Compensation committees have a lot on their shoulders. And they rely on compensation consultants for information, expertise and objective advice to make important decisions impacting the company — and its executives! Based on interviews with Compensation Committee Chairs, CHROs, and compensation consultants of large companies across multiple sectors, the Center On Executive Compensation (a division of HR Policy Association) recently released this report, Selecting an Independent Compensation Consultant: A CHRO Guide, with a curated collection of insights, tips, and tools for successfully navigating the process of selecting an independent compensation consultant. Here are the topics covered in the guide:
– Common triggers for making a change
– Details on the process — including who is involved and how the process is orchestrated
– Criteria for compensation consultant selection and evaluation
– The benefits of scanning the market periodically
It even includes a sample RFP, questions for reference checking and a consultant performance evaluation in the appendix!
Those familiar with Amazon’s executive compensation may not be surprised by this, but, having forgotten about the simplicity of the program, this took me by surprise initially when I saw an Equilar blog with sample PVP disclosures and commentary from the team at Equity Methods. Here’s an excerpt:
Finally, Amazon’s disclosure is a good example of a non-smaller reporting company (SRC) that does not have a company-selected measure (CSM). Remember, the CSM is the most important financial metric that explains changes in CAP. A CSM is required except if there is not a metric that meets the criteria.
Amazon’s proxy includes the following explanation in its PVP disclosure:
Consistent with SEC guidance, no additional performance measures are shown because, as discussed in the Compensation Discussion and Analysis, the Company does not use any financial performance measures to link executive compensation to company performance since our executives’ compensation is tied directly to the creation of shareholder value, as reflected by changes in our total shareholder return.
In the CD&A, in addition to clear disclosure upfront that the company’s executive compensation program consists of base salaries and time-vested RSUs, the proxy calls out a few unique features that reflect the company’s goals and philosophy, including the following bullet:
We do not tie cash or equity compensation to one or a few discrete performance goals. To have a culture that relentlessly pursues invention and is focused on building shareholder value, not just for the current year, but five, ten, or even twenty years from now, we must encourage experimentation and long-term thinking. By definition, this means we do not know in advance exactly what will work. We do not select one or a few discrete goals that address one-, two-, or three-year performance horizons because we do not want employees to focus on short-term returns or discrete criteria at the expense of long-term growth and constant innovation and reinvention. Instead, to align our executives with long-term value creation, we compensate them primarily with restricted stock unit awards that have long vesting periods, generally five years or more. Simply put, while we could establish safe, short-term vesting conditions that constrain innovation and deter our executives from taking longer-term risks (and that could result in above-target payouts even when our stock price declines) and focus on the trees rather than the forest, we believe our consistent focus on performance across the enterprise over the long term has served our Company and our shareholders well since our founding. AWS, Kindle, Alexa, Fulfillment by Amazon, Marketplace, Prime Video, and The Climate Pledge might not exist today if our horizons were so limited.
For Amazon, the 2023 proxy season followed a year of low say-on-pay support, with 56% of votes cast in 2022 supporting the company’s executive compensation program, so the proxy also describes an engagement program and the decision not to grant any CEO equity awards in 2022. Notably, Amazon highlighted the PVP disclosure — in particular, negative compensation actually paid in 2022 — in the say-on-pay proposal:
As shown in the Pay Versus Performance Table on page 106, Compensation Actually Paid to Mr. Jassy in 2022 was negative $148 million, largely attributable to the 2022 decline in value of restricted stock units scheduled to vest over the next 8 years, while his 2022 realized compensation declined by 25% from 2021, both as a result of our stock price decline and fewer shares vesting compared to 2021, showing the alignment between our executive compensation program and our shareholder returns.
As a reminder, on Tuesday, June 13th, at 2 pm Eastern, our esteemed panelists, Weil’s Howard Dicker, Freshfields’ Nicole Foster, Aon’s Daniel Kapinos, and Mercer’s Carol Silverman, will discuss lessons learned from the first year of PVP in our “Pay Vs. Performance: Lessons From Season 1” webcast.
A week before its annual meeting this year, JPMorgan Chase posted this letter to its website and filed it with the SEC as additional soliciting material. The letter highlights that ISS had favorably changed its voting recommendation for the company’s say-on-pay resolution.
This can happen sometimes if the company agrees to resolve a problematic pay practice. But here, the proxy advisor didn’t make the change because of any commitment by JPM. Instead, the company was somehow able to identify that ISS had used incorrect data for one of the ISS-selected peer companies, which caused a “technical error” in the proxy advisor’s quantitative pay-for-performance screen. ISS agreed to re-run its analysis, and the data change caused JPM to move from “medium” concern to “low” concern. Three days after JPM first publicly communicated about the perceived error, ISS changed its voting recommendation from “against” to “for.” JPM reported that 89% of voting shareholders ended up supporting the say-on-pay resolution.
This is a reminder that everyone makes mistakes – even proxy advisors. What’s difficult for companies is identifying and communicating errors in pay-for-performance models in time to salvage the voting outcome. This blog from Ed Hauder offers verification steps that other companies should consider whenever they are faced with a negative say-on-pay recommendation:
– Review your company’s compensation data used in the report to ensure it is accurate.
– Pull the compensation data for the proxy advisor’s peer group to see if it conforms to the data presented in the report.
– Have your staff or your compensation consultant analyze whether the compensation data used is the latest that should be used according to the proxy advisor policies.
JPM was also proactive in messaging its views about the ISS’s original recommendation prior to ISS agreeing to change it, with its first public letter coming 10 days before the meeting. I can only imagine the effort and resources that went into identifying the error, correcting it, respectfully communicating, and soliciting proxies.
Although early returns from the pay versus performance disclosures show that – at many companies – there is alignment between executive compensation outcomes and shareholder interests, a new Pay Governance study cautions that “compensation actually paid” is not a perfect tool for measuring the correlation between pay & performance. That validates what many folks expected.
Pay Governance looked at how CAP stacked up to “total compensation” from the Summary Compensation Table and the concept of “realizable pay” that is often used internally as a factor in determining compensation amounts, but may not be publicly disclosed. Here are the key takeaways:
– There is no perfect solution for evaluating pay for performance.
– Summary Compensation Table (SCT) compensation values are not useful when measuring pay for performance but serve a valuable corporate governance purpose, primarily by showing Board/Compensation Committee intent when providing various compensation programs.
– The new CAP disclosure provides a better understanding of pay for performance than SCT compensation, but the results can be distorted by the inclusion of certain mandated items such as equity awards granted prior to the performance measurement period.
– Realizable Pay generally provides a more rigorous approach to matching the time period for compensation with the performance underlying such awards.
The Pay Governance team suggests that Realizable Pay can provide Compensation Committees with more robust insights when evaluating pay for performance than tools based on the SCT or PVP methodologies and should be a consideration in addressing this important corporate governance issue. They note:
While only 10% of S&P 500 companies expressly disclosed the use of some type of RP model to evaluate compensation outcomes with company performance, it is likely many more are using RP as part of their annual Compensation Committee process but do not disclose its use in public filings. And still others may decide to explore such RP analyses to eliminate many of the distortions included in the SCT and PVP/CAP disclosures when evaluating the alignment of pay and performance.
My personal hope is that if investors and proxy advisors begin to incorporate pay versus performance data into their models, they will not reduce it to a one-size-fits-all measurement tool. Correlations can vary based on the stage of the company.
Make sure to mark your calendars for our webcast – “Pay Vs. Performance: Lessons From Season 1” – which is coming up on Tuesday, June 13th from 2-3pm Eastern Time. Join Weil’s Howard Dicker, Freshfields’ Nicole Foster, Aon’s Daniel Kapinos, and Mercer’s Carol Silverman for practical insights into Year 1 challenges & trends, and predictions for longer-term impacts of this new disclosure framework.
We’ve got a terrific lineup of speakers who will be delivering practical takeaways & action items – essential info for all of us who are grappling with the SEC’s ambitious regulatory agenda. Here’s the 3-day, action-packed agenda for both Conferences, which are bundled together (here’s the agenda specifically for the Executive Compensation Conference). Make yourself look good by getting insights direct from the experts! And for the lawyers out there, get CLE credit while you’re at it!
The Conferences are virtual, September 20th – 22nd. You can also add registration for our “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. Register online by credit card – or by emailing sales@ccrcorp.com. Or, call 1.800.737.1271. Here’s a reminder of the benefits of attending:
– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?
– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.
– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.
We’re kicking off a new podcast series here on CompensationStandards.com! For our first episode, K&L Gates partner Ali Nardali joins me to discuss clawbacks—since all signs point to the need to “short list” this action item and we suspect many companies haven’t had much bandwidth to focus on the exchange listing rules yet with proxy season in full swing. Ali shares a lot of practice pointers in this short, 17-minute podcast, and we cover the following topics:
– Overview of the new clawback requirements
– Types of compensation covered—and not covered—by a Dodd-Frank clawback policy
– Whether compensation clawed back is on a pre- or post-tax basis
– The time period covered in the event of a financial restatement
– Whether companies can indemnify or insure their officers against a clawback
– Common issues, complications and considerations, including:
Going beyond Dodd-Frank’s requirements
Having one policy or two
Considerations for compensation program design
To better understand how companies are handling some of these considerations, we’re also running a short, anonymous survey on clawback policies. Please take a moment to participate!
For future episodes of this new podcast series, the idea is to focus on topics of interest to the members of this site, including executive and director pay trends, compensation governance and disclosure considerations. Like our other podcasts, we hope to talk to folks—in the compensation space—willing to spend 15 minutes sharing a little bit about themselves, their work, or topics they find interesting. If you have something you’d like to talk about, please feel free to reach out to me via email at mervine@ccrcorp.com.
So far in 2023, say-on-pay results seem to be improving from 2022 despite decreases in TSR. WTW recently reported on updated say-on-pay results at Russell 3000 companies, and the data continues to confirm the early positive trends:
On the one hand, 2023 say-on-pay outcomes appear to be holding fairly steady. Average say-on-pay support continues to trend around 90%, with negative recommendations from proxy adviser Institutional Shareholder Services (ISS) having a 20 to 30 percentage point downward impact on outcomes.
However, as shown in Figure 1 below, the rate of ISS “no” recommendations for say-on-pay and the overall failure rate has dropped considerably so far in 2023. The 1% failure rate is derived from six failed votes observed to date, which is markedly below the 13 and 22 failed votes observed at a similar time in the proxy season in 2022 and 2021, respectively.
. . . Pay-for-performance disconnects remain the primary issue most investors and their advisers cite when voting against say-on-pay resolutions and pay outcomes are likely driving some of the reduced opposition for say-on-pay this year.
That being said, WTW notes:
It will be interesting to see if the early trend of less say-on-pay opposition continues to play out in the 2023 proxy season. Historically, WTW has tracked a reversion to the mean when all outcomes are ultimately tallied.
ISS Corporate Solutions recently released a paper “TSR: Measuring Performance in a Tough Market” (available for download) that analyzed relative TSR metrics across the S&P 500. Below is an excerpt from the summary with key takeaways:
– As of the end of last year, 54 percent of companies in our analysis have a relative TSR performance that’s equal to or greater than the median of their performance peer group
– In the year through December 2022, 40 percent of companies maintained the same relative positioning
– Median TSR for all the groups was up as of the end of March 2023 after a general stock price recovery from the lows of 2022
– Although stock prices have generally fallen across the board as a result of the recent market turmoil, relative TSR metrics have remained resilient and have delivered on their promise of helping incentivize executives to outperform their peers in challenging and uncertain times
The full paper goes on to suggest action items when planning incentive awards using relative TSR, including carefully selecting and frequently reviewing your peer group, considering relative TSR in the context of other financial and strategic objectives to avoid duplication and this tip on how to incorporate shareholder-friendly provisions:
Companies should consider shareholder-friendly provisions in their award designs to mitigate concerns. These could include:
– Capping award payouts at Target if the absolute TSR of the company is negative over the period in question. The cap would apply even if the company outperformed its peer group.
– Increasing the target goal level to the 55th or 60th percentile of the performance peer group to reflect true outperformance for target payouts.
– Considering absolute stock price targets based on historical market performance, or get-back-to-even targets, to mitigate shareholder losses during down periods.
In case you missed it, the Wall Street Journal ran a big write-up on CEO comp last week based on the numbers reported as “Compensation Actually Paid” under the new pay-versus-performance rules. It’s always interesting to see how new disclosures land, how they’re taken in, analyzed and reported on by the media and, therefore, how they’re widely understood.
The article highlights that the “new method” takes into account changing stock prices. But I think companies and compensation committees hoped that it would be evident from their disclosure — and many included language to this effect — that Compensation Actually Paid isn’t actually reflective of take-home pay and, like the Summary Compensation Table total, still only provides a “moment-in-time snapshot.”
In any event, this is a must-read for those interested in how their retail holders likely view PVP disclosures. Also, check out the table with CEO pay data for the S&P 500, which includes the Summary Compensation Table total, Compensation Actually Paid and median employee pay and graphically depicts pay versus industry pay and performance versus industry performance.
For almost four years now (!), I’ve been teaming up with Vontier’s Courtney Kamlet for a “Women Governance Trailblazers” podcast series – where we interview women in the corporate governance field about their career paths & emerging substantive trends. We’ve had many awesome guests! For our latest 17-minute episode, we spoke with Kelly Malafis, who is a Founding Partner at Compensation Advisory Partners. Our discussion included:
1. The biggest changes that Kelly has seen in executive compensation since founding CAP in 2009.
2. Key trends she’s seeing in executive compensation – and how she’s advising clients to address them.
3. The impact on executive compensation of trends in ESG and an enhanced regulatory environment.