Calendar year-end companies will soon be filing their first disclosures addressing new Item 402(x)(1), which requires a description of policies and practices related to the timing of option & SAR grants and the release of MNPI. Companies must address how the board decides when to grant (do they follow a predetermined schedule?), whether the board or compensation committee considers MNPI when deciding timing and terms of the options (and if so, how) and whether the company has timed the disclosure of MNPI to affect the value of executive compensation.
We know that the narrative policies and practices disclosure is required regardless of whether a company has actually made grants of option awards close in time to the release of MNPI, but one interpretive question we’ve heard pop up is what companies need to say — if anything — if they just don’t grant options or SARs at all. Gibson Dunn’s Ron Mueller addressed this in last week’s webcast, “The Latest: Your Upcoming Proxy Disclosures.” Here are a few takeaways from his talking points:
– Item 402(x) is not limited to NEOs. This requires disclosure about any option grant policy generally.
– Item 402(x) has no time limit. A lot of companies stopped granting options in the last few years — moving to performance-based awards — but they still have options outstanding. It’s unclear from Item 402(x) whether those companies need to address their policies and procedures under Item 402(x)(1).
– Item 402(x) does not address RSUs or PSUs. But some companies have written policies that apply not just to options, but also to grants of RSUs or PSUs. Many of these companies — including those that don’t grant options — have elected to discuss these equity grant policies and practices — going beyond what is required but providing helpful information. Per this Gibson Dunn alert, “although these rules apply only to options and similar awards, we expect many companies to include, or expand on existing, narrative disclosures regarding their policies and practices related to the timing of full value awards as well (i.e., restricted stock units, restricted stock, and performance stock units).”
Late last month, I recorded a conversation with Shaun Bisman of Compensation Advisory Partners on ISS and Glass Lewis compensation-related policy updates for the 2025 proxy season. Tune in to this 16-minute episode of The Pay & Proxy Podcast to hear Shaun address:
Executive compensation-related updates to Glass Lewis’s 2025 Voting Policy Guidelines
ISS’s FAQ updates regarding the presentation of realizable pay, evaluation of program metrics and changes to in-process pay programs
ISS’s new FAQ on performance-vesting equity disclosure
Potential changes to ISS’s Benchmark Voting Policies for 2026 relating to the treatment of time-vesting equity awards
Practical implications and action items for compensation committees
As always, if you have a topic you’d like to discuss on a podcast, please reach out to me at mervine@ccrcorp.com!
Back in the 2021, there was a jump in the percentage of companies including individual performance metrics in their annual incentive plans. A number of companies added these metrics during pandemic times in order to provide some flexibility in the midst of uncertainty. A recent analysis from ISS Corporate observes that usage has remained steady ever since – with 34% of companies across the S&P 500 and Russell 3000 using them, compared to 29% in 2020. The memo looks at payouts at these companies compared to companies that do not use individual performance metrics. Here are the key findings:
– Incorporating discretionary components within a company’s Annual Incentive Program has become increasingly common, particularly in the Real Estate and Financial sectors.
– Companies that have individual performance metrics in their Annual Incentive Programs tend to deliver higher payouts and executives are more likely to achieve target than companies that do not.
– Discretionary components in a compensation program generally shift pay more towards the Annual Incentive Program for companies in the Russell 3000, while having the opposite effect for the S&P 500.
– Individual performance metrics may be used as a substitute for discretionary bonuses for S&P 500 companies, but the opposite is true for Russell 3000 companies, where companies with discretionary metrics also award larger discretionary bonuses on average.
Companies may want to prepare to talking points in response to these observations, because the memo offers this advice to investors:
The results also suggest that investors should carefully evaluate programs that lack pre-set quantifiable metrics. While IPMs add needed flexibility to a CEO’s pay package, they can also subtly lead to an increase in short-term pay. Companies with IPMs are more likely to hit their target payout, and short-term payouts may be significantly higher as well. In short, the results suggest an important role for monitoring AIPs with a heavily weighted individual performance metric and it is incumbent on companies to provide adequate disclosure.
Remember that last month, updated ISS FAQs also signaled that companies may face more scrutiny this year around performance metrics and related disclosures, especially for performance-vesting equity when pay & performance aren’t aligned under ISS’s quantitative test.
Tune in at 2:00 pm Eastern tomorrow – Thursday, January 9th – for our annual 90-minute webcast, “The Latest: Your Upcoming Proxy Disclosures.” We’ll hear from Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Goodwin Procter and TheCorporateCounsel.net and Ron Mueller of Gibson Dunn on a variety of compensation “hot topics” – including:
– Potential Impact of New Administration on SEC Rulemaking
– Potential Impact on Compensation Disclosure (Pay Ratio, Rule 701 and more)
– Evolution of Clawback Policies, Disclosures to Date and Clawback Mechanics
– Pay vs. Performance — Preparing for the First Year of Five-Year Disclosure
– Proxy Advisor Compensation Policy Updates
– The Key CD&A Topics and Tabular Insights
– New Item 402(x) and Equity Grant Policies
– Incentive Plan and ESG Metric Trends
– Compensation-Related Shareholder Proposals
– Planning for 2025 Say-on-Pay Votes
– Planning for 2025 Equity Plan Proposals
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. 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. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
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This program will also be eligible for on-demand CLE credit when the archive is posted, typically within 48 hours of the original air date. Instructions on how to qualify for on-demand CLE credit will be posted on the archive page.
As we kick off a new year, many people are reflecting on their goals and plans for the future. For your CEO, that may include retirement planning. And these days, that transition may come sooner than you expect!
According to a WTW memo that Meredith recently shared, CEOs have been retiring at younger ages in recent years. In addition to the obvious succession planning issues that this creates, there are also a few things that compensation committees can consider in order to optimize equity awards during an executive’s last few working years.
In the latest 10-minute episode of The Pay & Proxy Podcast, Meredith was joined by WTW’s Mike Oclaray and Kate King to discuss this topic. Tune in to hear:
– Statistics from five years of pay history for recently retired S&P 500 CEOs
– Why compensation committees should reconsider LTI strategy as CEOs near retirement
– Assessing existing equity awards to understand treatment on retirement and the value of in-flight awards that may be prorated or truncated
– Potential alternatives to consider in light of an impending retirement, including a larger grant, a change to pay mix or vesting or a special performance award
– A real-world example of improving CEO equity awards to sync with remaining tenure and align the CEO’s interests with those of the organization and shareholders
Check out this LinkedIn post from Aon’s Laura Wanlass for other things to consider around executive transitions. Thinking ahead about contracts and disclosures can help you avoid negative votes at your annual meeting.
In December, BlackRock published its voting guidelines that will apply to 2025 annual meetings – including updates to its guidelines for U.S. securities as well as its “Global Principles.”
BlackRock made only incremental updates to the policies that relate to executive compensation – and some changes may be articulating factors that the investment stewardship team was already applying in practice to its voting decisions. Nevertheless, if BlackRock holds significant voting power at your company, you may want to do the following:
– Check how your disclosures (and compensation committee discussions) stack up against BlackRock’s updated expectations.
– Consider submitting your equity plan for approval sooner than you otherwise would have.
– Warn your compensation committee members about BlackRock’s threat to vote against them for two new reasons: “imprudent use” of equity awards and option repricings.
Diving into the guidelines, here are the highlights for the compensation-related changes:
– Focus on financial value: When it comes to linking pay to performance, BlackRock now specifies that it means “financial” value creation.
– Your rationale for compensation decisions: New language encourages companies to clearly explain how compensation outcomes have rewarded performance (versus basing pay increases solely on peer benchmarking). The policy clarifies that companies should consider rigorous measure(s) of outperformance in addition to peer benchmarking.
– Clawbacks: BlackRock built on its existing policy to say that it expects boards to exercise limited discretion in forgoing, releasing or settling amounts subject to recovery for executives and not to indemnify or insure executives for losses they incur.
– Equity compensation plans: BlackRock added a new paragraph – “We find it helpful when companies submit their equity compensation plans for shareholder approval more frequently than required by listing exchange standards to facilitate the timely consideration of evolving plan governance practices. Particularly when share reserve requests grow significantly versus prior plans, boards should clearly explain any material factors that may potentially contribute to changes from the company’s past equity usage. We may support an equity plan share request if we determine that support for such plan is in the best interests of shareholders; however, we may also vote against members of the compensation committee to signal our concerns about the structure or design of the equity compensation plan or the company’s equity grant practices and the imprudent use of equity.”
– Repricings: For option repricings and exchanges, the policy specifies that BlackRock may vote against members of the compensation committee where a board implements or approves a repricing or option exchange without shareholder approval. Where such a repricing or option exchange includes named executive officers, we may also vote against the company’s annual advisory vote on executive compensation. This builds on BlackRock’s existing policy of voting against equity plans that permit repricing without shareholder approval.
This recent Pay Governance memo confirmed that now — well over 10 years into mandatory say-on-pay votes — increased shareholder democracy on executive compensation has still not had the effect of lowering CEO pay. (At least not to the extent intended. A recent academic study suggests that the say-on-pay vote lowers total CEO pay levels by about 6.6%.) Using a constant company sample of 166 companies in the S&P 500 over 2008 to 2022, Pay Governance research has shown that:
– CEO pay has continued to increase post-Dodd-Frank
– CEO pay increases were reflective of a 64% increase in revenue and more than doubling of market cap for a constant sample of S&P 500 companies over the same period
That said, there has been a significant shift in pay practices and focus on quantum of pay at certain levels:
– There’s a continued trend of pay compression at large public companies with significantly lower increases in pay at the 90th percentile than other percentiles (before SOP, CEO pay at the 90th percentile was 4.5 times the 10th percentile; more recently, that ratio is 2.5)
– S&P 500 CEO pay is significantly more performance-based (90% of CEO pay is now delivered in annual or long-term incentives versus 84% before SOP)
– The mix of long-term incentives has shifted significantly towards PSUs (from 34% before SOP to 63% today)
The article argues that the strong, typically 90+ percent average support for say-on-pay proposals validates the historical increases and today’s performance-based pay model.
Programming Note: I can’t believe I’m saying this, but this is our final post on The Advisors’ Blog in 2024 (barring any major developments)! Thanks for your participation in our sites this year – we couldn’t do this without you! I’m so thankful for this professional community, and my New Year’s wish for us all is more community — personal and professional! I hope I get to see many of you in 2025! Happy Holidays!
Yesterday, the SEC announced that it settled charges against a company related to an alleged failure to disclose approximately $1 million worth of perquisites predominantly related to its CEO’s use of chartered aircraft. The SEC’s order against the company states that its process did not apply the “integrally-and-directly-related standard.” Instead, the company’s “system for identifying, tracking, and calculating perquisites incorrectly applied a standard whereby a business purpose would be sufficient to determine that certain items were not perquisites or personal benefits that required disclosure” and “incorrectly viewed the CEO’s business expenses to include expenses associated with the CEO’s personal flights, including transportation, meals, and hotel.” If this sounds familiar, it is!
In this case, the company discovered the error and revised its disclosure in a subsequent proxy statement:
On April 28, 2023, Express filed its fiscal year 2022 proxy statement, which, among other things, provided revised disclosures regarding perquisites and personal benefits provided to the CEO for fiscal years 2020 and 2021. Express also disclosed that the CEO voluntarily reimbursed the company approximately $454,000 for private air travel and expenses that were determined to be perquisites or personal expenses.
At the risk of sounding like a broken record, I’m going to share this reminder from the order:
According to the Adopting Release, “an item is not a perquisite or personal benefit,” and does not need to be reported, “if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.” The Adopting Release also states that “the concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.”
According to the Adopting Release, even where the company “has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,” that determination “is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes.” Indeed, “business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”
As always, the devil is in the details! For a refresher, check out the “Perks & Other Personal Benefits” Chapter of our Executive Compensation Disclosure Treatise — many pages are devoted to airplane use!
On Friday, ISS posted updated FAQs on executive compensation policies (new and materially updated questions are highlighted in yellow). This follows an off-cycle update in October of this year, which noted that another update would follow in December. Question 46, addressing when a clawback policy is considered “robust,” is highlighted but unchanged from the October updates.
Here’s a paraphrased recap of the questions that were materially updated:
– Computation of Realizable Pay (Question 24): The realizable pay chart will not be displayed for companies that have experienced multiple CEO changes (2 or more) within the three-year measurement period. (This was previewed in October.)
– Evaluation of Program Metrics (Question 39): While still not endorsing TSR or any other specific metric, ISS will consider the following factors when evaluating metrics: Whether the program emphasizes objective metrics that are linked to quantifiable goals, as opposed to highly subjective or discretionary metrics; The rationale for selecting metrics, including the linkage to company strategy and shareholder value; The rationale for atypical metrics or significant metric changes from the prior year; and/or The clarity of disclosure around adjustments for non-GAAP metrics, including the impact on payouts.
– Changes to In-Flight Programs (Question 42): Consistent with a prior FAQ focused on COVID-era pay program changes, ISS still generally views changes to in-process pay programs (e.g., metrics, performance targets and/or measurement periods) negatively. Clear disclosure is expected addressing rationale and how the changes do not “circumvent pay-for-performance outcomes.”
Most importantly, ISS added the following new FAQ, which was also previewed by the proxy advisor when it announced the opening of the comment period on proposed changes to its benchmark voting policies:
ISS previously announced adaptations to the pay-for-performance qualitative review effective for the 2025 proxy season, relating to the evaluation of performance-vesting equity awards. What does this entail? (Question 34) Beginning with the 2025 proxy season, ISS will place a greater focus on performance-vesting equity disclosure and design aspects, particularly for companies that exhibit a quantitative pay-for-performance misalignment. While ISS has historically analyzed the disclosure and design of incentive programs as part of the qualitative review, investors have increasingly expressed concerns with the potential pitfalls surrounding performance equity programs. As such, existing qualitative considerations around performance equity programs going forward will be subject to greater scrutiny in the context of a quantitative pay-for-performance misalignment. Typical considerations include the following non-exhaustive list:
– Non-disclosure of forward-looking goals (note: retrospective disclosure of goals at the end of the performance period will carry less mitigating weight than it has in prior years);
– Poor disclosure of closing-cycle vesting results;
– Poor disclosure of the rationale for metric changes, metric adjustments or program design;
– Unusually large pay opportunities, including maximum vesting opportunities;
– Non-rigorous goals that do not appear to strongly incentivize for outperformance; and/or
– Overly complex performance equity structures.
Multiple concerns identified with respect to performance equity programs will be more likely to result in an adverse vote recommendation in the context of a quantitative pay-for-performance misalignment.
Aon’s Laura Wanlass shared this helpful commentary on this new FAQ on LinkedIn:
ISS did signal proactively in previous weeks that there would be a requirement for more forward-looking goal disclosure at the onset of a performance period and it has been codified in FAQ 34. The middle ground practice has always been to commit to and actually disclose full performance plan design and outcome information at the conclusion of the performance period (i.e., some companies don’t give forward looking guidance and/or there are competitive harm considerations). I suspect this factor won’t be a deal breaker on a stand-alone basis but will likely require one or more additional issues from this new list of qualitative evaluation factors to drive a negative vote recommendation.
Yesterday, ISS also posted updated FAQ documents for equity compensation plans, the pay-for-performance mechanics, and the peer group methodology, with very minimal changes. With respect to equity compensation plans, I’m happy to report that the only highlighted FAQ reads: “For 2025, there are no new factors, and no changes to factor weightings or passing scores for any of the EPSC models.”
While a majority of companies don’t modify their CEO’s LTI vehicle mix or vesting schedules in the years leading up to retirement, this WTW memo makes the case for taking steps to “optimize” a CEO’s compensation before their pre-retirement years. Staying the course may not make much sense at a point when a CEO is a few years from retirement.
For example, assume a CEO annually receives grants comprised of PSUs (50%), stock options (30%) and RSUs (20%). Stock options with a standard 10-year term would be “out of sync with the remaining tenure” and don’t really have the intended effect of aligning the CEO’s interests with those of the company and shareholders.
After projecting the timeframe to retirement, assessing current equity award terms and estimating the value of in-flight awards that will be prorated or truncated, the article notes a few example alternatives to consider:
– A larger final equity grant made two or three years before retirement could continue to align your CEO’s pay with their final-years performance while effectively avoiding proration, truncation and/or lost value.
– A special performance-based grant could help to underscore and celebrate achievements toward the end of the CEO’s successful tenure.
– A change to the equity pay mix and/or vesting period could help to do the same.
In the above example, the article says, “it would be reasonable to grant no more stock options to the retiring CEO, while delivering final grants via PSUs and/or RSUs.”