Coming off a year of record say-on-pay failures in 2022, companies have focused on disclosing “responsiveness” to investor feedback in proxy statements and engagement conversations. That can be done by disclosing the number or percentage of significant shareholders that the company met with and changes to executive pay programs that were made year-over-year to address previous investor concerns.
We are very early in the season – but these efforts appear to be paying off. According to this new Semler Brossy memo (with data from Proxy Insight), say-on-pay votes are tracking higher this year, and the “failure” rate is tracking lower than last year. Here’s more detail:
– Average Say on Pay support for the Russell 3000 (92.2%) is 170 basis points higher than the average support at this time last year. More companies are receiving greater than 90% support (76%) than at this time last year (71%).
– The failure rate for the Russell 3000 (0.7%) is 140 basis points lower than at this time last year (2.1%). Only one Russell 3000 company has failed so far this year.
– The current S&P 500 average vote result of 88.8% is 160 basis points higher than last year’s average at this time.
– Average Say on Pay support for the S&P 500 (88.8%) is 340 basis points lower than the Russell 3000 average – however, only 34 S&P 500 companies have held a Say on Pay vote thus far in 2023.
Semler Brossy notes that proxy advisors remain influential – the average vote result for Russell 3000 companies that receive an ISS “against” recommendation is 19% lower than at companies where ISS recommended “for” the proposal. So far this year, ISS has been recommending in favor of more say-on-pay proposals than last year.
Speaking of proxy advisors, remember that if you receive less than 70% support (ISS) or 80% support (Glass Lewis), and aren’t sufficiently “responsive,” the proxy advisors may recommend against reelection of compensation committee members or the entire board in subsequent years. The “Say-on-Pay Solicitation Strategies” chapter of Lynn & Borges’ Executive Compensation Disclosure Treatise also explains that you need to be wary of “cautionary” support. That can turn into an “against” vote the following year, especially if there is tepid performance on TSR or other metrics in the proxy advisor’s model. For that reason, you may want to consider disclosing responsiveness even to “cautionary” feedback.
Here’s an optimistic update that Dave shared on TheCorporateCounsel.net last week:
As John recently noted, the timing of the SEC’s approval of exchange listing standards implementing Rule 10D-1 could be upon us sooner rather than later. That outcome could prompt a flurry of activity as issuers seek to implement compliant clawback policies within the 60-day window mandated by the SEC.
On Monday, April 3rd, a group of law firms submitted letters to the SEC responding to the requests for comments on the NYSE and Nasdaq clawback proposals, asking that the SEC not approve the adoption and effectiveness of the listing standards earlier than November 28, 2023. The letters outlined the many challenges that issuers are facing in determining how to implement a compliant clawback policy, on top of having to address other recent SEC rules changes such as the pay versus performance disclosure requirements and the Rule 10b5-1 amendments. The letters also note that adoption of a clawback policy would require board approval, and issuers would therefore be forced to hastily convene board meetings for such purpose given the uncertainty associated with the effective date of the listing standards and the subsequent short compliance period.
We can only hope that the SEC will carefully consider these comments when determining the timing for approval of the final listing standards.
In addition to the letter signed by 39 law firms to urge a reasonable effective date for the Dodd-Frank clawback listing standards, the following groups have also submitted comments:
– CII – expressing concern over the lack of investor participation in the NYSE’s proposed delisting procedures for companies that fail to comply, which differs from the Nasdaq approach
– Trade Group Coalition (American Securities Association, Business Roundtable, Center On Executive Compensation, National Association of Manufacturers, U.S. Chamber of Commerce) – also urging a longer lead time
Dave noted that one of the key questions as you look to comply with these new rules is whether to adopt a new standalone policy or try to integrate the Dodd-Frank clawback requirements into your existing policy. We’re continuing to share practical information about the Dodd-Frank clawback requirement in our “Clawbacks” Practice Area.
We’ll also be sharing key action items at our “20th Annual Executive Compensation Conference” this September. Although we all hope the approval of these rules occurs no earlier than November, with delisting on the line, it’s not a topic you can ignore. The Conference agenda is filled with other essential info as well – 19 panels over the course of three days for our combined “Proxy Disclosure & 20th Annual Executive Compensation Conferences.” Register now to get the “early bird” rate before it expires – you can sign up online using the “Conferences” drop-down menu, email sales@ccrcorp.com or call 800.737.1271.
We have posted the transcript for our recent webcast “The Top Compensation Consultants Speak” in which Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer shared their insights on these topics:
– Early Trends in Pay vs. Performance Disclosures
– Clawback Policies: Strategic Views
– 10b5-1 Plans and Practices
– Compensation Committee Role in Human Capital Management
– Compensation Committee Role in ESG; Trends in Non-Financial Incentive Metrics
– Director Compensation Trends
During the webcast, Ira Kay described a soon-to-be released Pay Governance study that used PVP data by 50 large S&P 500 companies that filed their proxies on or before March 10, 2023 to calculate the level of alignment of “compensation actually paid” with TSR, relative TSR, GAAP net income, and the company selected measure. The study, which has now been released, concluded that the vast majority of companies have directionally aligned changes in CAP and cumulative TSR and argues that these findings support shareholders’ consistently strong support for say-on-pay proposals.
Check out this post from Farient Advisors for a helpful table summarizing institutional investor policies on ESG in compensation plans. The policies are categorized by “No Policy,” “Policy Does Not Require ESG” and “Policy Expects/Requires ESG” as described further by this excerpt:
Large investors, in particular, are demanding that companies adopt sustainability strategies and targets, diversify their boards, and disclose ESG information. A more recent development, however, has been the investor’s role in driving the incorporation of stakeholder measures into incentive plans.
While many investors do not have a formal policy on incorporating ESG measures into compensation plans, some of the largest asset managers have released specific policies on their expectations. BlackRock and Vanguard, for example, are pushing companies that use stakeholder measures in incentive plans to prove that they have the same level of goal rigor as that used for other financial and non-financial metrics.
Meanwhile, other global investors such as AllianceBernstein, Legal and General, Allianz, Amundi, and UBS have engagement policies that encourage the adoption of stakeholder incentive measures, and particularly climate measures for companies in certain industries. It should be noted, however, that some of these investors are not asking for a pay connection to all ESG goals. In fact, some investors are making the linkage to only a part of the “E,” such as climate targets.
To stay up to date on constantly evolving expectations and practices, navigate to our “Sustainability Metrics” Practice Area, where we continue to post resources on the latest trends.
I recently blogged about 2022 and 2023 increases in executives’ base salaries given preferences for upfront cash in light of market volatility. This HLS blog from Compensation Advisory Partners reiterates that higher base salary increases and lower bonus payouts are the consistent themes seen in early filings by S&P 1500 companies with fiscal years ending between September 30 and November 30 and gives further detail regarding compensation actions for CEOs and CFOs. Here are some key statistics from the blog:
– Approximately 80% of CEOs and CFOs received salary increases
– Bonuses decreased by 10%, on average, for CEOs while CFOs had an average decrease of 12%
– Grant date fair value of equity awards increased by 17%, on average, for both CEOs and CFOs
– Significant year-over-year changes (+/-25% or more) in total compensation were seen for approximately 40% of CEOs and 33% of CFOs
As John and Liz have reminded us, new clawback policies may need to be in place way before the January 2024 timeframe many of us were initially hoping for based on the outside date in the rule. It’s hard to say rulemaking is moving more quickly than expected given that over a decade has passed since clawback rules were mandated by Dodd-Frank, but, between PVP and clawbacks, legal and HR teams have had to move quickly to keep up. Is there a phrase that means the opposite of “hurry up and wait”?
As Liz noted, we’ve posted Wilke’s sample form of clawback policy that addresses the Dodd-Frank requirements in our “Clawbacks” Practice Area, but—like everything in this area—there’s a lot to analyze as you go to adopt a compliant policy and make sure you have the documentation and procedures in place to support the process if and when clawbacks must be exercised. In Part 1 and Part 2 of a three-part series, WTW reviews some steps you should be taking now:
– Audit existing compensation plans to understand how they deal with any number of potential events that may occur before the compensation is actually paid
– Identify existing clawback policies and related provisions in plan documents and employment agreements
– Consider which elements of existing clawback policies and plan documents—to the extent they go beyond the rule requirements—should be carried forward, possibly in a separate policy
– Inventory and identify all elements of compensation that use financial reporting metrics and are subject to clawback upon a financial restatement (see WTW’s list of documents to review as part of this process)
Why have two policies? As noted by the panelists on our recent webcast “The Top Compensation Consultants Speak,” it may be easier to address the disconnect between current market practice and the rule requirements with two separate policies. As Liz blogged previously, shareholders will not be pleased if existing policies are pared back. A separate policy could cover clawbacks in circumstances other than an accounting restatement and could make them discretionary, rather than mandated, and cover a different group of individuals. WTW suggests that companies may also consider an additional layer of clawbacks as a result of the recent DOJ directive on compliance programs.
John blogged yesterday on TheCorporateCounsel.net that when it comes to updating your clawback policy, you may have less time than you think. Even though the SEC’s final Dodd-Frank clawback rule doesn’t require the listing standards to be adopted until November 28th of this year, the listing standards that were published in the Federal Register a couple of weeks ago say:
“[w]ithin 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days . . . the Commission will: (A) by order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved.”
John pointed to a recent Weil memo that acknowledges that the effective date for these policies could come months earlier than many companies are planning for. While it’s possible that the exchanges will amend their filings to provide for an effective date closer to what most companies had initially anticipated (January 2024), you can’t count on that at this point.
Thanks to our friends at Willkie, we’ve posted a sample form of clawback policy in our “Clawbacks” Practice Area that addresses the Dodd-Frank requirements and may be helpful to anyone who needs to accelerate compliance efforts. If you have a form that you are willing to share with the community, we would welcome more samples! You can email John at john@thecorporatecounsel.net, Meredith at mervine@ccrcorp.com or me at liz@thecorporatecounsel.net.
I shared a reminder last fall that many companies will need to include a “say-on-when” proposal in this year’s proxy statement. But we all make mistakes! Along with other “say-on-frequency” reminders, this Freshfields blog shares practical steps to take if you forgot to include the proposal, after you pick your stomach up off the floor:
If a company inadvertently omits the say-on-pay frequency proposal from the definitive proxy statement for its annual meeting, there may be a simple way to rectify the oversight so long as the meeting has not yet occurred. Assuming the company does not consider the addition of the say-on-pay frequency proposal a material change to the proxy statement, a company should be able to prepare a short proxy statement supplement and an amended proxy card, filed with the SEC as definitive additional soliciting materials, without the time and expense of a full proxy statement update. In addition to amending or supplementing proxy materials, a company should also be sure to update any electronic voting platforms or portals to include the previously omitted proposal. If the addition of a say-on-pay frequency proposal is considered a material revision, then the company will need to prepare a full amended proxy statement and proxy card.
One key question in evaluating options is timing:
– For a company that relies on the SEC’s “e-proxy” rules to avoid printing and mailing a full set of proxy materials to shareholders, are you already in the 40-day period before the annual meeting is scheduled to be held? If so, it will no longer be sufficient to file the amendment or supplement with the SEC and circulate a Notice of Internet Availability to shareholders. In such a situation, in order to avoid delaying or adjourning the meeting, the amendment or supplement must instead be printed and mailed, assuming there is sufficient time for the materials to be received by shareholders as discussed below. Otherwise, the company will need to set a new meeting date, which may also necessitate fixing a new record date and conducting another broker search.
– Is there sufficient time before the meeting to comply with the notice requirements under the company’s governing documents and the laws of its jurisdiction of organization? If there is not, there may be no choice but to set a new meeting date or adjourn the meeting, which may also necessitate fixing a new record date and conducting another broker search—themselves additional sources of delay.
– Was the company required to file a preliminary proxy statement due to the inclusion of “non-routine” proposals, such as a charter amendment? If a preliminary proxy statement was required, a company should consider whether the addition of the omitted proposal to the proxy statement would be considered a fundamental change in the proxy materials that would require another 10-day waiting period before amended definitive materials can be provided to shareholders pursuant to Rule 14a-6(a). Formal guidance on what constitutes a fundamental change is limited, and the determination for any company will depend on its specific facts and circumstances. However, because a say-on-pay frequency proposal would not itself have required a preliminary proxy statement to be filed and is advisory in nature, we believe there are often reasonable grounds to conclude that adding a say-on-pay frequency proposal would not constitute a fundamental change to a company’s proxy statement.
If a company chooses to file a proxy statement supplement, a few matters should be covered. In addition to providing the omitted say-on-pay frequency proposal and an amended form of proxy card, the supplement should also include an amended notice of annual meeting that includes the new proposal, instructions on how to vote and how to revoke or modify previously cast votes in light of the change, what happens to previously cast votes that are not revoked and disclosure about the effects of votes on the new proposal, such as the effect of abstentions and broker non-votes.
An inadvertently omitted say-on-pay frequency proposal can cause consternation, and fixing the issue requires a company to act quickly under pressure. Nevertheless, with thoughtful analysis and consultation with counsel, a company can often address a slip-up with minimal delay and expense.
3. Board Leadership Disclosures: Lessons From Corp Fin’s Sweep
4. Director Skills & Backgrounds: Why Your Disclosures Need a Refresh… & How To Do It
5. Proxy Fights: Practical Steps for UPC’s Sophomore Year
6. Proxy Disclosures: 12 Things You’ve Overlooked
7. Shareholder Proposals: Finding Success in a Challenging Environment
8. The Latest on Rule 14a-8 No-Action Relief
9. Political Spending: Practical Governance & Disclosure Steps for Fraught Times
10. Human Capital Management: Are You Ready for Detailed Disclosure?
11. Insider Trading & Buybacks: What You Need to Do Now
12. Cyber Risk Disclosures: Key Action Items
13. Climate Disclosures: Requirements & Risks
14. The SEC All-Stars: Executive Pay Nuggets
15. The Top Compensation Consultants Speak
16. Pay Versus Performance: What’s New for Year Two
17. Clawbacks: Key Action Items Now
18. ESG Metrics: Beyond the Basics
19. Navigating ISS & Glass Lewis
I’m very proud of the group of experienced speakers that we’ll be bringing together here – lots of former SEC Staff and other heavy hitters – it’s difficult to spotlight specific folks because everyone is so great! And (especially now that I’ve returned to private practice) I’m excited to get practical guidance as we head into another challenging proxy season & grapple with SEC rule changes, Delaware law issues, an unpredictable political environment, and more.
The Conferences are virtual, September 20th – 22nd. You can bundle registration with the “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271. Here’s a reminder of the benefits of attending:
– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?
– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.
– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.
According to the Compensation Advisory Partners memo that I blogged about a couple of weeks ago, early “pay versus performance” disclosures are averaging 4.3 pages – with at least one running to 7 pages. In an age where proxy statements keep getting lengthier, let’s also recognize the effort that goes in to keeping things brief.
Winning the “Brevity Award” – at least from what I’ve seen so far from larger companies – is IBM. The “Pay Versus Performance” section – on page 66 of their proxy – clocks in at 1.25 pages, mostly consisting of footnotes to the required table. Short & sweet!