Late last week, Glass Lewis issued its 2023 policy guidelines for the US and certain other markets – which apply for annual meetings held after January 1st. The biggest change on the executive compensation front is that you may see more “concerns” raised in the coming year for LTI programs, even if they don’t result in negative recommendations. Here’s more detail:
Long-Term Incentives: We revised our threshold for the minimum percentage of the long-term incentive grant that should be performance-based from 33% to 50%, in line with market trends. Beginning in 2023, Glass Lewis will raise concerns in our analysis with executive pay programs that provide less than half of an executive’s long-term incentive awards that are subject to performance-based vesting conditions. As with past year, we may refrain from a negative recommendation in the absence of other significant issues with the program’s design or operation, but a negative trajectory in the allocation amount may lead to an unfavorable recommendation.
In addition, Glass Lewis has made several clarifying amendments that compensation committees should know about – including a couple related to the SEC’s final pay vs. performance and Dodd-Frank clawback rules:
Compensation Committee Performance: We have clarified our approach when certain outsized awards (so called “mega-grants”) have been granted and the awards present concerns such as excessive quantum, lack of sufficient performance conditions, and/or are excessively dilutive, among others. We will generally recommend against the chair of the compensation committee when such outsized awards have been granted and include any of the aforementioned concerns.
Say-on-Pay Responsiveness: With regard to our discussion of company responsiveness, we have clarified that we will also scrutinize high levels of disinterested shareholders when assessing the support levels for previous years’ say-on-pay votes. When evaluating a company’s response to low support levels, we also expanded our discussion of what we consider robust disclosure, including discussion of rationale for not implementing change to pay decisions that drove low support and intentions going forward.
One-Time Awards: We have expanded our discussion regarding what we consider reasonable disclosure in terms of one-time awards. Specifically, we have included that we expect discussion surrounding the determination of quantum and structure for such awards.
Grants of Front-Loaded Awards: Adding to our discussion relating to front-loaded awards, we have included language touching on the topic of the rise in the use of “mega-grants”. Furthermore, we expanded on our concerns regarding the increased restraint placed upon the board to respond to unforeseen factors when front-loaded awards are used. Finally, we provided clarification surrounding situations where front-loaded awards are intended to cover only the time-based or performance-based portion of an executive’s long-term incentive awards.
Pay for Performance: We included mention of the new pay versus performance disclosure requirements announced by the U.S. Securities and Exchange Commission (SEC) in August of 2022. In our revised discussion of our Pay-for-Performance methodology, we have made clear that the methodology is not impacted by new rules. There is no change to the methodology for the 2023 Proxy Season. However, we note that the disclosure requirements from the new rule may be reviewed in our evaluation of executive pay programs on a qualitative basis.
Short- & Long-Term Incentives: We have added new discussion to codify our views on certain exercise of compensation committee discretion on incentive payouts. Glass Lewis recognizes the importance of the compensation committee’s judicious and responsible exercise of discretion over incentive pay outcomes to account for significant events that would otherwise be excluded from performance results of selected metrics of incentive programs. We believe that companies should provide thorough discussion of how such events were considered in the committee’s decisions to exercise discretion or refrain from applying discretion over incentive pay outcomes.
Recoupment Provisions: We have revised our discussion on clawback policies to reflect new regulatory developments for exchange-listed companies. On October 26, 2022, the U.S. Securities and Exchange Commission (SEC) approved final rules regarding clawback policies based on which the national exchanges are to create new listing requirements. During period between the announcement of the final rules and the effective date of listing requirements, Glass Lewis will continue to raise concerns for companies that maintain clawback policies that only meet the requirements set forth by Section 304 of the Sarbanes-Oxley Act. However, disclosure from such companies of early effort to meet the standards of the final rules may help to mitigate concerns.
These are just a portion of the updates. I blogged about other key changes this morning on the Proxy Season Blog, over on TheCorporateCounsel.net. Lawrence will be taking a deeper dive into ESG-related topics on the PracticalESG.com blog (which you can subscribe to for free).
As executives and compensation committees plan for 2023, the possibility of a recession and stock price declines continue to be front-of-mind. This Semler Brossy blog offers six approaches to equity grant practices that can help manage “burn rates” – and preserve share authorizations – during volatile times. Here’s an excerpt:
1. Adjusting the Grant Date Fair Value for purposes of determining award sizes by using an average value—such as an annual average stock price—to better reflect the likely prices once the market stabilizes. Note that if this calculation results in a larger number of shares than historical, there will be greater leverage if the market rebounds.
2. Replacing shares with cash awards below the top leadership team—e.g., NEOs. Note that this may not be an option for struggling or cash-strapped firms.
3. Changing the mix of long-term incentive (LTI) vehicles from performance-based to time-based vehicles. Experience has shown that providing greater certainty of awards in volatile times makes executives more willing to accept fewer shares. There is an added benefit: fewer shares need to be reserved for time-based awards because there is no upside.
4. Reducing the eligibility for LTI awards to reflect share constraints while increasing the size of annual incentive opportunities.
5. For early-stage companies, characterizing awards as inducement awards which are not counted against share authorizations. However, these awards do need to be reported to the applicable stock exchange and in a press release. In addition, these awards would be reported as “not approved by shareholders” in the Equity Compensation Plan Information Table.
6. Targeting awards to ensure that higher value-add positions and top performers receive larger awards, especially in tight labor markets.
The blog also offers factors for boards to consider before selecting a course of action – such as how burn rates compare to peers, the date of the last request for an increase in share reserves, and whether the company could switch to cash payouts if necessary.
For additional thoughts on executive compensation trends in a volatile environment, visit the transcript from our August webcast on this exact topic, the May-June issue of The Corporate Executive newsletter, and this blog that Emily shared in May.
Recently, a management professor at the London School of Economics asked 1000 executives whether they care about income inequality and the societal problems it creates. The short answer is “yes.” Yet, the labor market for executives is so inefficient that they are unfairly trapped into being awarded millions of dollars per year.
This article in The Guardian summarizes the research. Here’s an excerpt:
It was evident from the results of our study that many executives take distributive justice very seriously. They engaged with the survey process, telling us about the amount of time they had taken to digest the questions and reflect on their answers. They agreed or strongly agreed with more principles of justice than they disavowed. The narrative comments that many of them provided were consistent with a serious ethical perspective on pay and inequality. We concluded that senior executives are not in the main the self-interested egoists of popular culture – some are, but most are not. Instead, they are the most fortunate beneficiaries of a market failure.
Economists have known for a long time that labour markets are different from other commodity markets. This is particularly true of the market for the people the French economist Thomas Piketty described in his book Capital in the Twenty-first Century as “super-managers”. An efficient market requires many buyers and sellers, homogeneous products or at least good substitutes, free market entry and exit, plentiful information and little economic friction. The problem with the market for top executives is that practically none of these conditions hold good.
The article concludes that companies are in an “arms race” for top talent – with everyone paying more than they need to in order to attract “super managers” and avoid the worst executives who could crater the company. Shareholders have supported compensation arrangements through advisory votes and other approvals (so, seemingly, they are happy with how things are going). But a lot of people think it’s not working out very well for society as a whole.
While special retention awards continue to be frowned upon by proxy advisors and investors, they do tend to serve their stated purpose of retaining executives during times of uncertainty – and companies are starting to address investor concerns by adding a long-term performance component to these types of grants. That’s according to a recent analysis by Willis Towers Watson of retention awards in the S&P 1500 from 2017-2021. Here’s more detail:
– 37% of S&P 1500 companies have granted a retention award at least once in the past 5 years.
– 33% of retention grant packages in 2021 included a long-term performance award, the most in any year in our study and a +10 percentage point increase from the prior year. Time-vested restricted stock remained the primary vehicle, being included in 58% of retention packages.
– 76% of executives who received a retention award during 2017 – 2019 remained with the company through the duration of the retention period.
– 11% of of the companies that granted a retention award during the study period saw the award flagged as part of an “Against” say-on-pay ISS recommendation.
The notion of including a performance component in retention awards is something that Rachel Hedrick of ISS also shed light on at our recent “Proxy Disclosure & 19th Annual Executive Compensation Conferences.” Here’s an excerpt from the transcript of our “Navigating ISS & Glass Lewis” panel – with Rachel, Glass Lewis’s Maria Vu, and Davis Polk’s Ning Chiu:
As Maria alluded to, our clients want to see the structure of these awards, particularly, special awards, be more rigorous than the long-term incentive program because if the long-term incentive program is there to incent performance and behavior over the say three year performance period, then the hope is that an additional retention or special award is going to go beyond that and require additional strong performance or some sort of special performance factors in order to be earned.
This session – and the rest of the Conference – was full of useful nuggets. If you attended, make sure to bookmark the archive so that you can refer back to it as you head into proxy season. If you weren’t able to attend the live event, you can still get access to the archived videos & transcripts by emailing sales@ccrcorp.com.
Today, trial begins in the derivative suit against Elon Musk & Tesla – in which former thrasher band drummer and Tesla shareholder Richard Tornetta is alleging that 2018 mega-grant to Musk unfairly awarded him with corporate assets and harmed shareholders. Here’s the complaint. In the more detailed 142-page pretrial brief, the plaintiff argues that the grant should be invalidated because it was:
– Unfair to Tesla because it was excessively large, paid to a “part-time executive,” and based on the company’s already-baked performance trajectory,
– Approved by a conflicted committee (requiring “entire fairness” review), and
– Inadequately “cleansed” due to defective proxy statement disclosure.
Deference under the business judgment rule says that compensation of executive officers is precisely the kind of thing that (in an ordinary situation) deserves to be handled with the lightest touch by the court. As then-Vice Chancellor Slights said in an earlier opinion in this case: “A board of directors’ decision to fix the compensation of the company’s executive officers is about as work-a-day as board decisions get. It is a decision entitled to great judicial deference,” citing See Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (“[A] board’s decision on executive compensation is entitled to great deference. It is the essence of business judgment for a board to determine if a particular individual warrant[s] large amounts of money. . .”).
It’s too early to predict takeaways for other companies, but it is worth noting the plaintiff’s disclosure-related arguments, which could be areas to bolster in proxy statements that describe significant compensation awards. Chancery Daily summarizes the plaintiff’s “inadequate disclosure” claims as:
– Failure to disclose committee members’ potential conflicts
– Failure to accurately disclose the grant milestones’ achievability
– Failure to accurately disclose the grant process
– Failure to disclose Musk’s competing interests
The control arguments are more unique to the facts of this case, but also worth watching. Even though Musk didn’t own a majority of Tesla stock at the time of the grant, the plaintiff is arguing that Musk exercised control over the company and the compensation committee, and that at least half of the directors who approved the grant were conflicted. If the judge agrees, then the “entire fairness” standard of review will apply.
ISS has announced that for companies with annual meetings between February 1st and September 15th of next year, its peer group review & submission window will open next Thursday, November 17th – and will close at 8pm ET on Monday, December 5th. ISS opens this window twice per year for companies to provide input (but note that the company-submitted peers are just one factor in the ISS determination process). Here’s more detail:
Companies that have made no changes to their previous proxy-disclosed executive compensation benchmarking peers, or companies that do not wish to provide this information in advance, are under no obligation to participate. For companies that do not submit any information, the proxy-disclosed peers from the company’s last proxy filing will automatically be factored into ISS’ peer group construction process.
Additional information on the ISS peer submission process, including links to ISS’ current recent peer selection methodology for the U.S., Canada, and Europe, is available on the ISS website here.
With the SEC’s new pay versus performance rules requiring new disclosures that compare company performance to the performance of a peer group, companies may be taking an even closer look at their peer group this year, and it may be worth informing ISS of any changes.
As you face down the new Item 402(v) disclosure requirements for your 2023 proxy statement, join us tomorrow for a 3-hour special session, “Tackling Your Pay Vs. Performance Disclosures.” This is a 3-part, 3-hour special session that will cover:
1. Navigating Interpretive Issues – we are already getting lots of questions in our Q&A forum about how to apply the new rules, and we know that new issues are arising daily. Hear practitioner guidance and any SEC updates that you need to know – from Sidley’s Sonia Barros, Compensia’s Mark Borges, WilmerHale’s Meredith Cross, EY’s Mark Kronforst, and Morrison Foerster’s Dave Lynn – including what you’ll need to tell your board and executives.
2. Big Picture Impact – how will the disclosure mandate affect say-on-pay models and shareholder engagements? This session will provide context and pointers for bolstering executive compensation & compensation committee support during proxy season – featuring ISS Corporate Solutions’ Jun Frank, Morrison Foerster’s Dave Lynn, and SGP’s Rob Main.
3. Key Learnings From Our Sample – attendees of this event will get first access to our sample disclosures, prepared by Mark Borges and Dave Lynn. Hear “lessons learned” from their drafting effort that will guide you through your own process and jump start your disclosures. Mark & Dave will be joined by Gibson Dunn’s Ron Mueller and Fenwick’s Liz Gartland for this discussion.
If you’ve signed up to access this event, you’ll access the video stream tomorrow by clicking through where indicated on the event page and entering the email address that you used to register. If you have any questions, please email our Event Manager, Victoria Newton, at vnewton@ccrcorp.com.
This event is available at a reduced rate of only $295 for anyone who is already a CompensationStandards.com member or who registered for the live or on-demand version of our “Proxy Disclosure & 19th Annual Executive Compensation Conferences.” You can still register online today for the “special session” and get the CompensationStandards.com member rate. Beginning tonight, you can register by emailing sales@ccrcorp.com, up until 12:30 pm Eastern tomorrow.
For non-members, the cost to attend is $595. You can register online if you sign up before 4pm Eastern today (after that, email sales@ccrcorp.com… you can sign up as late as 12:30 pm Eastern tomorrow).
If you’re not yet a member, try a no-risk trial now. We’ll be continuing to add practical guidance on this topic to CompensationStandards.com as disclosure hurdles & consequences come to light – such as this great podcast that Dave already taped with Gibson Dunn’s Ron Mueller about “first impressions” of the rule, emerging interpretive issues, possible pitfalls, and more.
All that to say, a CompensationStandards.com membership be an essential ongoing resource if you are involved with pay vs. performance. Plus, 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. Register for the “special session” here if you are a non-member and didn’t attend our Conference.
As a bonus, you also can still get the discounted special session rate if you sign up for on-demand access to the Conference archives, which you can do by emailing sales@ccrcorp.com. The practical guidance that was provided at these events will help you navigate shareholder activism, executive compensation, ESG disclosures, compensation committee responsibilities, and more in 2023.
At our “19th Annual Executive Compensation Conference” last month, we covered key action items for the SEC’s new pay versus performance disclosure rules – including how the rules differ for smaller reporting companies. This Pearl Meyer blog summarizes the major accommodations for scaled disclosure under the new rules (and other executive compensation disclosure requirements), for SRCs and EGCs. The Pearl Meyer team notes:
While at the outset, the scaled disclosures may give some companies a welcome reprieve, it may also give rise to an inconsistent or incomplete message for smaller companies. For example, in many smaller companies (that may not qualify as EGC), Net Income and Company TSR may not tell the full or even partial story of how pay aligns with performance.
As such, SRCs may consider voluntarily providing a company-selected measure or listing other measures that align with their pay program in a tabular list and/or providing some narrative around measures that otherwise drive pay and performance. For a further discussion of how certain growth stage companies may address these issues, please see this article.
The blog notes that if you’re an EGC or SRC, it’s important to understand the disclosure breaks you’re getting – and when those reprieves phase out.
We’ll be discussing the new pay vs. performance rules in detail this Thursday, November 10th, in our Special Session: “Tackling Your Pay Vs. Performance Disclosures” – which is a 3-part virtual event that runs from 1-4pm Eastern. If you haven’t already registered, you can still sign up online (you get a discounted price for being a CompensationStandards.com member). At this session, we’ll cover interpretive issues, big picture context (bridging the gap between your pay vs. performance disclosures and your CD&A story), and you’ll get first access to sample disclosures prepared by Dave Lynn & Mark Borges.
In addition, if you attended our fall conferences, you can can now access the on-demand video archives & transcripts, which will be helpful to refer back to for practical guidance on a variety of important proxy disclosure and executive compensation topics. If you weren’t able to attend, you can still email sales@ccrcorp.com to get access to this practical info!
Here are findings from Semler Brossy’s latest “Industry Report” on ESG metrics in S&P 500 incentive plans:
– Energy, Utilities, Materials & Real Estate companies have the highest prevalence of ESG metrics in incentives. They are the top four industries that incorporate environmental metrics and among the top five industries that have adopted HCM metrics
– Diversity & Inclusion metrics rank as a top 3 metric by prevalence in 10 out of 11 industries
– Carbon Footprint is the only environmental metric represented in all 11 industries (increase from 9 industries last year)
– While the Consumer Discretionary industry has had the largest year-over-year increase in ESG metrics – which Semler Brossy expects has been driven by investor & stakeholder pressures – it continues to have the lowest overall prevalence.
The report shows that ESG metrics by industry are often aligned with key strategic drivers of business-specific successes and risks – e.g., safety for heavy manufacturing, talent development for real estate, and emissions/chemical containment for energy.
The report’s findings are largely consistent with last year, and Semler Brossy continues to urge caution in adopting plan metrics purely due to pressure from investors or peer practices.
As John blogged this morning on TheCorporateCounsel.net, the SEC has adopted new rules that will require institutional investment managers to disclose their say-on-pay votes on Form N-PX. I blogged about the proposal last year (which was an updated version of a 2010 proposal).
This final rule fulfills the SEC’s rulemaking mandates under Section 951 of the Dodd-Frank Act. Here’s more info from the SEC’s Fact Sheet:
New rule 14Ad-1 will require managers to report annually on Form N-PX each say-on-pay vote over which the manager exercised voting power. The rule requires a manager to report say-on-pay votes when it uses voting power to influence a voting decision with respect to a security.
The rule permits joint reporting of say-on-pay votes by managers, or by managers and funds, under identified circumstances to avoid duplicative reporting. It also requires additional disclosure to allow identification of a given manager’s full say-on-pay voting record.
Managers will also be required to comply with the other requirements of Form N-PX for their say-on-pay votes.
The rule and form amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024.