibility, such as a market is not the sole vesting condition as described in Question 128D.16, those, other substantive conditions must also be considered in determining when an award has vested. Such conditions would include, but not be limited to, a market condition as described in Question 128D.16 or a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period.
With the December 1st compliance deadline looming for listed companies to adopt a Dodd-Frank clawback policy, most companies have survived “step 1” of this new requirement. Unfortunately, adopting the policy was the easy part. This King & Spalding memo points out that the specter of recoupment likely will complicate internal investigations into financial errors. Here’s an excerpt:
If executive officers received incentive-based compensation based on a financial reporting measure that subsequently must be restated, clawbacks may be required no matter how small the original errors were, no matter whether misconduct led to the errors and no matter whether the executives in question had any role in the errors. It will be natural for executives to prefer not to return compensation to a company once they received it, so the executives naturally would prefer that no restatement occurred. The new requirement that actions taken pursuant to required clawback policies must be disclosed puts even more pressure on these executives because any return of compensation will become public. As a result, the new rules create a potential conflict of interest that must be examined at the outset of every internal investigation involving a potential accounting restatement.
The memo concludes on this cheery note:
In short, audit committees may be conducting more internal investigations and executives may not get information during the investigations. These circumstances will be frustrating to everyone, and experienced outside counsel will be essential to navigating them. Outside counsel advising companies and their audit committees should thoroughly understand the potential errors being investigated and how they might have impacted incentive-based compensation that could be subject to clawback in order to assess potential conflicts of interest of current and former executives.
And companies can no longer take comfort that “little r” restatements (correcting an immaterial error from a prior period that would result in a material misstatement if the error were corrected, or left uncorrected, in the current period) have no significant impact. The impact on financial statements may not be significant, but if clawbacks are required, that can be very significant to current and former executives.
John shared tips on internal investigation processes last week on TheCorporateCounsel.net. We have a lot of resources on that site in our “Internal Investigations” Practice Area. And now that everyone’s required Dodd-Frank clawback policies are in place, we will be sharing more & more about navigating recoupment issues in the “Clawbacks” Practice Area of this site.
This blog will return next week. Happy Thanksgiving!
Late last week, Glass Lewis issued its 2024 Voting Guidelines – which include several updates on executive compensation topics. Here’s an excerpt:
– Clawback Provisions – In addition to meeting listing requirements, effective clawback policies should provide companies with the power to recoup incentive compensation from an executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Such power to recoup should be provided regardless of whether the employment of the executive officer was terminated with or without cause. In these circumstances, rationale should be provided if the company determines ultimately to refrain from recouping compensation as well as disclosure of alternative measures that are instead pursued, such as the exercise of negative discretion on future payments.
– Executive Ownership Guidelines – We have added a discussion to formally outline our approach to executive ownership guidelines. We believe that companies should facilitate an alignment between the interests of the executive leadership with those of long-term shareholders by adopting and enforcing minimum share ownership rules for their named executive officers. Companies should provide clear disclosure in the Compensation Discussion and Analysis section of the proxy statement of their executive share ownership requirements and how various outstanding equity awards are treated when determining an executive’s level of ownership.
In the process of determining an executive’s level of share ownership, counting unearned performance-based full value awards and/or unexercised stock options is inappropriate. Companies should provide a cogent rationale should they count these awards towards shares held by an executive.
– Proposals for Equity Awards for Shareholders – Regarding proposals seeking approval for individual equity awards, we have included new discussion of provisions that require a non-vote, or vote of abstention, from a shareholder if the shareholder is also the recipient of the proposed grant. Such provisions help to address potential conflict of interest issues and provide disinterested shareholders with more meaningful say over the proposal. The inclusion of such provisions will be viewed positively during our holistic analysis, especially when a vote from the recipient of the proposed grant would materially influence the passage of the proposal.
The updated guidelines also clarify the proxy advisor’s approach to these issues:
– Non-GAAP to GAAP Reconciliation Disclosure – We have expanded the discussion of our approach to the use of non-GAAP measures in incentive programs in order to emphasize the need for thorough and transparent disclosure in the proxy statement that will assist shareholders in reconciling the difference between non-GAAP results used for incentive payout determinations and reported GAAP results. Particularly in situations where significant adjustments were applied and materially impacts incentive pay outcomes, the lack of such disclosure will impact Glass Lewis’ assessment of the quality of executive pay disclosure and may be a factor in our recommendation for the say-on-pay.
– Pay-Versus-Performance Disclosure – We have revised our discussion of the pay-for-performance analysis to note that the pay-versus-performance disclosure mandated by the SEC may be used as part of our supplemental quantitative assessments supporting our primary pay-for-performance grade.
– Company Responsiveness for Say-on-Pay Opposition – For increased clarity, we amended our discussion of company responsiveness to significant levels of say-on-pay opposition to note that our calculation of opposition includes votes cast as either AGAINST and/or ABSTAIN, with opposition of 20% or higher treated as significant.
During last week’s webcast for members, our expert panelists noted that these guidelines set an expectation that companies will adopt clawback policies that go beyond what’s required by the listing standards adopted under the Dodd-Frank Act and SEC Rule 10D-1. That program is now available to members for on-demand listening, and the transcript will be available in a few weeks. (If you aren’t already a member, you can sign up online or email sales@ccrcorp.com.)
Also check out John’s blog on TheCorporateCounsel.net on Friday for info on other changes to Glass Lewis’s Voting Guidelines that you’ll need to know for proxy season. You may need to beef up your charters on board oversight of E&S issues….
Join us today at 2 pm Eastern for our webcast “More on Clawbacks: Action Items and Implementation Considerations” to hear Compensia’s Mark Borges, Ropes & Gray’s Renata Ferrari, Gibson Dunn’s Ron Mueller and Davis Polk’s Kyoko Takahashi Lin continue their excellent discussion from our 20th Annual Executive Compensation Conference on complex decisions and open interpretive issues that unlucky companies faced with a restatement will need to tackle.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
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