Companies that have existing elements that go above and beyond the SEC rules will likely maintain those. Shareholders will not want to see existing policies weakened to meet the minimums of the SEC rules. Additionally, institutional investors and proxy advisors increasingly expect to see “enhanced clawbacks” that extend beyond the rule; those expectations are unlikely to go away.
Since the 2015 SEC proposal, many companies have adopted clawback policies reflective of the original proposed SEC rules—for these companies, adhering to the rule will be a simpler matter of reviewing existing clauses and making minor modifications to reflect the final requirements. For instance, many companies that had maintained wide board discretion to determine whether and how to proceed with a clawback when a restatement occurred will need to eliminate board discretion except for narrow cases defined by the rules.
Check out the full memo for a chart that compares common practices for voluntary clawbacks to the final rule. In addition, join us next Thursday, December 15th at 2pm Eastern for our webcast, “SEC Clawback Rules: What To Do Now” – to hear practical guidance from Cooley’s Ariane Andrade, Hunton Andrews Kurth’s Tony Eppert, Orrick’s JT Ho, Pay Governance’s Mike Kesner, and Kirkland’s Abigail Lane about what you need to do in light of the final rules and the current enforcement environment.
We’ve posted the transcripts from our 3-part “Special Session: Tackling Your Pay Vs. Performance Disclosures.” If you registered for this Special Session, you now have immediate access to those transcripts, along with the on-demand video archive and the Model Disclosures that have been available since the event. Simply follow the “Access the Session Archives” link to find the videos and transcripts for each of the three segments:
– Tackling Your Pay Vs. Performance Disclosures: Navigating Interpretive Issues
– Tackling Your Pay vs. Performance Disclosures: Big Picture Impact
– Tackling Your Pay vs. Performance Disclosures: Key Learnings From Our Sample Disclosures (which includes as “course materials” the Model Disclosures prepared by Dave Lynn. . . also check out Dave’s “lessons learned” from this somewhat painful drafting effort)
We’ll be providing ongoing coverage of Staff interpretations, disclosure trends and investor reactions here on CompensationStandards.com, and in The Corporate Executive newsletter, as we head into proxy season. Mark January 19th at 2pm Eastern on your calendars – for our 90-minute webcast, “The Latest: Your Upcoming Proxy Disclosures” – where Morrison Foerster’s Dave Lynn, Compensia’s Mark Borges, Gibson Dunn’s Ron Mueller and Hogan Lovells’ Alan Dye will share the very latest guidance on these disclosures and other important items for the 2023 proxy season.
This 32-page report from Southlea Group (which is a Canadian executive compensation consulting firm owned by the same group as Farient Advisors) says that ESG metrics are starting to evidence “staying power” globally – even though there’s been some back & forth on whether they are actually valuable.
For the US, the report looks at the S&P 100. It offers this prediction on the direction of ESG metrics (also see this recent report from The Conference Board, ESGauge & Semler Brossy):
Companies will continue to move toward better-defined and articulated alignment between stakeholder and shareholder value. That is, the focus on “value” will overcome a focus on “values.”
The report is useful because (among other things) it shows the stages of incorporating ESG metrics into an executive compensation program, excerpts policies on this topic from select global institutional investors, and shows examples from specific companies of qualitative & quantitative metrics. Page 30 offers these action items for boards to consider:
1. Ask the right questions (see sidebar)
2. Identify measures that are derived from the strategy and can move the needle on sustainable performance
3. Consider the use of stakeholder measures not only in short-term but also in long-term incentive plans
4. Take a broad perspective in considering the use of stakeholder measures, e.g., use of measures inside as well as outside of incentives, alignment up and down the organization, messaging in all types of company communications (internally and externally), impact on culture, and comparisons with peer and most-admired companies
5. Review board governance of stakeholder matters to provide effective oversight. Ensure that governance responsibilities are assigned and overlapping, as needed, to avoid gaps or lapses in oversight
As these action items suggest, the decision of whether – and how – to incorporate ESG metrics is challenging and company-specific. I’ve blogged about common pitfalls specific to DEI metrics, which are the most common non-financial metrics for most companies right now. This Forbes article from McDermott’s Michael Peregrine analyzes the risks of incorporating ESG metrics – including:
Last week, I announced that I am leaving the Managing Editor role at CCRcorp, effective at year-end. I am extremely proud of what we’ve accomplished across all of our sites, newsletters and events the past few years. Most of all, I am grateful for the relationships that I’ve formed with many of you, and for your willingness to contribute to our resources.
I admire the many smart and practical folks in the executive compensation community who are willing to share their time. Because of you, we are able to deliver step-by-step guidance on what can be a very complex topic. Thank you so much, and please keep it up!!
You won’t see any significant changes as a result of this move. I’m staying on part-time to continue blogging and assisting with our webcasts and events. So, you’ll still get our blog emails each day, and at least in the near-term nothing will change on how those are delivered. John Jenkins, who is terrific and has been an integral part of our team for many years, is taking over as Managing Editor, and I’ll be supporting him in any way I can. I’m also planning to return to private practice at a law firm this spring, so my contributions will be even more informed by direct experience. I’m looking forward to working directly with clients again – and hopefully I will have the chance to collaborate with many of you!
I’ll continue to be reachable at my email here – liz@thecorporatecounsel.net – and on LinkedIn and Twitter. Keep in touch! Thank you again to all of you who read this blog, speak on our programs, reach out with commentary and tips, post on our Q&A forum, and provide support from afar. It has meant so much to me.
A recent Willis Towers Watson memo looks at how S&P 100 stock ownership & retention guidelines have changed since 2015. The firm’s summary notes that these guidelines haven’t changed much since last year – but there’s been a definitive shift since 2015.
The WTW team shares these predictions about where stock ownership guidelines & retention requirements could be heading:
CEO salary multiples will likely be the main point of interest for ownership guidelines in years to come. Going above 6x salary for the CEO is becoming more common, but it is unclear whether this will turn into the majority practice.
Linking stock retention requirements to ownership guidelines is also worth considering, as the overall increase in companies with retention requirements is largely attributed to guideline-dependent policies specifically. Guideline-dependent policies totaled 83% of retention requirements in 2022 compared with 73% in 2015 (a 14% increase), which is inclusive of companies that used both a guideline-dependent policy and a stand-alone policy together.
On our page about “Director Compensation Practices,” we regularly share trend reports on the amount and form of director pay. I blogged a couple of months ago that average total compensation for directors in the S&P 500 is around $316k.
This recent Directors & Boards article, written by Jena Abernathy and Don Lowman of Korn Ferry, notes that while you don’t want to pay directors so much that it’s unreasonable or affects their independence, directors are being asked to do more & more. In addition, competitive director compensation not only attracts talented individuals who have in-demand experience & skills, it also reinforces accountability expectations.
The Korn Ferry folks also note that – unlike the annual review of executive compensation – director compensation is more typically reviewed only once every 2 – 4 years. They suggest scheduling regular board compensation reviews in order to verify that what the company is providing is competitive & reasonable, and propose these guidelines:
– Establish a timetable for board compensation review.
– Compare your board compensation program with programs of other peer organizations.
– Choose companies for comparison by size, reputation, growth, products and services, financial performance, employees, customers and investors.
– Develop a rationale or justification for the mix of cash and equity offered to board members.
– Engage an external compensation consultant to review your board compensation program for alignment with company goals, shareholder expectations, public perceptions and regulations.
I’m blogging about this here because it’s a responsibility often handled by the compensation committee and because Item 402 of Reg S-K, which is something we obviously cover on this site, requires disclosure about director compensation (see our Treatise chapter for the details). But as noted in the article, at some companies, this is handled by the nominating/governance committee.
Yesterday, the SEC’s final Dodd-Frank clawback rules were published in the Federal Register. that means the rules will have an effective date of January 27, 2023.
As I blogged when the SEC adopted these rules, the Federal Register publication also starts the 90-day clock for the exchanges to propose listing standards. The effective date for those listing standards can be as late as November 28, 2023. Companies will have 60 days following the listing standard effective date to adopt a compliant recovery policy – which would put us at January 2024.
As this Covington memo details, the threat of a recession is raising new “human capital” and workforce compensation issues for boards to consider. With compensation committees taking on this responsibility at many companies, it may be a topic for your next committee meeting. Here are the 6 questions the memo recommends asking:
1. Should incentive plan performance targets be adjusted?
2. Can we unilaterally reduce compensation or benefits?
3. Will we have enough shares to continue making equity grants?
4. What can be done about underwater stock options?
5. Should employer contributions to 401(k) plans be reduced or suspended?
6. What changes can be made to non-qualified deferred compensation?
Here’s a pretty interesting study from three B-school profs about what actual CEO take-home pay can tell investors, compensation committees, and others that use executive pay info for decision-making. Let’s start with the takeaways – excerpted from this CLS Blue Sky blog:
We find that a firm’s accounting performance during the evaluation period strongly predicts the probability that the CEO will receive a payout, the probability that the payout is at the target level or higher, and the actual payout amount after controlling for firm characteristics, other aspects of CEO pay, CEO power, and corporate governance. We find no evidence that the strong payout-for-performance relation is driven by earnings management. There is also no strong evidence that firms design contacts to award CEOs regardless of performance.
In contrast to the significant relation between the actual plan payout and performance, the disclosed target plan payout, which is often used as a proxy for the estimated fair value of performance plans, is not correlated with firm performance in the evaluation period. The finding suggests that the current practice of extrapolating executives’ payout-for-performance relation from the reported ex-ante expected values could be misleading.
We also find that the actual plan payout contains information about CEO quality. Achieving the target payment level or higher may signal that the CEO is of good quality as she can meet or beat the internal performance expectations set by the board. Confirming that investors infer CEO quality from actual plan payouts, we find that, when the LTAP payout is at or above the target payment level, the stock market reacts positively, shareholders are less likely to vote against executive compensation in subsequent say-on-pay (SOP) voting, and the CEO is less likely to leave the firm over the next two years.
A small subset of our sample LTAPs (8.6 percent of those with actual payouts) has abnormally high payouts that generally exceed the plan’s maximum payment level. These firms do not have better accounting or stock performance over the performance evaluation period than firms with normal payouts and experience significantly lower performance over the next three years. The CEOs who receive abnormal payouts tend to be powerful and work for firms with weak governance, and they are more likely to sell their shares after receiving abnormal payments. After reading the proxy statements, we find that firms granting abnormal LTAP payouts on average provide less detailed disclosure, adopt complex plans with soft payout targets, and allow adjustments to the amount ultimately paid.
In a perfect world, these findings could be compelling support for the SEC’s new pay versus performance disclosure rule, with its notion of “compensation actually paid.” But we’ll have to file this with our hopes & dreams of “what could have been” – because it doesn’t match up with the final rule that the SEC actually adopted.
The difference is that the the researchers calculated take-home pay by simply using ex-post payouts, rather than using ex-ante estimates of equity awards and other benefits. That’s more in line with how you would think “compensation actually paid” would be defined. But their approach also has some limitations. For example, it may be complicated for plans that have multiple performance metrics.
Speaking of plan complexity and multiple performance metrics, here’s one other interesting finding about plan design:
LTAPs can differ in various contract features, such as performance horizon, relative performance evaluation, or the number of performance contingencies. We find that plans contingent on multiple accounting performance metrics demonstrate a weaker payout-for-performance relation.
We do not find that the payout-for-performance relation depends on the length of the evaluation period, whether the performance hurdles are disclosed ex-ante, or whether the performance is benchmarked to peer firms (i.e., relative performance evaluation). Taken together, the influence of contact design on the payout-for-performance relation appears to be weak.
Programming Note: This blog will be off tomorrow and Friday. Happy Thanksgiving!
Incredibly, we are heading into the 12th year of say-on-pay. With Rule 14a-21(b) requiring a “say-on-frequency” vote no less than once every six years, that means that companies that are not smaller reporting companies will be facing their third go-round on this ballot item during the 2023 proxy season (smaller reporting companies got an extra two years at the front end, so their next say-on-frequency vote won’t be until 2025).
During the second round of say-on-frequency votes in 2017, shareholders at more than 90% of Russell 3000 companies approved “annual” voting. So not surprisingly, that frequency has been the predominant practice since say-on-pay was adopted. In 2017, Compensia found that as of July 2017, 78 out of 79 companies disclosed that shareholders voted for annual say-on-pay votes.
The chapter goes on to list key considerations that affect the say-on-frequency recommendation and provides guidance on ballot wording for this resolution. And, as highlighted in a Faegre webinar last week, don’t forget to have the board actually make the say-on-frequency determination and report the decision on the Item 5.07 Form 8-K (in the initial filing or an amendment).