Pay Governance recently released this viewpoint on alternatives to option repricings. While the article is focused on the biotech sector, in the current market, companies in many industries are grappling with this issue, and Glass Lewis expects an uptick in repricings in 2023. The viewpoints article points out that, while commonly considered, option exchange or repricing programs are seldom pursued. Between 2017 and 2022, only 29 biotech companies sought stockholder approval for an option exchange or repricing program.
The alert goes on to describe a number of alternatives that many companies considered or implemented in 2022 to re-engage employees while managing share usage and cash expenditures. The alternatives include:
– A CEO pool of RSUs for non-executive employees
– Increasing the mix of RSUs in annual equity grants
– Delivering larger annual equity awards to critical talent
– Granting special equity retention awards
– Granting inducement equity awards to newly hired employees
– Allowing employees to elect their mix of equity awards
– Dividing annual grants in two grant dates
– Shortening the vesting period or increasing the frequency of vesting
– Limiting equity eligible employees based on performance and criticality
– An option exchange or repricing
With respect to repricings, Liz recently blogged about the major issues that need to be considered and vetted, including tax and accounting considerations and tender offer rules.
The purview of compensation committees has expanded drastically in recent years, with an expectation that compensation committees oversee a myriad of topics under the umbrella of HCM—from pay equity to corporate culture and talent development. At the same time, the topics historically addressed by compensation committees are increasingly complex, with newly required disclosures and policies. This Compensation Committee Handbook from the Executive Compensation and Benefits Group at Skadden is intended to help compensation committee members better understand their responsibilities and arm them with the necessary information to discharge those responsibilities, including by explaining some key technical rules, deliberately written in a nontechnical manner. Here’s an excerpt describing the new content in the ninth edition:
We discuss the developments over the past year to executive and director compensation practices and related trends, particularly with respect to the SEC’s new clawback rule in connection with the Dodd-Frank Act (discussed principally in Chapter 2), new pay-versus-performance disclosure requirements (discussed principally in Chapter 4) and continued attention on environmental, social and governance (ESG) considerations (each discussed principally in Chapter 10).
For corporate secretaries of NYSE-listed companies, check out the illustrative compensation committee calendar in the appendix.
This Outten & Golden blog notes six key trends most likely to impact executive pay in 2023:
Increases in Base Compensation
Geographic Location/Remote Work
Retention-Based Compensation
P4P Requirements for Public Companies
Environmental, Social, and Governance (ESG) Prioritization, Integration, and Disclosure
Increased Pay Transparency Laws
Increased Executive Mobility and its effect on Executive Compensation
See the blog for more details on each trend.
I found the first one particularly interesting. In support of this trend, the blog cites Pearl Meyer survey data showing higher base pay increases and off-cycle adjustments to salaries in 2022 as well as further increases expected in 2023, and credits this phenomenon on executives’ preferences for upfront cash rather than deferred compensation or equity in light of market volatility.
On pay versus performance, the blog states:
These new disclosure requirements will undoubtedly impact executive compensation structures for NEOs and say-on-pay voting outcomes as shareholders obtain greater transparency about pay practices, pay and performance relationships, and special awards.
It’s still unclear how investors will use PVP disclosure, but I’ll hop on the bandwagon and hope that monthly vesting schedules are going the way of the dodo. I imagine many companies are reconsidering vesting schedules after going through the first year of equity adjustment calculations!
ISS recently posted updated FAQs on peer group selection methodology and the issuer submission process. As usual, ISS made our lives a little bit easier by highlighting any key changes compared to the FAQs applicable during last proxy season. In addition to a new question on externally managed issuers, ISS also added language to the question about publicly disclosing the updated peer group information submitted to ISS, as follows (emphasis added to highlight the new language):
ISS does not require that companies make any special public disclosure of their updated peer group information at the time it is submitted to ISS. We would expect, however, that this list of submitted companies matches the benchmarking peers that are disclosed in the upcoming proxy. ISS encourages issuers to disclose in the proxy the stock ticker for each peer alongside the peer company name to provide for greater certainty that ISS and investors are considering the correct peers.
If the peers submitted to ISS through this process are different from the peers disclosed in the upcoming proxy, ISS may apply additional scrutiny to this variance as part of its pay-for-performance analysis. If there is a significant unexplained discrepancy between submitted peers and those disclosed in the proxy, ISS may in its discretion remove a company from a future peer submission process.
The first change is an easy action item for companies: Add tickers to your proxy peer group disclosures if you don’t already have them. The second change may not be quite as simple. ISS submissions often don’t involve the same controls as proxy disclosures, and the folks charged with submitting an updated peer group to ISS may not have been in the room with the committee and comp consultant when the peer group was set.
Add the timing lag—by the time you’re submitting your peer group to ISS, you may be in the thick of reviewing peers for the next fiscal year or already have a new peer group—and I can imagine how this could get mixed up. So, double and triple check your peer group submissions to ISS lest you risk losing the ability to submit your peers in the future. That being said, I know some companies choose to opt out of the peer group submission process altogether, particularly when peers haven’t changed much—or at all—since last year’s proxy.
As Meredith noted last week, high-level DOJ folks recently announced a pilot program focused on corporate compensation & clawback policies. They’re part of sweeping policy changes at the Department that are aimed at encouraging voluntary disclosure of misconduct and holding the real “bad guys” accountable. Deputy AG Lisa Monaco previewed this policy in a big memo last fall. This Sidley memo highlights the new details that we’ve been waiting for:
1. Every corporate resolution involving the Criminal Division must include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system. Under this Program, resolving companies will need to revise their performance and bonus metrics to include compliance-related components. Companies might implement a system whereby executives and staff are required to forfeit their bonuses if they fail to meet certain compliance-related objectives.
2. The Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers. Notably, recognizing the reality of how difficult clawbacks can be, Monaco announced that companies that pursue clawbacks in good faith, but are unsuccessful, may still be eligible for a fine reduction.
We’re posting memos about the DOJ’s new program in our “Clawbacks” Practice Area and will be watching how it plays out in practice. The DOJ stance is something to keep in mind as you update your clawback policies in response to the new listing standards that will be finalized this year.
Yesterday, we “celebrated” Equal Pay Day – which represents how far into the current year US women who are working full-time and year-round must work to catch up to what their corresponding male colleagues earned the previous year. There are separate “Equal Pay Days” for different groups of underpaid workers. This NPR article says the gender pay gap of 82 cents hasn’t diminished much over the past 20 years even though women have been making inroads in education and entry-level professional positions. I guess that’s why Margo Price is so frustrated.
Shareholders appear to be less interested in this topic lately – but there may be more than meets the eye. Last week, Apple reported that it had secured shareholder support for every management proposal & recommendation at its annual meeting (also see this Bloomberg article). Falling well short of a majority, 33.8% of voting shareholders supported a proposal from Arjuna Capital that requested the company shift from disclosing median racial & gender pay gaps to statistically adjusted pay gaps. So far, this appears to be the only “pay equity” proposal going to a vote this season.
You might think that this means that “private ordering” for pay transparency & pay equity is receding, but that’s likely not the case. Two trends show that companies still can’t ignore this topic:
1. Investors have merely shifted their focus to the broader concept of racial equity & civil rights audits. I’ve blogged about these proposals on The Proxy Season Blog over on TheCorporateCounsel.net and we’ve also covered what companies should do on PracticalESG.com. These audits tend to also capture the concept of pay equity.
2. In addition to the ongoing push for civil rights audits, new state laws are coming into effect that require companies to publish salary ranges for job postings. That means that employees are getting more info than they’ve ever had before – and boards should keep the resulting “human capital” risk on the radar. Just check out this stunning Twitter thread from a UX writer who aired lots of “dirty laundry” for all to see.
We discussed the Compensation Committee’s role in human capital management – and how pay equity audits come into that – during our “Top Compensation Consultants Speak” webcast yesterday. You can check out the on-demand replay at your convenience – the edited transcript will be available in a few weeks. Also check out our “Gender & Racial Pay Equity” Practice Area for other practical resources on this topic, including a checklist.
Meredith blogged last week that we are starting to see more large-cap pay versus performance disclosures “in the wild” – in response to the SEC rules adopted last August. This memo from Compensation Advisory Partners summarizes early trends for S&P 500 disclosures. Here are some highlights:
– Comparator Group for TSR: Most companies are using an industry index rather than a custom benchmarking peer group.
– Company-Selected Measure: So far, 96% of companies selected a financial measure while one company selected relative TSR. Of the companies that selected a financial measure, the vast majority defined this measure as adjusted or non-GAAP.
– Tabular List of Most Important Measures: The number of measures in the tabular list was 4 at median and 4.6 on average. Disclosure of only financial measures was far more prevalent than disclosure of financial and non-financial measures. Among the companies that disclosed non-financial measures, the measures were typically operational and ESG measures or a combination of operational and ESG objectives.
– Explanation of Relationships Between Compensation & Performance: Some companies just displayed the graphs and did not make any statements to comment on or to explain the relationships. In instances where companies added narrative to the graphs, comments related to items such as the pay and performance alignment, an explanation based on stock price or other performance, and an explanation of the metrics used in incentive plans (versus the requirement to disclose Net Income).
– Summary Compensation Table Vs. Compensation Actually Paid: The relationship between SCT reported numbers and Compensation Actually Paid varied significantly by year…When PEO Compensation Actually Paid and SCT values for all three years are summed, the ratio tends to align to company 3-year TSR performance. While relationships by company vary, on balance there is alignment, likely because the majority of PEO compensation is delivered in stock-based compensation.
– Location of Pay Vs. Performance Disclosure: None of the companies in our sample included their PvP disclosure in the CD&A. The vast majority included the disclosure following the already required tables and often near the CEO Pay Ratio disclosure, another Dodd-Frank disclosure requirement. The placement of the new PvP disclosure reinforces the view that the required analysis of the new rules were not part of the compensation decision-making process of the compensation committee. We do not expect the PvP outcomes to become a primary factor in analyzing future compensation decisions but it will likely be part of the discussion going forward.
– Length of Disclosure: Disclosures among early filers spanned 3 to 7 pages, with a median of 4 pages and average of 4.3 pages. Since this is the first year of required disclosure, most companies focused on complying with the requirements and minimizing additional voluntary disclosure. The longer disclosures were often the disclosures with the most detailed footnotes and charts reconciling the Compensation Actually Paid calculations.
Thanks again to the CAP team for these early takeaways – see the full memo for more detail, as well as our “Pay-for-Performance” Practice Area. We’ll be sharing more analysis and guidance on newly required pay vs. performance disclosures at our “Top Compensation Consultants Speak” webcast this afternoon – join us at 2pm Eastern!
Tune in at 2pm Eastern tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest areas of focus for compensation committees, including early trends in pay vs. performance disclosures & say-on-pay.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. 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. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
As Liz and Dave blogged, the exchanges have posted initial rule filings to implement listing standards under the SEC’s Dodd-Frank clawback rule. On March 7, the SEC published notices to solicit comments on both the NYSE and Nasdaq proposed rules. Comments will be due 21 days from publication of the notices in the Federal Register.
Since NYSE and Nasdaq posted their rule filings, memos have been rolling in on the proposals, which we’re posting in our “Clawbacks” Practice Area. Especially for our law firm members who need to be well-versed on both proposals—and know how they differ—this Davis Polk memo provides a handy chart with a side-by-side comparison of the terms. They both closely conform to the SEC’s requirements, but as Dave noted, as usual, the process differs a bit in the case of a company that does not comply. Here’s an excerpt from the memo:
What happens if a company does not comply?
If the NYSE determines that a company has not clawed back erroneously awarded compensation, as required by its policy, reasonably promptly after such obligation is incurred, trading in all listed securities of the company would be immediately suspended and the NYSE would immediately commence delisting procedures. The NYSE will determine whether the steps a company is taking constitute compliance with its clawback policy.
If a company fails to adopt its required clawback policy by the Effective Date, the company would be required to notify the NYSE in writing within five days. The NYSE will then promptly send written notification to the company of certain procedures, including contacting the NYSE to discuss the status of the policy and issuing a press release disclosing the occurrence of the delinquency.
If a company does not adopt a compliant clawback policy, disclose the policy as required or comply with the policy’s clawback provisions, then it will be subject to delisting.
Nasdaq will determine whether the steps a company is taking constitute compliance with its clawback policy. The company’s obligation to claw back compensation reasonably promptly will be assessed on a holistic basis with respect to each accounting restatement prepared by the company. Nasdaq will consider whether the company is pursuing an appropriate balance of cost and speed in determining the appropriate means to seek recovery, and whether the company is securing recovery through means that are appropriate based on the particular facts and circumstances of each executive officer who owes a recoverable amount.
A noncompliant company is required to submit to Nasdaq Staff a plan to regain compliance, and the administrative process for such deficiencies will follow the established pattern used for similar corporate governance deficiencies and would allow Nasdaq Staff to provide the issuer up to 180 days to cure the deficiency; thereafter, Nasdaq Staff will be required to issue a delisting letter.
There was another regulatory development on clawbacks recently—this time from the DOJ. Here’s a summary of the DOJ’s announcement from Freshfields:
On the heels of the issuance of the Proposed Exchange Rules, last week, Deputy Attorney General Lisa Monaco and Assistant Attorney General Kenneth Polite announced the launch of a three-year DOJ pilot program on compensation incentives and clawbacks. Under the “first-ever” program, the DOJ will (1) require corporate criminal resolutions to include a directive that companies implement a compensation system that promotes compliance, and (2) reward companies that attempt in good faith to claw back payments to law-breaking executives and employees—even if those efforts are unsuccessful. Monaco said in making the announcement: “[The DOJ’s] goal is simple: to shift the burden of corporate crime away from shareholders who frequently play no role in the misconduct and onto those who are directly responsible.”
We’ve now posted the links for early-bird registration for our “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences.” The conferences will be fully-virtual from September 20th to 22nd. We’ve also posted a preview of the topics & speakers. This is a milestone year (two decades!), and the practical guidance our panelists share is more important than ever as we face an incredibly active SEC and a challenging economic, political and well…everything…environment.
Here’s what Liz shared on TheCorporateCounsel.net on why this is a can’t miss event:
We’re particularly excited about the fact that Corp Fin Director Erik Gerding will be sitting down with our very own Dave Lynn for an interview about his latest views on Corp Fin priorities & expectations.
This interview in itself is a compelling reason to be there. But if you (or your boss) need more convincing, consider these benefits (feel free to pass these along to whomever approves your budgeting requests):
– 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.
– There’s an “early bird” rate!! We understand budgets are very tight and that more cuts could be coming. If you sign up now, you get the best price. This helps us plan ahead, and helps you save money. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271.