I’ve blogged before about calls by Norges Bank to simplify executive pay by doing away with performance programs and simply linking it to long-term share ownership. Some experts think this approach makes more sense than using ESG metrics – or any metrics, for that matter.
This year, although Norges recognizes that few have embraced this structure, it tightened its voting policies to identify companies that are “most materially misaligned” with the firm’s preferred approach. This resulted in voting against say-on-pay at 1 in 10 companies during the first half of the year! Here’s an excerpt from their recent 23-page voting report:
Overall, we voted against at least one proposal – including director elections – at nearly 6 percent of all companies based on concerns about CEO pay. The most common concerns were the use of one-off awards like ‘golden hellos’, awards that are paid out over too short a timeframe, and/or cases where we considered the board had not taken enough steps to respond to concerns from shareholders regarding pay in previous years.
We developed a new framework for assessing US packages, leading us to vote against CEO pay at 82 companies where we assessed the package to be unduly costly and where we had significant concerns about structure, out of a total of 142 US companies where we voted against CEO pay.
Here’s more detail on the new framework:
We are using a new framework for evaluating US packages, looking at absolute value, peer comparisons and dilution. We do not vote against pay packages based on size alone. Our aim is to identify the structures we view as most problematic and misaligned with long-term value. For 2023, we applied this stricter assessment to packages worth 20 million dollars or more, leading us to vote against more than half of packages above this level.
Norges notes that it also voted against a small number of directors based on its assessment that the board did not adequately respond to a say-on-pay vote that received low support in the prior year.
Meredith blogged last week about trends in measurement techniques for ESG incentives. This 16-page memo from FW Cook – which looks at ESG incentive trends in the largest 250 US-listed companies in the S&P 500 – reinforces that there’s no universal approach. But there are common considerations & risks to consider (the memo lays out 9 of those).
What most caught my eye, though, was an acknowledgement that comp committees are pausing to make sure that what they’re doing in this area is having a positive business impact. Here’s what the memo says about emerging trends:
Our study observed a leveling-off of ESG measure prevalence, a possible signal that the momentum to emphasize ESG performance in incentive compensation has indeed slowed. This year’s study findings also align with our experience in seeing less focus and “airtime” in Compensation Committee meetings on this topic over the past year for reasons including:
• More challenging economic conditions turning focus to business improvements,
• Less pressure from institutional investors,
• Internal pushback regarding goal-setting calibration,
• Increasing politicization of the topic, and
• Board member/investor concerns over “greenwashing.”
Companies that already include ESG measures are assessing how to respond to pressure from institutional investors and proxy advisory firms to include more rigorous/quantifiable measures and increase disclosure transparency around performance achievement and corresponding impact on company value. Many large institutional investors have been vocal that they do not hold strong views about whether ESG measures should be included in compensation plans. Investors are primarily concerned with how ESG measures are implemented, expecting clear targets that have a strong tie to long-term strategy while also being measurable and transparent.
The memo explains that proxy advisors are similarly focused on ESG incentives being tied to pre-determined, quantitative targets that are transparently disclosed, rather than requiring or expressly encouraging ESG metrics.
The challenge for companies is finding a way to balance investors’ desire for transparent, quantitative metrics with the unique challenges presented by committing to numerical targets for DEI & other multi-faceted ESG-related incentives.
We’ll be discussing this important topic at our upcoming “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which are coming up virtually September 20th – 22nd. In particular, the panel “ESG Metrics: Beyond the Basics” – with Orrick’s JT Ho, Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, and Pay Governance’s Tara Tays – will delve beyond the surface of “ESG is good” vs. “ESG is bad” and give practical guidance on what to do at this juncture. The conference is coming up quickly and so are year-end comp committee meetings! So register now. You can sign up online, by emailing sales@ccrcorp.com, or by calling 1-800-737-1271. Plus, you can bundle this conference with our “2nd Annual Practical ESG Conference” and get even more step-by-step guidance to conquer the “ESG overwhelm” that many of us our facing. That event is happening virtually on September 19th.
As Liz blogged last year, nearly all big companies use long-term incentive plans to encourage performance over periods greater than one year – usually three. But sometimes macro forces or a company’s specific circumstances make setting appropriate and rigorous multi-year performance goals extremely challenging. This Thoughtful Pay Alert from Compensia discusses best practices for adding PSU awards to long-term incentive programs, particularly for life sciences and technology companies. The alert notes that companies will sometimes choose to use a one-year performance period but will usually structure the awards in one of the following ways so that they still encourage long-term performance and retention:
– a one-year performance period with any earned shares subject to an additional time-based vesting requirement of anywhere from two to four years to increase the focus on long-term value sustainability and retention; or
– multiple (typically three consecutive) one-year performance periods with the performance objectives for each period to be established at the beginning of each year and any earned shares “banked”; to be distributed to executives at the end of the entire three-year performance period.
Per Compensia’s research, when a company uses a single, one-year performance period, the additional time-based vesting period is typically three (36%) or four (36%) years for life sciences companies and three years (81%) for technology companies.
As Liz shared when the final clawback rules were released, there are only three limited exceptions to enforcing a Dodd-Frank clawback policy:
– if direct expenses paid to third parties to assist in enforcing the policy would exceed the amount to be recovered and the issuer has made a reasonable attempt to recover;
– if recovery would violate home country law that existed at the time of adoption of the rule (November 28, 2022) and the issuer provides an opinion of counsel to that effect to the exchange; or
– if recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the IRC.
This recent Mayer Brown alert addresses the first two exceptions in more detail and discusses complications for companies incorporated in foreign jurisdictions or with executives working abroad. The memo reminds us that “home country law” is limited to the laws of the issuer’s country of incorporation and does not address complications due to the country where the executive works:
For companies that have executives working in foreign countries where enforcement may fall under the local laws of that country, the company must be able to enforce the clawback requirements or rely on the Direct Expense Exception. […] However, to rely on [the Direct Expense Exception], the company must first make a reasonable attempt to recover the requisite compensation and document the recovery efforts. To be deemed to be impracticable, the direct costs paid to a third party to assist in enforcing recovery, such as legal expenses and consulting fees, must exceed the erroneously awarded compensation amounts.
It goes on to discuss how these two exceptions would be invoked:
For each of these exceptions, the determination would have to be made by a committee of independent directors responsible for executive compensation decisions, such as a compensation committee, or in the absence of such a committee, by a majority of the independent directors. In addition, as discussed below, the company would need to disclose why it did not pursue the recovery. The determination is subject to review by the applicable exchange.
The memo then details local laws applicable to a clawback in each of Brazil, China, France, Germany, Hong Kong, Singapore, the UAE & the UK, the availability of offsets against future compensation and steps companies can take now to increase the likelihood of enforceability in each jurisdiction.
In July, the HLS blog ran a post from Meridian Compensation Partners discussing ESG metrics in compensation plans among the S&P 500. The blog described how ESG metrics are used — including DEI metrics, which were the most prevalent:
Unlike traditional financial and operational metrics, most ESG metrics are not individually measured and weighted. Instead, most companies use either scorecards and/or individual performance assessments.
Both approaches generally incorporate a list of undifferentiated performance measures that include an ESG metric with a variety of other operational or strategic criteria. This approach tends to reflect that many companies are either unable, or find it undesirable, to set more precise goals for these metrics and prefer instead to use judgment and discretion to assess results.
I was reminded of the guest post from Orrick that Liz recently shared on considerations when incorporating DEI goals in light of June’s SCOTUS affirmative action decision. They noted that “rewarding executives for their overall efforts on DEI rather than for achieving targeted metrics will mitigate some of the legal risk” to avoid managers perceiving “achievement of the metrics as a de facto quota.” So we may see DEI metrics trending even further from precise goals. The guest post also noted that “the devil is in the details” and recommended that companies that incorporate DEI metrics into compensation programs do a privileged evaluation of their programs.
I recently shared this Gibson Dunn memo on The Proxy Season Blog on TheCorporateCounsel.net. It is chock full of important takeaways from this proxy season. Notably, it flags that executive compensation shareholder proposals increased 108% from 2022. The increase was mostly related to numerous proposals focused on executive severance agreements, which were already a trending proposal topic in 2022. Here’s info from the memo on how they fared so far in 2023:
In 2023, 75 proposals focused on executive compensation were submitted, up from 36 proposals in 2022. This increase was largely attributable to the marked increase in proposals seeking shareholder approval of certain executive severance agreements, the most common executive compensation proposal received by companies.
Forty-seven proposals requesting boards seek shareholder approval of severance agreements were submitted in 2023, up markedly from 16 such proposals in 2022. These proposals typically requested that boards seek shareholder approval of any senior manager’s new or renewed pay package that provided for severance or termination payments with an estimated value exceeding a certain multiple (usually 2.99x) of the executive’s base salary and bonus. At least 43 of these 47 proposals were submitted by John Chevedden and/or his associates.
Nine companies sought to exclude these proposals via no-action requests, seven of which were successful on procedural grounds. The two remaining companies were denied relief, one arguing for exclusion on procedural grounds and one on substantial implementation grounds. Proposals seeking shareholder approval of severance agreements that went to a vote received average shareholder support of 23.8%, with two proposals receiving majority shareholder support. At numerous companies, voting results were significantly affected by whether companies already had in place or, in response to the proposal, adopted policies addressing key aspects of the proposal.
As Liz has blogged, a majority of large-cap companies provide severance in excess of this threshold, and any policy to limit severance benefits as a result of these proposals could have unintended consequences.
We added this new chapter as part of our comprehensive annual update to the full Treatise. I’m happy to report that the 2024 Edition is now complete – well in time for the next proxy season. The Treatise is a key resource for anyone involved with the complex world of executive compensation disclosures, which I can once again personally attest to, because I’ve been using it almost every day since returning to private practice. The Treatise is available online to all members of CompensationStandards.com, so make sure to take advantage of this benefit!
Meredith blogged recently about Tesla’s proposed settlement of claims that its board had authorized excessive director pay. The clawback & forfeiture terms of that agreement are shocking – a $735 million clawback plus no additional compensation for 2021-2023 – and potentially controversial, according to The Chancery Daily.
But there’s another piece of the settlement that is also getting a lot of attention, which is the governance approach to setting director pay. The terms illustrate what could be considered a “best practice” for protecting director compensation decisions that are outside the norm, which can be tricky. The proposed settlement says:
As soon as practicable after the Effective Date, the Compensation Committee of the Tesla Board (“Compensation Committee”) shall amend its charter to provide that the Compensation Committee shall be responsible for:
(a) conducting annually a review and assessment of all compensation, including cash and equity-based compensation, paid by Tesla to Non-Employee Directors;
(b) engaging an independent compensation consultant (“Independent Consultant”) annually to advise the Compensation Committee in connection with such annual review and assessment, including with respect to (i) the amount and type of Non-Employee Director compensation, and (ii) any comparative data deemed appropriate by such consultant; and
(c) recommending to the Tesla Board, on the basis of such annual review and assessment, the amount and type of compensation payable to Non-Employee Directors.
The Tesla board must annually review total direct compensation, including the compensation committee’s recommendation. And then:
On an annual basis, Tesla shall submit the proposed annual compensation to be paid to Non-Employee Directors to an approval vote of the majority of Unaffiliated Tesla Stockholders present in person or represented by proxy and entitled to vote on such decision. For purposes of the Stipulation, “Unaffiliated Tesla Stockholders” means all Tesla stockholders of record other than (i) Defendants and (ii) Other Tesla Directors (but only while such Other Tesla Directors serve on the Tesla Board). For the avoidance of doubt, Defendants and Other Tesla Directors (but only while such Other Tesla Directors serve on the Tesla Board) shall (with respect to any and all shares over which they hold beneficial ownership, as that term is defined in 17 CFR § 240.13d-3(a)) abstain from voting in their capacity as stockholders on the votes required by this Section and shall not be counted as shares present or entitled to vote for purposes of determining the majority.
Prior to any stockholder vote on compensation to be paid to Non-Employee Directors, Tesla shall disclose to stockholders in a proxy at least the following information, in a manner consistent with Tesla’s operative bylaws:
(a) a description of the philosophy relating to Non-Employee Director compensation;
(b) the process by which decisions were made concerning Non-Employee Director compensation, including with respect to the role and analysis of the Independent Consultant and any peer group or other comparative data deemed appropriate by such Independent Consultant (or that no such data was deemed appropriate); and
(c) the proposed compensation of Non-Employee Directors, including the cash and equity value of such compensation, on a director-by-director basis.
In addition, the settlement directs Tesla to annually review its internal controls for director compensation to ensure that it’s properly administered – and report the results of the annual review to the audit committee.
“Director Say-on-Pay” isn’t necessarily a new thing – it garnered a wave of attention following the Investors Bancorp decision back in 2018. And maybe this directive for an annual vote will be more likely to stick than what we’ve seen in other contexts. But I don’t know whether this is a practice that will ever become widespread – especially at companies that are moving towards simplifying director pay and staying close to peer group levels. We have “Director Compensation” Practice Areas for anyone currently dealing with decisions on pay practices or disclosures.
We’ve been continuing to post model Dodd-Frank clawback policies for your reference as we approach the effective date & compliance date for the new listing standards that are required under Exchange Act Rule 10D-1. The latest addition is our very own sample, which was expertly drafted by Dave Lynn. You can find it – in both Word and PDF – in our “Clawbacks” Practice Area. That’s also where you’ll find links to the SEC rule and exchange listing standards, law firm summaries & analysis, and more.
Don’t forget that we will also have a panel devoted to this topic at our rapidly approaching “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which will be held virtually September 20th – 22nd. Here’s the full agenda for that pair of conferences. If you haven’t already registered, sign up today on our membership center or by emailing sales@ccrcorp.com – or by calling 1-800-737-1271.
The practical & insightful guidance that you’ll get at the Conferences will be key to helping you put the finishing touches on your policy, consider implementation mechanics, and prepare for all the issues that proxy season and SEC rulemaking are going to throw our way. What’s more, Conference attendees will have continued access to the video archives & transcripts for a year following the event – so you can continue to refer back to this essential guidance as you navigate year-end and proxy season. CLE credit is also available for the live event as well as the on-demand replays!
Unlike executive compensation – which seems to constantly move in the direction of more complexity – director compensation has become more straightforward over the years, with a move away from meeting fees in favor of annual retainers. This detailed Compensation Advisory Partners memo recaps compensation data for the largest companies – for the full board, committees & committee chairs, and lead directors. It also looks at other trends in director compensation arrangements, such as pay limits and stock ownership guidelines. Here’s an excerpt about baseline compensation for board membership:
– Total Fees. Median board compensation increased by 2.6%, to $320K.
– Pay Structure. Companies rely mainly on annual retainers (cash and equity) to compensate directors. Pay programs for large companies are simple and tend to not use meeting fees. This year saw a 50% drop in companies who disclose using meeting fees, excluding those with meeting thresholds in place, with only four companies now providing board meeting fees. We support this approach as it simplifies administration and the need to define what counts as a meeting, though it may not be appropriate in all situations. Among the four companies that do provide meeting board fees, three have non-standard ownership.
– Equity. Consistent with prior years, providing full-value equity awards (shares/units) is the standard, with only 2% providing stock options (one of these companies grants both stock options and RSUs). Almost all companies denominated equity awards using a fixed value and not using a fixed number of shares. Using fixed value is generally considered best practice as it manages the “target” value awarded each year. This is consistent with practices observed in prior years.
– Pay Mix. On average, total pay was comprised of 63% equity and 37% cash, which is consistent with findings during recent years.
– Form of Increase: 17 percent of companies disclosed increases to board cash retainers, while 34% of companies disclosed an increase to their annual equity grant.
If you’re looking to review your director compensation program – or if you’re considering recruiting one or more new directors – this is a good memo to review. The CAP team suggests these considerations:
– Communication and Education. Not all companies get this aspect of effective compensation programs right. Oftentimes, distributing a simple summary (or “cheat sheet”) of the director pay program to participants can be an effective tool, that limits misunderstandings and an help prompt questions, as well as support consistent understanding of the program, philosophy and rationale behind the program.
– Recruiting New Directors. As boards look to refresh and diversify their membership, this may be the time to re-visit initial at-election equity awards for new directors. At-election grants can be a way to differentiate your company’s pay program in the recruiting process without a more costly increase to standard director pay levels.
– Board Leadership Roles. Taking on the role of non-executive Chairperson, Lead Director or Chair of a major Board committee can come with considerable additional time requirements, responsibilities, and reputational risk, yet additional compensation provided for most of these roles only reflects a modest premium on the standard director pay program. Providing greater additional compensation for the role of Lead Director of Chair of a major Board committee should be considered, in recognition of the typical time requirements, responsibilities and reputational risk individuals in these roles take on.
– Stock Ownership Requirements. Many boards, especially among the largest companies, require equity-based compensation be deferred until retirement (i.e., termination of board service). While we support alignment of director and shareholder interests through equity compensation, a standard stock ownership guideline (e.g., multiple of annual cash retainer) may be a competitive advantage when recruiting new directors who may be more focused on current compensation.