Earlier this month, I blogged about biotech companies reconsidering using options as the sole award type — specifically, whether that continues to be advisable in a down market after stock prices dropped and options remained underwater. Another “option” often considered — but less often pursued — in these circumstances is a repricing.
WilmerHale recently released a primer on option repricings for public companies. To call repricings “complicated” would be an understatement — they present many traps for the unwary and often elicit shareholder and proxy advisor scrutiny. This primer is a helpful resource for public companies considering repricing underwater options and gives a current summary of the legal issues involved, common structures, the implementation & approval process and alternatives to repricings. In particular, take a look at the chart with pros and cons of each common structure. While significantly more straightforward, the WilmerHale team also released a separate primer that addresses structural, tax, securities laws, accounting and consent considerations of option repricings for private companies.
Here’s something Meredith blogged last week on our “Proxy Season Blog” on TheCorproateCounsel.net:
DFIN is out with its annual “Guide to Effective Proxies” (available for download). As usual, this is a “go-to” guide for benchmarking your proxy disclosure against “innovative and shareholder-friendly” samples that DFIN drew from its client base. Mirroring the trend in “best in class” proxies in recent years to do more with less, this year’s guide both shrunk in length — still at a whopping 318 pages! — and contains a new section on pay versus performance. Here’s an excerpt from DFIN’s press release:
Companies have been telling their Pay for Performance (PfP) story in their Compensation Discussion and Analysis statements for years. New regulations regarding PvP call for quantitative disclosure on executive pay relative to certain financial metrics in order to best illustrate trends. This guide shows how organizations differentiated PvP while finding new ways to tell their PfP story and better illustrate the relationship between executive compensation paid and financial performance.
This 34-page memo from FW Cook analyzes 2023 director pay at 300 companies of various sizes & industries. Companies are paying directors more these days – but are also more likely to adopt total annual limits to protect those decisions. Here’s more detail:
– Total Compensation: The increases in total director compensation in 2023 for the mid-cap and large-cap companies were meaningfully larger than in 2022 (1.1% and 2.0%, respectively), likely reflecting the expanding responsibilities associated with Board and committee service, the tight talent pool for qualified directors, and the general inflationary environment.
– Annual Limits: Prevalence of annual limits on director compensation continues to increase (75% of the total sample versus 72% last year), with a growing bias towards a total compensation limit (59% versus 54% in 2022) rather than an equity-only limit (41%).
On top of regular director fees, FW Cook points out that some companies – particularly in the tech industry – are paying directors for committee membership (on top of committee chair fees):
– Approximately 75% of Technology companies provide committee member retainers; only ~33% of companies in the Industrials sector provide member retainers.
– I blogged a couple of years ago about fees for ESG committee chairs…this year’s report focuses only on the 3 “main” committees of audit, compensation, and nominating/governance.
The report also looks at the pay mix:
– The average mix across the entire sample is roughly 38% cash and 62% equity, slightly more heavily weighted towards equity compared to 2021 and 2022 (40%/60% cash/equity mix in both years).
– In the total sample, 86% of companies use a retainer-only structure (up slightly from 85% in 2022), 11% pay an annual Board cash retainer and meeting fees, and 3% use equity-only programs. Eight percent of companies pay meeting fees after a pre-set minimum number of Board meetings per year and 3% pay fees for all meetings; this is the first year that prevalence of the former has been higher than the latter.
For the companies that include equity in the pay mix, FW Cook notes that most companies are requiring directors to keep that “skin in the game” with ownership guidelines or retention requirements:
– In the total sample, 88% of companies have director ownership guidelines (same as in 2022), while stock retention requirements are less common (34% of companies).
– The most common director ownership guideline is 5x the annual cash retainer with a 5-year timeframe to meet the guideline.
– Of companies with retention requirements, there has been a trend towards requiring retention of stock awards until ownership guidelines are met (68% in 2023, up from 62% in 2022), while 31% require retention until retirement, and 1% require retention for a fixed number of years.
Now that the effective date of October 2nd has passed for the listing standards that implement Exchange Act Rule 10D-1, listed companies that have not already adopted a Dodd-Frank clawback policy have only a few weeks to do so before the compliance deadline of December 1st. But as suggested by the NYSE letter that we blogged about last month, companies applying for initial listing may have less leeway. In our “Q&A Forum” (#1487), a member recently asked about this:
In the NYSE issuer notification that went out a few weeks ago re clawbacks, it provided that “In addition, issuers submitting initial applications for securities to be listed on or after October 2, 2023 will be required to confirm the adoption of a compensation recovery policy as part of its listing application in Listing Manager.” So far, we have not seen an earlier deadline than December 1, 2023 being applied to Nasdaq initial listing applications. Is anyone aware of Nasdaq’s position?
Here’s what John said:
I have not seen any notice from Nasdaq, but the form of Corporate Governance Certification that’s required to be submitted for a new listing application that appears on Nasdaq’s website does include a new Section 5C, which requires a company to certify that it has adopted a clawback policy conforming to Rule 5608. That suggests to me that Nasdaq is requiring companies that are applying for listing after the October 2, 2023, effective date of the rule to have a policy in place.
As Meredith noted back in June, both NYSE 303A.14 and Nasdaq Rule 5608 are subject to cure periods for non-compliance. The NYSE covers that in 302.01F, and for Nasdaq, check out the 5800 series, particularly Rule 5810.
We are continuing to post memos, sample policies, and other practical resources in our “Clawbacks” Practice Area – I have also been finding the May-June issue of The Corporate Executive newsletter extremely helpful as I put the finishing touches on policies and help clients understand the ins & outs.
Since this is such a hot topic and we’re getting in to the 11th hour, make sure to also mark your calendars for the webcast that we’ve just scheduled for Thursday, November 16th at 2pm Eastern – “More on Clawbacks: Action Items and Implementation Considerations.” This is a follow-up to the excellent conversation that occurred at our “20th Annual Executive Compensation Conference,” because it was clear from that session that there are many questions bubbling up about these policies and how they’ll be implemented. If you missed the essential conversation at the Conference, you can still get access to the video archives & transcripts by emailing sales@ccrcorp.com or calling 800-737-1271.
Since at least 2016, we’ve been pondering the oversight responsibilities of the compensation committee that go beyond “executive compensation.” Thinking and practices are continuing to evolve – especially with new disclosure expectations around “human capital management,” evidenced by last month’s recommendations from the SEC’s Investor Advisory Committee about an HCM disclosure rule and guidance from certain asset managers that encourages disclosure of EEO-1 reports (“or else”).
This new 7-page memo from Semler Brossy gives a roadmap for committees looking to acknowledge HCM responsibilities in their charter. It recommends these steps to help directors fully consider their oversight role on this topic:
1. Clarify the HCM connection
2. Understand the current state
3. Define success
4. Determine responsibilities
5. Update the calendar
6. Share oversight & metrics with investors
In addition to the roadmap, the memo gives sample charter language, matrices for visualizing board responsibilities and HCM agenda items, and key HCM areas that boards & committees tend to oversee.
We’ve posted this resource in our “Compensation Committee Charters” Practice Area – make sure to refer back to it the next time you’re discussing roles or updating charters. Also check out this Semler Brossy article on whether you need a CHRO on your board, and Meredith’s blog about the tricky issue of talent retention in M&A.
Pay Governance recently analyzed over 400 biotech companies with greater than $50 million in market cap to better understand how compensation practices in these companies have shifted over the last three to five years. In this report on its findings, the team discusses how market volatility has impacted biotech companies’ equity compensation strategies, noting that “in this environment, significantly underwater options have put pressure on many companies’ equity incentive programs, requiring many to consider different approaches.” At a high level, they found that many biotech companies have adapted their strategies as follows:
– Increased use of restricted stock and restricted stock units (RSUs)
– Increased rate of aggregate annual equity usage (“burn rate”)
– Increased level of automatic equity reserve refresh rates and reliance on such refreshes (“evergreen provisions”)
– Decreased levels of available shares authorized for grant to employees (“share pool” or “equity reserves”)
– Increased levels of outstanding employee ownership (dilution)
After reviewing the trend data, the report concludes that the increased use of RSUs and the higher burn rates are here to stay — albeit at lower levels since both likely peaked in 2022 — with options continuing to be the preferred equity award type.
If you joined us for the “Pay Versus Performance: What’s New for Year Two” panel during our 20th Annual Executive Compensation Conference, you’ve already heard a high-level overview of initial SEC comments on PvP disclosures to date and first-year mistakes seen by our panelists. Since then, Compensation Advisory Partners released this summary of the first 16 comment letters. The comments focus on missing required disclosures and issues with calculating “compensation actually paid.” Here are the common topics noted in the memo, separated by disclosure issues and CAP calculation issues:
– Missing required elements of the disclosure, such as a description of the relationships between Compensation Actually Paid (CAP) and the metrics or the list of 3-7 financial performance measures used to link CAP with company performance;
– Including multiple Company-Selected Measures, or not including the Company-Selected Measure in the tabular list of 3-7 most important financial performance measures;
– Failing to provide a reconciliation of non-GAAP measures selected as the Company-Selected Measure (CSM) against GAAP financial statements;
– Using a TSR peer group that does not match either the industry group used for Regulation S-K in the 10-K performance graph or the compensation peer group disclosed in the CD&A; or
– Incorrect footnote descriptions to the table that suggest misinterpretation of the rules.
– Not including or not identifying all NEOs who served in each year in the table;
– Using partial compensation received for the year for individuals in the table (e.g., if an individual is promoted to a Named Executive Officer (NEO) role during the year, only including compensation earned for the period served as an NEO); and
– Footnotes indicating a “year over year” change in fair value for awards that should be valued as of the date of vesting, rather than at year end.
The memo then lists and summarizes each comment letter, ranked by the recipient company’s annual revenue.
Our conference panelists highly recommended that companies start thinking now about what needs to change for year two of PvP to make sure this year’s preparation process is less of a mad rush than last year’s, and they shared great practice pointers for the second year of disclosure. For example, they suggested that companies shouldn’t feel obligated to maintain the same format for the relationship disclosure or stick with last year’s CSM if they now think another metric would be more appropriate (even if the compensation program is largely similar). If you missed our conferences, remember that you can still purchase access to the archives (including on-demand video plus easy-to-reference transcripts), and we are now offering the ability to earn CLE credit for watching on-demand sessions as well.
If you follow any of our other blogs, you may have noticed that we’ve been changing over from our traditional practice of having our blogs come from the email address of one of our editors. Beginning tomorrow, our “daily updates” email for The Advisors’ Blog will no longer be coming from Liz’s account but will instead come from Editorial@compensationstandards.com. Please follow these allowlist instructions to ensure that you keep getting our emails. If you are not currently receiving this blog, or any of our other blogs, by email, you can easily select any or all you want to subscribe to at the bottom of that page!
The Center for Audit Quality (CAQ) SEC Regulations Committee recently released the highlights from its meeting with SEC Staff on March 21, 2023. At the meeting, the SEC Staff clarified that instruction 1 to paragraph (v) of Item 402 of Regulation S-K — which provides the transitional relief that allows companies to initially disclose three years of pay versus performance information instead of five — applies when companies lose EGC status. Here’s an excerpt:
The Committee and the staff discussed the following question regarding implementation of the recently adopted Pay versus Performance rules:
If a calendar-year Emerging Growth Company (EGC) that completed its IPO in March 2020 lost its EGC status on December 31, 2023, how many years of Pay versus Performance disclosure would the registrant be required to provide in its annual meeting proxy statement to be filed in early 2024?
The staff confirmed that consistent with the transition provisions in S-K 402(v)(8) and Instruction 1 to S-K 402(v), the registrant referred to above would be required to provide three years of Pay versus Performance disclosure (two years for a Smaller Reporting Company (SRC)) in its early 2024 proxy statement.
Late last month, the Vanguard Investment Stewardship team shared a new update about the asset manager’s approach to ESG metrics in compensation plans. This update follows earlier guidance from May 2022.
Vanguard implies that it’s time for more detail because it’s seeing a growing number of U.K. and European companies implementing ESG metrics. However, the insights & suggestions appear to be relevant to all portfolio companies, including U.S. companies.
Vanguard still doesn’t expect companies to use ESG metrics and recognizes there’s no one-size-fits-all approach to executive pay. But if a company does use ESG metrics, those metrics should be transparent, rigorous & well-planned – it’s not a place to “test-and-learn.”
The update explains that pay-for-performance alignment continues to drive Vanguard funds’ say-on-pay votes. The stewardship team gives these examples that may cause concerns & impact voting decisions:
1. The introduction of ESG metrics that are not clearly aligned to company strategy.
2. The inclusion of ESG metrics that are not linked to a financially material risk or opportunity, even where targets are quantifiable or clearly disclosed.
3. The introduction of ESG metrics without the disclosure of comprehensive definitions.
4. Increased weightings placed on ESG metrics or replacing financial metrics with ESG metrics without a disclosed compelling rationale.
5. Year-over-year optimum achievement of ESG targets. This may raise concerns over the rigor of plan design, including the level of rigor in the established ESG targets. This concern may be exacerbated when ESG metrics are not quantifiable or clearly aligned to a company’s annual reporting.
VIS also suggests these “best practices” (see the full 4-page update for more detail on what each of these mean):
1. Focus on materiality
2. Alignment to appropriate time horizons
3. Robust disclosure
4. Stretch targets
5. Use of underpins or modifiers where appropriate
6. Thoughtful approach to external indexes
Lastly, the update shares a few questions that Investment Stewardship reps may ask about ESG metrics during engagements.