So far in 2023, say-on-pay results seem to be improving from 2022 despite decreases in TSR. WTW recently reported on updated say-on-pay results at Russell 3000 companies, and the data continues to confirm the early positive trends:
On the one hand, 2023 say-on-pay outcomes appear to be holding fairly steady. Average say-on-pay support continues to trend around 90%, with negative recommendations from proxy adviser Institutional Shareholder Services (ISS) having a 20 to 30 percentage point downward impact on outcomes.
However, as shown in Figure 1 below, the rate of ISS “no” recommendations for say-on-pay and the overall failure rate has dropped considerably so far in 2023. The 1% failure rate is derived from six failed votes observed to date, which is markedly below the 13 and 22 failed votes observed at a similar time in the proxy season in 2022 and 2021, respectively.
. . . Pay-for-performance disconnects remain the primary issue most investors and their advisers cite when voting against say-on-pay resolutions and pay outcomes are likely driving some of the reduced opposition for say-on-pay this year.
That being said, WTW notes:
It will be interesting to see if the early trend of less say-on-pay opposition continues to play out in the 2023 proxy season. Historically, WTW has tracked a reversion to the mean when all outcomes are ultimately tallied.
ISS Corporate Solutions recently released a paper “TSR: Measuring Performance in a Tough Market” (available for download) that analyzed relative TSR metrics across the S&P 500. Below is an excerpt from the summary with key takeaways:
– As of the end of last year, 54 percent of companies in our analysis have a relative TSR performance that’s equal to or greater than the median of their performance peer group
– In the year through December 2022, 40 percent of companies maintained the same relative positioning
– Median TSR for all the groups was up as of the end of March 2023 after a general stock price recovery from the lows of 2022
– Although stock prices have generally fallen across the board as a result of the recent market turmoil, relative TSR metrics have remained resilient and have delivered on their promise of helping incentivize executives to outperform their peers in challenging and uncertain times
The full paper goes on to suggest action items when planning incentive awards using relative TSR, including carefully selecting and frequently reviewing your peer group, considering relative TSR in the context of other financial and strategic objectives to avoid duplication and this tip on how to incorporate shareholder-friendly provisions:
Companies should consider shareholder-friendly provisions in their award designs to mitigate concerns. These could include:
– Capping award payouts at Target if the absolute TSR of the company is negative over the period in question. The cap would apply even if the company outperformed its peer group.
– Increasing the target goal level to the 55th or 60th percentile of the performance peer group to reflect true outperformance for target payouts.
– Considering absolute stock price targets based on historical market performance, or get-back-to-even targets, to mitigate shareholder losses during down periods.
In case you missed it, the Wall Street Journal ran a big write-up on CEO comp last week based on the numbers reported as “Compensation Actually Paid” under the new pay-versus-performance rules. It’s always interesting to see how new disclosures land, how they’re taken in, analyzed and reported on by the media and, therefore, how they’re widely understood.
The article highlights that the “new method” takes into account changing stock prices. But I think companies and compensation committees hoped that it would be evident from their disclosure — and many included language to this effect — that Compensation Actually Paid isn’t actually reflective of take-home pay and, like the Summary Compensation Table total, still only provides a “moment-in-time snapshot.”
In any event, this is a must-read for those interested in how their retail holders likely view PVP disclosures. Also, check out the table with CEO pay data for the S&P 500, which includes the Summary Compensation Table total, Compensation Actually Paid and median employee pay and graphically depicts pay versus industry pay and performance versus industry performance.
For almost four years now (!), I’ve been teaming up with Vontier’s Courtney Kamlet for a “Women Governance Trailblazers” podcast series – where we interview women in the corporate governance field about their career paths & emerging substantive trends. We’ve had many awesome guests! For our latest 17-minute episode, we spoke with Kelly Malafis, who is a Founding Partner at Compensation Advisory Partners. Our discussion included:
1. The biggest changes that Kelly has seen in executive compensation since founding CAP in 2009.
2. Key trends she’s seeing in executive compensation – and how she’s advising clients to address them.
3. The impact on executive compensation of trends in ESG and an enhanced regulatory environment.
Median CEO total direct compensation was up 4% in 2022 among a select number of companies surveyed by Compensation Advisory Partners, according to a recent memo. CAP looked at 50 companies with fiscal years ending between August & October, finding that long-term incentive awards were driving the modest increase – at a time when financial performance was up, but stock market declines pushed down total shareholder return. Here are more details:
– Performance: 2022 financial performance – as measured by revenue, pre-tax income, and earnings per share (EPS) – was strong, with median revenue (+11.8%), pre-tax income (+10.0%), and EPS (+8.9%) all up, though modest compared to 2021. One-year total shareholder return, or TSR, was down year-over-year (-16.4%).
– CEO Pay: Median CEO total direct compensation increased +4% year over year, driven by a 15% increase in the grant-date value of long-term incentives (LTI). While median bonus payout was down -8% from last year, 2021 was a year of high payouts.
– Annual Incentive Payout: Overall, 2022 median bonus payout for CEOs was above target (119% of target). While this is lower than 2021 (when median payout was 149% of target), two-thirds of companies in this study had a payout at or above target, reflecting continued strong financial performance. Payout for the CEO was generally in line with the corporate payout factor (i.e., the percentage at which the annual incentive funds based on company performance) as companies were less likely to make discretionary adjustments (up or down) to CEO pay.
– Say on Pay Results: For the third year in a row, median say on pay support was 95%. We saw a sharp increase year over year in the number of companies receiving 80% or higher support (98% this year vs. 88% last year).
Investors seem to be evaluating equity plan proposals with a more critical eye this year, based on early proxy season results. In its latest update on voting outcomes, Semler Brossy notes:
Average vote support for equity proposals thus far in the proxy season (88.4%) is 300 basis points below the average vote support observed at this time last year, driven by two failed equity proposals early this proxy season. By comparison, no more than three proposals failed in a single year over the last five years.
A recent SGP write-up takes a closer look at why this might be happening – and suggests that companies may need to put extra effort into engagement if a plan proposal is currently on the ballot…or expected for next year. Here’s an excerpt:
Across the market, declining share prices over the past year created dilution and share availability issues, causing companies to rethink equity practices and potentially creatively manage equity burn rates (shift to cash? Lower grant sizes? Change mix of awards?). For many companies, creative considerations were not possible – which potentially has put more companies in a precarious situation: needing shares to replenish their equity plan, but bumping into the dilution and plan cost thresholds of proxy advisors and large investors. In the coming months, many companies will need to strategically engage with their shareholders to win support for their equity plans.
WHAT TO WATCH: Although very few equity plans each year fail to receive majority support, there have already been two failures in the first three months of 2023. Given the challenging market conditions of the past year, large grants to executives have been increasingly costly and highly dilutive. Will this be the year that investors push back?
SGP’s memo also touches on other executive pay-related trends that are coming to the fore this proxy season – lower director support due to executive pay concerns, importance of say-on-pay engagements, and whether pay vs. performance disclosures are creating more questions than answers.
If the Financial Times is diving into your perks disclosure, it’s usually not a good sign. But that’s not the case for this recent analysis of personal pizza reimbursements for Domino’s execs. Read on if you enjoy a cheesy perks story.
Here’s the deep dish: the Domino’s NEOs have been enjoying several thousand dollars worth of delicious products each year. According to this year’s proxy statement, the CEO received more than $7k of food payments in 2022!
The FT takes a stab at tallying the menu items that could possibly total up to these figures – and for the economics geeks out there, it speculates on the behavioral patterns that drive the spending. Are execs regularly feasting on the company’s most expensive option – a large (14”) hand-tossed MeatZZa with premium chicken, bacon, Philly steak, salami, pineapple and shredded parmesan asiago, which retails for $30? Since that pie clocks in at 3,920 calories, I was relieved to see that the company also covers an annual comprehensive physical.
The FT “defies readers to claim they learned anything useful in this piece” – but I did learn a thing or two! First, it had never occurred to me to measure pizza consumption on a square footage basis. Plus, as far as I know, nobody is sharpening their pitchforks over this cheesy situation…yet…which is a rare feat for any perk. However, while the article is full of great infographics, I’ve got to quibble over the lack of pie charts.
With the compensation committee’s role expanding significantly and quickly in recent years, this NFP Compensation Consultants blog reminds us that pressure is also on corporate secretaries and HR teams to facilitate committee oversight of new focus areas, like HCM and DEI. That doesn’t mean to you need to reinvent the wheel, but a continued—and greater—focus on organization and communication is key.
The blog notes that committee calendars are the most effective tools to ensure that topics are addressed and sufficient time is dedicated to them. Evolving expectations of committees means these calendars will need to be refreshed more often. I’ve seen companies prepare two versions for different purposes: a granular version for management’s internal use and a color-coded, highly designed version to include in committee materials.
The post also highlights the importance of increased communication for committee members and HR. Often the corporate secretary has a key role in facilitating that communication. If your compensation committee agenda and materials are prepared by one department working in a silo, now is the time to improve your internal collaboration—among HR, legal and financial reporting.
For resources, including comprehensive guides and sample calendars, check out our “Compensation Committees” practice area on CompensationStandards.com.
The news has been chock full of corporate crises and mass layoffs this year, and there’s been no shortage of media reports criticizing high CEO pay in the wake of these events and calling out CEO pay increases staying ahead of inflation while median employee pay stagnates. This CNN article notes that sometimes – like Dire Straits said – it was just that the time was wrong. Hiring and compensation decisions, and even prior year performance, might be said and done before a crisis occurs. And in times of trouble, retention may be key.
On the other end of the spectrum, the article also notes that some large companies significantly reduced CEO pay earlier this year in light of macro trends. After recent layoffs, Zoom’s CEO announced that his salary was being reduced by 98% and he was forgoing his fiscal 2023 bonus. But pay cuts can be criticized as well, with Forbes recently highlighting stock price increases after pay cuts and layoffs, saying the salary and bonus cuts look “performative.” As highlighted by the Wall Street Journal, pay-versus-performance disclosure may make the impact of stock price fluctuations on CEO pay even more evident.
As Dave recently blogged on TheCorporateCounsel.net, in our current polycrisis environment, crisis management is critical. I hate to add to your list of everything, everywhere all at once, but the reasonableness and optics of CEO pay – always a hot topic – also need to be front and center for your compensation committee (and your PR and IR teams) in times of crisis.
Liz has blogged about the advance proxy voting disclosure initiatives of various institutional investors on our Proxy Season Blog on TheCorporateCounsel.net, including Neuberger Berman’s NB Votes initiative. As part of that initiative, now in its fourth year, NB recently announced that it’s voting against the directors of one company due to low share ownership levels and related company policies. Here’s an excerpt:
Regarding share ownership, we encouraged the company to make share ownership guidelines mandatory and increase ownership requirement for management and directors. Further, we have concerns regarding a notable lack of insider purchases during a period when the company shares are at a decade’s low. In our view, it is imperative for management and the board to maintain a significant equity ownership in the company not only to ensure alignment with shareholders’ interests, but also to signal to the market a renewed commitment to protecting and enhancing shareholder returns.
…Due to our concerns about the lack of share ownership at the board level we intend to oppose the election of all independent directors who do not meet the company’s current, voluntary guidelines.
Check out our “Stock Ownership Guidelines” Practice Area for checklists, sample guidelines and a monitoring chart to help you keep tabs on compliance by your officers and directors.