BlackRock recently released this investment stewardship announcement, which complements its global incentives commentary by outlining factors that US companies may (should?!) consider when designing executive compensation programs. Directors and others who set compensation will appreciate the high level approach BlackRock has taken here. The announcement specifically avoids providing prescriptive guidance on executive compensation construction, which BlackRock believes boards are in the best position to design. Instead, BlackRock encourages compensation committees of US companies to consider the following factors:
– How the balance between retentive and motivational components in compensation program design promotes long-term performance
– How the compensation program rewards long-term financial value creation, sustained across the duration of the program’s performance period
– How pay underpins strategy, with clear disclosure of the rationale for the selected performance metrics
– How resilient the pay program may be across dynamic market environments and the business cycle
– How the committee might responsibly use discretion to reinforce alignment of pay program outcomes with long-term shareholders’ interests
– How to provide sufficient disclosure in unusual situations such as executive transitions and newly public companies
In this uncertain environment, BlackRock expresses concerns about the resilience of executive compensation programs and suggests that companies may have overly relied on performance awards since 2020. Here is an excerpt:
We believe over-indexing executive pay to performance-levered awards increases the potential for a perceived need for special awards and award modifications, especially in tumultuous business environments. Since 2020, the business environment has been challenging for many companies and as a result, many performance awards have not paid out under the formulas within the plan design. Similarly, many options grants are underwater. We have noted that some boards have used discretion, special awards, and/or award modifications to increase the compensation likely to be realized by executives. In essence, these committees seem to be, at least in part, rewarding executives for expended effort rather than for realized results aligned with returns to long-term shareholders.
We ask that companies consider and explain how their executive compensation program is resilient and, thus, will deliver reasonable pay outcomes across a broad range of business outcomes and market environments. In this context, resilient means that programs will provide sufficient retentive impact without intervention when market conditions are difficult, motivate appropriate risk behaviors by executives, reward performance when conditions are more favorable, and adequately reflect the financial performance that shareholders are experiencing.
CalPERS, which due to its position as the largest public pension fund in the US is an influential investor at many public companies, articulated priorities for the current proxy season as part of a recent Investment Committee meeting. Executive pay remains a priority for this proxy season. Specifically, CalPERS will focus on engagement on relative underperformers with continual higher relative pay. The pension fund will continue to withhold votes from directors at companies with poor pay practices. The “Proxy Voting & Corporate Engagement Update” presented at last month’s Investment Committee meeting shares these results on executive pay votes over the past two years:
– Voted “against” 49% of management say-on-pay proposals versus 55% “against” in 2021
– Voted “against” 1,289 Compensation Committee members in 2022 versus 3,079 in 2021
Although that’s still a lot of “against” votes, at least there was as year-over-year improvement, from the corporate perspective.
Meanwhile, BlackRock – the world’s largest asset manager – has said in its Investment Stewardship team’s engagement priorities that it will want to talk with compensation committee member(s) if it identifies “apparent misalignments” between executive pay & performance or has other concerns about a company’s compensation policies. BlackRock will also vote against both say-on-pay and compensation committee members if say-on-pay is on the ballot and it concludes a company has failed to align pay with performance. That’s consistent with the voting guidelines announced in December.
From the folks who brought you the say-on-pay tracker and other tools, the team at Farient Advisors has now announced the launch of “PVP Tracker” – which can help you stay on top of how S&P 500 competitors and peers are sharing data. Here’s more detail:
Included in our newly launched PvP Tracker™ is coverage of both qualitative and quantitative elements. On the qualitative side, the PvP Tracker™ summarizes trends in peer group selection, the “most important” performance measures, and the formats employed when describing the relationships between CAP and measures of financial performance, among other elements.
Here are a couple of early findings that the real-time data reveals:
– When companies reference the relationship between CAP and performance measures, they most commonly (55% of S&P 500 companies) disclose those relationships in a graphic format only. Another 34% of companies use a combination of graphs and narrative. A slim minority (11%) of S&P 500 companies disclose these relationships in a strictly narrative format. Thus, a visual representation is the preferred approach either because it helps to better show the connection between pay and performance, or because no additional narrative is needed to satisfy SEC reporting requirements.
– In terms of the “most important” company-selected metric (CSM), Farient’s PvP Tracker™ finds that a majority (54%) of companies are choosing an earnings metric, such as operating profit or EPS, followed by returns (15%) and cash flow (13%). Of course, CSM trends vary by industry—for instance, 37% of companies in the financial sector select a returns measure as their CSM.
You can sort the data by industry to show comparisons of CAP to SCT compensation and to explore disclosure trends. It’s a very handy tool for anyone tasked with benchmarking – or just curious about how these disclosures are shaping up.
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.