This recent post on the Goodwin Public Company Advisory Blog was prompted by several questions related to best practices for filing a new equity plan or amendment after shareholder approval. The blog notes that the form — but not the final copy — of the plan is included with the proxy statement and recommends that companies file the final plan or amendment as an exhibit to the Item 5.02(e) 8-K instead of incorporating the form attached to the proxy statement by reference or waiting until the next 10-Q. Hopefully, this prevents that 10-Q exhibit from being overlooked. And this is just one of those small ways to make things easier on people navigating your EDGAR filings — it’s annoying to click an exhibit link and find yourself in a proxy statement!
Maybe most importantly, it also suggests that companies combine the equity plan disclosure under Item 5.02(e) with the 5.07 disclosure reporting the results of voting at the annual meeting. As a reminder, under CDI Question 117.08, when a plan is subject to shareholder approval, the 8-K filing is triggered by receipt of that approval (not the earlier board action).
This may seem obvious, but in the thick of first quarter reporting and closing out proxy season, your instinct may be to pull last year’s annual meeting 8-K and tweak the proposals but lose sight of the additional 8-K trigger in a year with an equity plan. As a basic proxy season blocking and tackling tip, one of the ways to avoid this — and to remember other infrequent annual meeting 8-K disclosures like the frequency vote — is to include notes and related reminders in your proxy season timeline, which you’re usually preparing while thinking through your annual meeting proposals and the related proxy-season implications.
– Meredith Ervine
Glass Lewis has opened its Q3 peer submission window. Any company can make changes during this opening, but it’s most relevant for companies with meetings between October & February – there will be another window for companies with meetings from March to September. Glass Lewis identifies a few reasons you would want to submit changes:
– Your company has a more recent public disclosure with an updated peer group than the most recently filed Form DEF 14A (e.g., on your website or a Form 8-K).
– Your company provided two compensation peer groups in your most recently filed Form DEF 14A, and you wish to clarify which peer group should be used by Glass Lewis. For example, in your most recent proxy statement, you include one peer group for 2021 and one peer group for 2022, the latter of which would be included in your 2023 proxy statement for 2022 compensation. In this case, Glass Lewis generally collects the 2021 data. If instead you wish for the 2022 data to be used, the peer group submission process allows you to update us with this information.
– Your company publicly disclosed your 2021 peer group and specific changes to the constituents of that peer group for 2022, without separately listing the 2022 peer group in full. In this case, Glass Lewis generally records the peer group for 2021 compensation, but the peer group submission process allows you to update this information with the 2022 peer group.
The window closes in at midnight PT on Sunday, August 20th. There is no need to submit peers if you believe Glass Lewis has details of your most recent publicly disclosed peer group. If you don’t participate in this update process, Glass Lewis will rely upon the compensation peer group that was disclosed in the proxy statement for your most recently held annual general meeting. Also, Glass Lewis says to focus on submitting the most relevant and publicly disclosed peer group used to set executive compensation levels. Do not include more than one peer group, and do not include private companies in your list of peers.
Here are more details about the proxy advisor’s peer group methodology. Glass Lewis has been using Diligent data & analytics since 2020 or so. The proxy advisor uses the company-selected peer group as a starting point for its own peer selection to evaluate pay and make say-on-pay voting recommendations.
As has been the case for the past few years, our “Proxy Disclosure & 20th Annual Executive Compensation Conferences” will include a session with the pay experts from both ISS & Glass Lewis. Don’t miss the chance to hear what issues are affecting their recommendations. Our conference is timed so that you can tackle issues head-on before your next annual meeting. Register today!
– Liz Dunshee
DEI-related goals have become one of the most common non-financial metrics in public company executive incentive plans. However, in addition to thinking through potential complexities and unintended consequences, you may also need to work with your employment law colleagues to take a closer look at those programs and related disclosures in light of June’s SCOTUS affirmative action decision, and related fallout.
To get more color on what executive compensation advisors should know, I’m delighted to share this guest post from Orrick’s J.T. Ho, Mike Delikat, John Giansello and Bobby Bee:
On June 29, 2023, the Supreme Court found Harvard and UNC’s admissions policies, which considered race and ethnicity as factors in admissions, to be unlawful under Title VI of the Civil Rights Act of 1964 and the Equal Protection Clause of the Fourteenth Amendment. While this ruling does not directly impact corporate DEI programs due to existing legal prohibitions on considering race in employment decisions, this case may embolden more applicants, employees, government officials like state Attorneys General and conservative activist groups to bring “reverse discrimination” claims and shareholder demands and proposals, a trend that already is on the rise.
Executive compensation programs that include DEI performance as a metric have already been and may continue to be a source of such claims and attacks. Many executive compensation programs in recent years have incorporated DEI metrics due to institutional investor demands. Such goals are often tied to increasing the number of women or diverse employees by a certain percentage, especially in higher-paid roles or retaining a certain percentage of such groups of employees, and have become more formulaic and rigorous over the years due to investor scrutiny.
However, while “the devil is in the details,” incorporating DEI metrics into executive compensation programs can lead to the risk that managers perceive the achievement of the metrics as a de facto quota and impel employment decision-making based on diversity metrics instead of individual qualifications and job performance—or the reasonable perception thereof, which could give rise to reverse discrimination claims. For example, in Frank v. Xerox Corp. (5th Cir. 2003), where the Fifth Circuit reversed summary judgment for Xerox on a reverse discrimination claim, the court noted that “[s]enior staff notes and evaluations also indicate that managers were evaluated on how well they complied with the [diversity] objectives,” among other factors. As a result, the Fifth Circuit noted a jury could find the company “had considered race in fashioning its employment policies” and that because of plaintiff’s race, “their employment opportunities had been limited.” According to the EEOC amicus brief filed on appeal, managers were evaluated on how well they followed and adhered to diversity objectives in making personnel decisions; numerical targets were considered in hiring, promotion or pay decisions; and money designated for merit pay increases was allocated based on achievement in specific “EEO categories.”
The court arrived at a different conclusion in Coppinger v. Wal-Mart Stores (N.D. Fla. Oct. 25, 2008), where the plaintiff alleged, among other things, that Wal-Mart tied manager bonuses to its diversity program involving two components: (1) placement goals, which measured the disparity between the rate at which women and minorities apply for managerial positions and the rate they obtained such jobs, and (2) good faith effort goals, which required all salaried managers to mentor three employees from diverse backgrounds and attend at least one diversity event each year. Although the court granted Wal-Mart’s summary judgment motion, the court noted that it did so because, despite the allegations, “no part of any decisionmaker’s bonus or compensation was related to placement goals or good faith efforts goals other than attending one diversity event each year.” Although the court concluded that the plaintiff had failed to point to any record suggesting that managers took the goals into consideration when making any employment decision, it left open the question of whether it would have held differently had such goals been more concretely tied to the managers’ evaluations or bonuses.
While there are few cases in this area to date, in light of the recent Supreme Court decision, companies who incorporate DEI metrics into executive compensation programs should do a privileged evaluation of their programs to determine whether their goals actually impact individual employment decisions, which can be problematic, or merely inspire broader initiatives, such as improvements in outreach and in the composition of candidate and interview pools or evaluation techniques, which is legally permissible. In other words, rewarding executives for their overall efforts on DEI rather than for achieving targeted metrics will mitigate some of the legal risk.
Further, whether goals involve hiring or retention is also relevant as what leads to employee retention is a complicated set of factors, including organizational culture, effective leadership and employee perceptions of working conditions, and it is often difficult to connect goals related to retention to any individual employment decision in hiring, promotion, termination or salary and benefits. Such analyses are complicated, and companies are advised to seek legal counsel and the benefits of privilege to ensure that factors that mitigate against the risk of reverse discrimination claims are being considered and implemented when constructing executive incentive plans.
This is certainly a challenging area, and we’ll be discussing practical ways to approach it at our virtual conferences that are coming up in less than 2 months – the “2nd Annual Practical ESG Conference” and the “Proxy Disclosure & Executive Compensation Conferences.” Here’s the action-packed agenda for the Proxy Disclosure & 20th Annual Executive Compensation Conference. Get guidance on navigating DEI oversight, disclosures & goals during these two panels:
– “Human Capital Management: Facing Down Heightened Complexities & Disclosures” – with Skadden’s Ryan Adams, Kirkland’s Sophia Hudson, Vontier’s Courtney Kamlet, and Aon’s Laura Wanlass
– “ESG Metrics: Beyond the Basics” – with Orrick’s J.T. Ho, Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, and Pay Governance’s Tara Tays
Register today for this can’t-miss event. Bundle your registration with our “2nd Annual Practical ESG Conference” to get all the info & perspectives you need at the best price!
– Liz Dunshee
Here’s an update from Gibson Dunn on how “pay equity” shareholder proposals fared this season:
The number of shareholder proposals calling for a report on the size of a company’s gender and racial pay gap and policies and goals to reduce that gap increased during the 2023 proxy season. In 2023, shareholders submitted 16 proposals (up from nine proposals submitted in 2022), including two resubmissions to companies that received pay gap proposals last year. Six gender/racial pay gap proposals were submitted by Arjuna Capital and 10 were submitted by James McRitchie and/or Myra Young. Average support for these proposals decreased in 2023 as compared to 2022: the nine proposals voted on in 2023 received average support of 31.7% (with none receiving majority support), a significant decrease from average support of 42.6% for the five proposals voted on in 2022 (with two receiving majority support).
Six proposals were not included in the company’s proxy statement, with one proposal withdrawn after the company agreed to disclose quantitative median and statistically adjusted pay gaps. Each of these proposals targeted unadjusted pay gaps. In addition, where the company did not already provide adjusted wage gap information for comparable jobs (i.e., what women and ethnic minorities are paid compared to their most directly comparable male and nonminority peers, adjusted for seniority, geography, and other factors), the proposals requested that the company also provide adjusted pay gap disclosure.
Even though these proposals aren’t garnering significant shareholder support, other trends & developments mean that corporate leaders and advisors must continue to pay attention to “pay equity” – while also approaching any policies and disclosures carefully so they aren’t perceived as being discriminatory. Meredith blogged a few weeks ago about data collection tips to ensure that any information that you disclose is accurate & consistently calculated. When it comes to disclosure examples, Arjuna is still publishing its annual “Racial & Gender Pay Scorecard” – and for the first time in 6 years, Arjuna awarded a perfect score to a company for its disclosure.
– Liz Dunshee
According to this analysis from ISS Corporate Solutions, total compensation rose by 23% for S&P 500 CEOs over the past 5 years – compared to only 1% for CEOs of FTSE 100 companies. Here’s more detail:
– Median S&P 500 CEO salary grew 15% vs. 10% for the FTSE 100
– Annual bonuses increased 22% among S&P 500 CEOs vs. 21% for FTSE 100 CEOs
– The most striking difference was long-term Incentive (LTI) pay, which grew 34% for the S&P 500 CEOs, while dropping by 3% at FTSE 100 companies.
The article goes on to note that LTIs constituted 71.4% of S&P 500 CEO pay in 2022 (based on granted pay value). If they’re working as intended, those incentives seem to have paid off not just for US CEOs, but also for shareholders of the US-listed companies:
While many factors may contribute to the growing pay disparity, S&P 500 companies have outperformed their FTSE 100 counterparts both in terms of market cap (value creation) and revenue growth. Median market cap and revenue among S&P 500 companies witnessed 52% and 40% growth, respectively, while among their FTSE 100 brethren, market-cap levels remained flat despite a 20% rise in revenue.
I blogged about this pay mix – and payoff – back in 2019. Since then, the appetite for high-risk, high-payout awards has only grown. Several companies have granted “moonshot” awards to take pay to new heights. LTIs haven’t caught on to the same extent in the UK. America: Go big or go home!
– Liz Dunshee
Earlier this year, we blogged about two enforcement actions involving compensation-related disclosure failures — one predominantly related to personal use of a corporate plane and one concerning both perks and related-party transaction disclosures. In light of these and other enforcement actions involving companies with inadequate compensation-related disclosure controls, this Bryan Cave blog suggests that companies review their existing disclosure controls and procedures in this area to make sure they address these areas:
– The use of corporate-owned or charter aircraft, including proper accounting for any personal use
– The identification, valuation, documentation and tracking of other perquisites
– The identification, documentation and tracking of related person transactions, including procedures to identify relevant covered persons, such as relatives of directors and executive officers and their respective businesses
– Training of staff in the scope, definition and valuation of perquisites and related person transactions
The blog also recommends the following, which I would argue are a “must have” given how difficult it can be to identify and track perquisites without these controls:
– Adding or expanding perquisite questions in annual D&O Questionnaires
– Coordinating with the Compensation Committee and HR department to establish and enforce policies and procedures for approving perquisites
– Coordinating with the HR or Executive Compensation departments to document and track perquisites
– Meredith Ervine
We have posted the transcript for our recent webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – in which Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze this season’s highlights & lowlights. They covered a ton of ground in a short amount of time, including the following topics:
– Say-on-Pay Results
– Key 2023 Lessons Learned
– Pay-versus-Performance Highlights
– Developments in CD&A
– Perquisites Disclosure
– CEO Pay Ratio
– Equity Compensation Plan Proposals
– ESG Metrics
– Pay-Related Shareholder Proposals
– Human Capital Management
– Proxy Advisors
– Recent & Expected SEC Rulemaking
– The Latest on Clawbacks
One of the themes of the webcast was to try to avoid mega grants or “moonshot” awards. As Dave noted, these awards have waxed and waned in popularity over the last dozen or so years, and some companies are dealing with the fallout of grants made in the 2020-2021 period. Here’s an excerpt from Dave’s comments on this topic:
These are basically larger-than-normal equity awards, and they incorporate within them stretch goals to try to incentivize recipients to basically “shoot for the moon” in terms of long-term growth and shareholder value. […] The stock price targets are high, because you’re trying to say, “If we just really hit it out of the park and increase shareholder value by such a huge factor, then the value that’s accorded to this “moonshot’ award is going to be justified.” The problem was when the stock prices declined considerably, it became so much less likely that you would ever hit these price targets that were set at much higher price levels.
You run into a whole bunch of problems, and particularly one of the things that the investor community and the proxy advisory firms look for is, whether you’ve committed to not make additional equity awards during the life of one of these “moonshot” awards. Then, when you’re stuck with this “moonshot” award that has no incentive value, what do you do? Do you go back on that promise, or do you try to come up with other ways of addressing the issue, and are those other ways going to be suitable in terms of pay-versus-performance? There is an accounting overhang for these awards because you are expensing them based on grant date fair value. Then this change of circumstances happens and you don’t get another bite at the apple for accounting purposes. There’s also an overhang issue that these awards create that sometimes has to be considered in how you describe them.
One aspect of these types of awards that is important to think about when you’re drafting the CD&A disclosure is that it’s not just investors that read proxy statements and the executive compensation disclosure. These awards can draw a lot of attention among employees of the company. We saw, at least in 2022, the “great resignation.” Even today, people who are laser-focused on their impressions of executive conduct and executive compensation may choose where they want to work based on these things. The way you justify or describe these types of extraordinary mega grants in the CD&A is something that you have to look at through the lens of those types of readers as well.
– Meredith Ervine
This WTW memo addresses the next steps — both for disclosure and compensation-setting — for companies with their first proxy season of PVP disclosures behind them. In the off-season, WTW recommends that companies:
– Review peer disclosures and any SEC comment letters to understand normative market practices.
– Collect and analyze readily available peer data.
– Understand how external observers will use and interpret PVP.
Here’s an excerpt on the compensation-setting piece:
WTW recommends that companies start to collect CAP data for compensation peer groups and understand how the information could fit into existing frameworks for assessing alignment of pay and performance.
Understanding how similar or dissimilar the findings are utilizing CAP when compared to current approaches of assessing pay and performance alignment will indicate whether these are a helpful supplement or potential replacement of existing analyses in the future.
Additionally, for any companies that might not have been performing pay for performance alignment tests with regularity, the new disclosures provide a much easier avenue for assessments than prior frameworks where compensation needed to be calculated by the NEO for each peer.
Liz recently blogged about a Semler Brossy memo that argues that, even in the post-PVP era of “compensation actually paid,” older, time-tested approaches to assessing the link between pay & performance — like more traditional realizable pay analyses — will continue to be important for boards and compensation committees. Compensation committees certainly won’t want to limit the data they reference now that CAP is available, but this WTW memo highlights some benefits of using CAP as well:
CAP, while arguably more complex to calculate for individual companies, will have several advantages in pay and performance analyses that use peer data:
– Ease of collection: Straightforward to collect from peer disclosures
– Comparability: Consistent calculation methodologies allow for comparability across companies
– Transparency: Shareholders and other external observers have access to the same underlying data
– Meredith Ervine
You know Tornetta v. Musk, but do you know the greatest “shareholder derivative lawsuit settlement ever as measured by dollar value” (maybe) of all? Over on the D&O Diary blog, Kevin LaCroix analyzes the settlement agreement in the shareholder derivative lawsuit that the Police and Fire Retirement System of Detroit filed against Tesla’s board in June 2020 alleging excessive director compensation. Here’s an excerpt from the blog with background on the claims and details of the settlement agreement, which remains subject to Delaware Chancery Court approval:
The lawsuit alleged that the board had paid themselves “outrageous” compensation in the form of directors pay, stock awards, stock options, and other benefits and bonuses. The complaint alleges that the board “granted themselves millions in excessive compensation and are poised to continue this unrelenting avarice into the indefinite future.” The complaint sought to have the board members disgorge “egregious” stock option awards, reforms to board compensation practices and a declaration that the defendants had breached their fiduciary duties to Tesla and its stockholders.
… The settlement provides that the director defendants will, jointly and severally, provide to Tesla the value of 3,130,406 stock options, using methods and valuations provided in the settlement stipulation. The director defendants will return the value of the options in one of three forms: cash; unrestricted common shares of Tesla stock; and unexercised Tesla options. The director defendants shall have the “sole discretion” in the ratio of returned cash, returned stock, and returned options, provided that the total value of the returned amounts equals the settlement option amount. The agreement specifies the method to be used in valuing the returned assets. Using these valuation methods, the value of the settlement is $735,266,505. As part of the settlement, the director defendants did not admit to any wrongdoing.
The director defendants also agreed to permanently forego options for 2021 and 2022 and will not receive any compensation for Tesla board service for 2021 and 2022. The current directors also agreed to forego any compensation for Tesla board service for 2023. The current board also agreed to adopt corporate governance reforms and the board’s compensation committee agreed to certain measures to ensure oversight and independence.
The blog goes on to discuss the settlement’s comparative size. Kevin LaCroix has been tracking derivative settlements, and the largest-by-dollar-value data point is based on his calculations and supported by a quote from plaintiffs’ counsel in the case. It’s also notable that the defendant directors agreed to return cash, stock and options that they were granted for board service.
– Meredith Ervine
I’m loving Meredith’s new podcast series, “The Pay & Proxy Podcast”! If you haven’t already checked it out, now is a great time to listen to the latest episode – which is a 23-minute interview with Skadden’s Ryne Posey about “Mistakes to Avoid When Transitioning CEOs.” Meredith & Ryne discuss:
1. Understanding and quantifying the compensation package that may be due to the current CEO
2. Considerations when structuring a compensation package for an incoming CEO
3. Covenants in the outgoing CEO’s employment agreement
4. Potential implications for “good reason” termination rights in the employment agreements of other executive officers
5. Important considerations for internal and external communications plans
– Liz Dunshee