Join us tomorrow at 2pm Eastern for the webcast, “SEC Clawback Rules: What To Do Now.” We’ll be hearing 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 to do to prepare for the SEC’s new Dodd-Frank clawback rules that go into effect next month. Among other topics, this program will cover:
– Overview of rules
– Differences from existing requirements & practices
– Specific action items
– Compliance timeframe
– State law issues
– Interplay between ISS guidelines, institutional investor expectations and DOJ enforcement policies
– Enforcement of clawbacks
– Disclosure implications
We’re also continuing to post memos on this topic in our “Clawbacks” Practice Area. As a member of CompensationStandards.com, you get access to the live webcast, plus the on-demand archive & transcript, and all of the other resources on this topic – which we’ll be continuing to update as the compliance date nears.
FW Cook has released its Annual “Top 250 Report” – which examines the long-term incentive practices & trends of the 250 largest companies in the S&P 500. This year’s report also looks at how incentives have changed over a three- and six-year lookback period. This excerpt lays out the key findings for metrics & payout ranges:
While annual incentive plan design varies among companies and industries, practices are converging towards a balanced approach that incentivizes profitable growth and achievement of key non-financial measures. Common design features include:
• Two or three financial measures (70% prevalence; up from 58% in 2016).
• A profit metric (93% prevalence; up from 92% in 2016) with a weighting of 40% or more and at least one other financial metric that aligns with a company’s short-term priorities.
– Revenue is the most common secondary financial metric (57% prevalence; up from 46% in 2016), followed by cash flow (29% prevalence; up from 25% in 2016).
• A non-financial component (78% prevalence; up from 73% in 2016), with the use of standalone strategic measures or team-wide scorecards (58% prevalence; up from 42% in 2016) surpassing individual performance measurement (43% prevalence; up from 38% in 2016).
– The increase in use of strategic measures since 2016 is primarily driven by the heightened focus on Environmental, Social, and Governance (ESG) objectives and the resulting addition of ESG measures in annual incentive plans (72% of Top 250 companies in FW Cook’s 2022 Top 250 ESG Report).
• Payout ranges from 0% or 50% of target for threshold performance to 200% of target for maximum performance.
Severance policy proposals made a comeback during the 2022 proxy season and need to be on your radar for 2023. Over on the Proxy Season Blog on TheCorporateCounsel.net, I recently noted a new Glass Lewis voting policy on this topic. I’m pleased to follow up with more detail via this guest post from Orrick’s J.T. Ho and Bobby Bee:
We blogged back in August about a spike in a 14a-8 proposal that requests companies implement policies to seek shareholder approval of any executive pay packages providing for severance or termination payments exceeding 2.99 times the sum of base salary plus bonus. As discussed in that blog post, the activists define severance or termination payments as including not only cash payments but also the value of equity awards that accelerate upon a separation event. Despite proxy advisors’ historical support of such proposals, most companies faced with these proposals have been able to secure a shareholder vote rejecting it. In justifying their “no” vote recommendations, companies have pointed to existing practices or policies, which provide that they will seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executives’ salary and bonus, while providing for no such limit on equity acceleration benefits.
In a helpful position update, when Glass Lewis issued its 2023 voting guidelines for ESG Initiatives, it disclosed the following with respect to such proposals going forward (emphasis added):
“Retirement Benefits and Severance
We have updated our approach to proposals requesting that companies adopt a policy whereby shareholders must approve severance payments exceeding 2.99 times the amount of the executive’s base salary plus bonus. Although we are generally supportive of these policies, we have updated our guidelines to reflect that we may recommend shareholders vote against these proposals in instances where companies have adopted policies whereby they will seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executives’ salary and bonus.”
The revised approach by Glass Lewis is welcome news and further supports the position most companies have taken when faced with these shareholder proposals. As suggested in our earlier post, companies without existing severance limitation policies should consider, and may benefit from adopting and publicizing, a formal severance policy that requires shareholder approval for cash severance payments to 2.99 times the sum of base salary plus bonus. Such action may put companies in a better position to avoid receiving such a proposal and would also position them in line with the updated Glass Lewis recommendations.
Thanks to J.T. and Bobby for this analysis of the new policy! One note of caution: before you jump in, it is worth thinking through any unintended consequences that could result from policies that limit severance – at least so that you’re prepared for questions that others might pose. Also, see my blog last month for more detail on Glass Lewis’s overall policy guidelines, which accompany these ESG policies.
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.