The Advisors' Blog

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.

The plaintiff will be fighting an uphill battle in the Delaware Court of Chancery. This “Chancery Daily” newsletter explains why (also see the defendants’ 111-page pretrial brief):

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.

– Liz Dunshee

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.

– Liz Dunshee

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.

– Liz Dunshee

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!

– Liz Dunshee

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.

– Liz Dunshee

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.

– Liz Dunshee

As I mentioned in a blog a few weeks ago, a number of firms & trade organizations have been urging the SEC to postpone the compliance date for the pay versus performance rules, but there is no indication from the Commission that it will do so. Please participate in this anonymous 10-second poll about the extent to which your company is prepared to implement pay vs. performance disclosures that will be required in 2023 proxy statements:

We will be discussing ways to prepare – including interpretive questions and how to put these disclosures in context – at our special session next Thursday, November 10th, “Tackling Your Pay Vs. Performance Disclosures.” Make sure to register and join us from 1-4pm Eastern on November 10th. Attendees will get first access to sample disclosures drafted by Dave Lynn and Mark Borges!

– Liz Dunshee

Effective today, under Local Law 32, New York City joins Colorado, California and other states in requiring companies to disclose a range for base salary or hourly pay in ads for any job opening (including promotions or transfers) that “can or will” be performed in NYC.

The law won’t directly impact executive hiring that is conducted through a search firm, because it applies only to “advertisements” and doesn’t prohibit employers from hiring without using an advertisement. However, many compensation committees are taking on broader “human capital” oversight responsibilities and are overseeing pay equity & compliance issues in connection with that.

In the near-term, companies will need to navigate compliance strategies for this and similar laws. In the longer-term, the growing number of pay transparency laws likely will lead to questions from employees (and potentially shareholders) about perceived pay gaps & inequities, and require a more holistic & rigorous strategy for setting & communicating pay. To prepare, companies that don’t already conduct periodic pay equity audits should consider doing so (see this transcript from our 2020 webcast on the mechanics of doing this).

NYC has posted this “fact sheet” that explains the ins & outs of Local Law 32. This Holland & Knight memo summarizes key points. Here are a few excerpts:

Which Employees Are Covered? The Law covers all employers with four or more employees or one or more domestic workers, provided at least one of those employees works in New York City. The four employees do not need to work in the same location or all work in New York City. Owners and individual employers count toward the four employees, as do independent contractors, part-time employees, paid interns and domestic workers.

Which Job Postings Are Covered? The Law applies to any advertisement for a job, promotion or transfer opportunity that can or will be performed in New York City. The Commission on Human Rights defines “advertisement” broadly to include any written description of an available job, promotion or transfer opportunity that is publicized to a pool of potential applicants, regardless of the medium in which the advertisement is disseminated.

Does the Law Apply to a Posting for a Remote or Hybrid position? The Law applies to a posting for a fully remote or hybrid position, if the position can or will be performed in New York City, in whole or in part, whether from an office, in the field or remotely from the employee’s home.

What Are the Potential Consequences of Noncompliance with the Law? The NYC Commission on Human Rights enforces the Law. Employers who violate the Law are subject to paying monetary damages (if any) to adversely affected individuals and being directed to amend advertisements and postings, create or update policies, conduct training, provide notices of rights to employees or applicants, and engage in other forms of affirmative relief.

An employer will receive a warning for a first complaint of noncompliance, provided the employer shows it cured its noncompliance within 30 days of receiving the warning. An employer may have to pay civil penalties up to $250,000 for an uncured first violation and any subsequent violations.

This NYT article and this WSJ article highlight the approaches that a few big companies are taking to this new requirement – and they note that a similar law is pending in New York state. We’re posting memos that explain how to comply with various state & local laws in our “Gender & Racial Pay Equity” Practice Area.

– Liz Dunshee

As you continue to work through the technicalities of your upcoming pay vs. performance table, this FW Cook blog gives a heads up on valuing equity awards that use relative total shareholder return as a performance metric. Here’s an excerpt:

Companies often estimate the value of “in-flight” awards (awards partway through the performance period) by using the “Intrinsic Value method,” which estimates value by determining a payout percentage based on the current percentile ranking and then multiplying that payout by the current stock price.

It turns out that in many cases the Intrinsic Value method produces a value quite different from the “Fair Value,” which is the value used for accounting purposes and required for the PVP table. The difference is most acute for awards tracking at no payout, where the valuation required for the PVP table can produce valuations near target payout in some cases.

The blog includes a table from Infinite Equity that may be helpful in estimating fair value of these awards at different points during the performance period. The FW Cook team explains:

As companies develop estimates for CAP for their 2023 proxy statements, we believe that a table like this can be a reasonable placeholder for estimated Fair Values (at least until the end of the year when a final Monte Carlo simulation to determine Fair Value will be required). Although the table reflects a specific set of assumptions, so that results may diverge for some plan designs, we think it is still a useful tool for companies that would like to develop insight into their 2023 PVP table and have not yet started full valuations.

The table may be particularly helpful in cases where current percentile rankings are extremely high or low and there is significant time for the awards to run since this is where the divergence between Intrinsic Value and Fair Value is the greatest.

Make sure to register and join us for our 3-hour special session next Thursday, November 10th, on the SEC’s new pay vs. performance rules. We will be explaining how to handle major interpretive questions and how to put this new disclosure in context for say-on-pay, and will also walk through our sample disclosures – which registrants of this special session will be able to download in real-time. That resource alone is well-worth the price of admission!

– Liz Dunshee

Yesterday, by a 3-2 vote, the SEC adopted rules that will (eventually) require exchange-listed companies to maintain “clawback policies” for “the recovery of erroneously awarded incentive-based compensation received by current or former executive officers.” The SEC’s original proposal on these rules dates back to 2015. The Commission reopened the comment period in October 2021 and again in June 2022.

Here’s the 230-page adopting release – and the press release and 2-page Fact Sheet. Stay tuned for expert guidance via a CompensationStandards.com webcast on this topic – as well as in-depth analysis & practical takeaways from Dave Lynn in The Corporate Executive. We’ll also be posting the inevitable deluge of memos in our “Clawbacks” Practice Area. In the meantime, here’s a “baker’s dozen” things to know:

1. Rule Requires Policy & Disclosure: Nearly all exchange-listed companies will have to adopt and comply with a clawback policy that conforms to these new rules, and will also have to provide disclosure in proxy & information statements and annual reports about the policies and how they are being implemented.

2. Delisting at Stake: A company will be subject to delisting if it does not adopt and comply with a compensation recovery policy that meets the requirements of the listing standards.

3. Applies To “little r” Restatements: That policy must provide that, in the event the issuer is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (“little r” restatements), the issuer will recover incentive-based compensation paid to its current or former executive officers based on any misstated financial reporting measure.

4. Three-Year Lookback: The policy must apply to compensation received during the three-year period preceding the date the issuer is required to prepare the accounting restatement.

5. Applies to Current & Former Executives: The policy has to direct the company to recover erroneously awarded compensation from both current and former executive officers.

6. Three Limited “Impracticability” Exceptions: The only allowable exceptions to enforcing the policy are:

– Direct expenses paid to third parties to assist in enforcing the policy would exceed the amount to be recovered and the issuer has made a reasonable attempt to recover;

– Recovery would violate home country law that existed at the time of adoption of the rule, and the issuer provides an opinion of counsel to that effect to the exchange (regarding state laws, which Emily blogged about last year as a potential issue, the SEC says on page 92 of the adopting release that it’s not aware of any state laws that would clearly prohibit recovery, although executives may assert that as a defense and companies may need to address such matters as part of the recovery process); or

– Recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code.

7. New Exhibit to Annual Report: The clawback policy must be filed as an exhibit to the annual report, under Item 601(b)(97) of Regulation S-K.

8. Disclose Application of Policy: Companies must disclose how they have applied their recovery policies, including:

– The date on which the company was required to prepare an accounting restatement & the aggregate dollar amount of erroneously awarded compensation attributable to such accounting restatement (including an analysis of how the recoverable amount was calculated) or, if the amount has not yet been determined, an explanation of the reasons and disclosure of the amount and related disclosures in the next filing that is subject to Item 402 of Regulation S-K;

– The aggregate dollar amount of erroneously awarded compensation that remains outstanding at the end of its last completed fiscal year;

– If the financial reporting measure related to a stock price or TSR metric, the estimates used to determine the amount of erroneously awarded compensation attributable to such accounting restatement and an explanation of the methodology used for such estimates;

– If recovery would be impracticable pursuant to 17 CFR 240.10D-1(b)(1)(iv) (“Rule 10D-1(b)(1)(iv)”), for each current and former named executive officer and for all other current and former executive officers as a group, disclose the amount of recovery forgone and a brief description of the reason the listed registrant decided in each case not to pursue recovery; and

– For each current and former named executive officer, disclose the amount of erroneously awarded compensation still owed that had been outstanding for 180 days or longer since the date the issuer determined the amount owed.

– If compensation is recovered, companies must also reduce figures in the Summary Compensation Table, under a new instruction to that item.

9. XBRL Tags Required: Companies will be required to use Inline XBRL to tag their compensation recovery disclosure.

10. New Form 10-K Check Boxes: The rules add two new check boxes on the cover page of Form 10-K. One to indicate whether the financial statements included in the filings reflect correction of an error to previously issued financial statements, and one to indicate whether any of those error corrections are restatements that required a recovery analysis.

Hopefully someone smarter than me will clarify, but it does not seem immediately clear from the release whether these check boxes (especially the first one) will be required for Form 10-Ks that are filed in 2023, after the SEC rule is effective but before companies have to make any other disclosure about policies.

11. Comply in Late 2023/Early 2024: Assuming the typical Federal Register time frame and that the exchanges fully leverage the permitted compliance & effective date windows, we’re looking at an effective date in approximately January 2023 (60 days following publication of the release in the Federal Register), exchanges proposing listing standards in approximately February 2023 (90 days following publication of the release in the Federal Register), those listing standards becoming effective in approximately November 2023 (1 year after the publication date), and companies having to adopt policies in early January 2024 (within 60 days of the effective date of the listing standard), with disclosure following in annual reports and proxy statements that are filed after that date.

The release states, “We would not expect compliance with the disclosure requirement until issuers are required to have a policy under the applicable exchange listing standard.”

12. Plenty of Work Required Between Now & 2024: I’m sure nobody reading this thinks they can wait until December of next year to throw together a clawback policy. You hopefully have already been socializing the notion with the board and executives, and probably have some form of existing policy and concepts in plan documents and agreements. Now, you’ll need to analyze how those align with the new rule, what changes are needed, whether and how to position policies & agreements to overcome defenses that may apply under state laws and anticipate tax and other consequences, what disclosure will look like, etc. The expectation from most folks I’ve talked to is that the exchange listing standards will track the SEC rule pretty closely – but of course we won’t know for sure until they actually submit the proposals.

13. Don’t Forget Other Clawback Rules & Enforcement Initiatives: As Dave blogged earlier this week on TheCorporateCounsel.net, companies must also be mindful of the interplay with SOX 304 clawbacks and current enforcement initiatives when preparing policies and related compliance efforts. This Freshfields blog from late last year explains how Dodd-Frank clawbacks generally differ from the existing Sarbanes-Oxley rule.

As expected, the rules are prescriptive – and companies will face a lot of challenges in adopting and enforcing the policies that they require. That is not the fault of the Staff, but is a function of a stale mandate on a very complicated topic, made even more complex by the intervening prevalence of “little r” restatements.

– Liz Dunshee