A group of 60 PE firms, banks, pension funds and others have signed on to Ownership Works – a non-profit with the goal of creating $20 billion in wealth for lower income & diverse employees over the next decade. This WSJ article says that the organization is the brainchild of Pete Stavros of KKR – and counts Apollo, KKR, Warburg Pincus, CalPERS and the Washington State Investment Board among its members.
NYSE-listed Harley Davidson is listed as a case study. The company announced last year as part of its earnings & strategic plan that it would grant stock to all 4500 employees worldwide, which is also called out in the company’s recent proxy statement. Where are the shares coming from? In Harley’s case, they’re coming from the equity incentive plan, and are part of the reason the company is seeking an increase to the authorized number of shares this year. Ownership Works has a FAQ for that too, which suggests they aren’t pushing for a particular format of plan:
Many companies already share ownership with senior leaders in the form of a management equity plan. Achieving broad-based ownership may require allocating additional equity to an all-employee equity plan and/or a shift in the amount allocated to more senior executives. When well implemented, shared ownership programs should, over time, pay for themselves by maximizing shared wealth creation.
With the PE firms in this coalition committing to institute employee ownership at a minimum of 3 portfolio companies and the pension fund participants pledging to “encourage asset managers to consider it when appropriate,” there may be more “asks” coming for enhanced employee ownership. That’s on top of the interplay between stock ownership & pay equity attracting more attention. If you don’t already have a broad-based employee stock plan, it’s worth perusing the Ownership Works resources and keeping your compensation committee up to speed about the alternatives.
The last two years were rocky in the executive compensation world as compensation committees tried to design the right incentives during a pandemic. And in 2021, ISS put out its updated FAQ for pandemic-related pay adjustments, and suggested that pay programs should go “back to normal.” With the pandemic (slowly) fading out, Pay Governance looked at how it has changed the compensation world. Below is an excerpt of the 2021 compensation practices that they expect will have persisted from 2020:
– Wider performance curves. Many companies widened their performance curves to minimize the chance of a zero or maximum payout given the uncertainty in setting performance targets. This uncertainty persisted at the beginning of 2021, and a widening of the performance curve allowed companies to retain the basic structure of existing plans but with far less pay/performance leverage.
– Semi-annual short-term incentive performance periods. Companies in industries facing the greatest level of uncertainty continued or adopted a “1st half/2nd half short-term incentive plan whereby 6-month goals are set at the beginning and the middle of the performance year to allow for a “resetting” of targets at mid-year based on more current financial outlook.
– Inclusion of qualitative metrics. After unprecedented levels of discretionary adjustments applied in 2020, some companies added or increased the weighting of qualitative metrics to allow the Compensation Committee to exercise discretion within predefined guardrails (e.g., +/- 20%).
– Above target annual incentive plan payouts. Given the limited visibility at the beginning of 2021 amid the continued impact of COVID-19 (e.g., supply chain pressures, “The Great Resignation,” etc.) and 2020 annual incentive plan payouts, the majority of which were below target or zero, many companies may have established relatively conservative financial targets for their 2021 annual incentive plans. Early indications are that above target (or maximum) annual incentive payouts are being reported by companies that were more resilient than forecasted and capitalized on better-than-expected market opportunities in 2021.
With CEO pay bouncing back in 2021, what’s director compensation looking like? We’ve previously blogged about director pay at S&P500 companies and how equity compensation seems to comprise the biggest bulk of total compensation.
Pearl Meyer recently held a webcast with NACD and surveyed the 148 director attendees. 67% of respondents don’t expect to reduce the board equity grant value because of declining stock prices. In addition, for new board members, 49% provide pro-rated equity grants based on the new director’s start date and the annual granting date. Pearl Meyer ends with an interesting idea – if executives get inducement equity grants in a competitive market, why not directors?
To complement Semler Brossy’s memo on early say-on-pay results yesterday, here’s a memo from Equilar on the Harvard Law School Forum on Corporate Governance regarding early trends in executive compensation. Below are some highlights on how executive compensation is shaking out:
– CEO pay is back on the rise – there’s a change in median total direct compensation from $12 million in 2020 to $14.3 million in 2021.
– With CEO pay on the rise, you’ve also got the pay ratio number rising. The CEO pay ratio so far is 245:1 (vs. 192:1 in 2020). Liz previously blogged about how the pay ratio is directly affecting the say-on-pay votes at Kroger – we’ll have to see if failure rates also start climbing compared to what we’re seeing early on.
– Gender pay gap persists even at the highest levels. Median pay for women CEOs in the Equilar 500 was $11.8 million in 2021, vs. $14.5 million for men. I’ve previously blogged about how female executives may ironically be paid less because of benchmarking, and it looks like 2021 continues that trend.
With proxy season in full swing, here are some observations from the latest Semler Brossy memo tracking say-on-pay results for this season, published as of March 31:
– The current failure rate for the Russell 3000 is at 2.2% (with 3 companies failing), much lower than the failure rate at this time last year (4.9%). The three are Arrowhead Pharmaceuticals, D.R. Horton & Griffon Corporation – and notably, D.R. Horton’s CEO is on As You Sow’s Most Overpaid CEOs list.
– Breaking it down by sector, it looks like the consumer, industrials, IT & healthcare industries are where you see support dipping below 70%.
– 8.9% of Russell 3000 companies have received an “Against” recommendation from ISS thus far, which is 240 basis points lower than 2021 year-end.
It’s still early days and there’s lots more to come on this topic, since only 32 S&P500 companies have held a say-on-pay vote thus far. We’ll keep posting these stats in our “Say-on-Pay” Practice Area to keep you informed.
Pay ratio is coming full circle. Remember when the rule went into effect and everyone was really worried that their company would be canceled (or whatever the word was for that in 2017)? And then most companies just provided the basics of what Item 402(u) requires and nobody paid much attention. Seemed like kind of a nothingburger. For a minute.
Here’s part of a letter that Carl Icahn sent to Kroger on Tuesday:
Even in a hard-nosed capitalistic system like ours, it is obscene that a CEO makes 900 times what workers earn. It is truly difficult to point to anything comparable, even when considering the grave injustices in the early days of the Industrial Revolution. At Kroger, amazingly, it will take an average worker 20 years to make what the CEO earns in one week. In my 40 years of being an activist, I have never seen anything like this.
Yes, you read that right. Billionaire Carl Icahn is taking issue with the pay gap between a company’s CEO and its median employee. And he wants to put 2 directors on Kroger’s board to help solve the problem! (He owns 100 shares of Kroger stock, by the way.)
While I have previously blogged that pay ratio is becoming a factor in say-on-pay…which can lead to lower director support and potentially catch the attention of activists, this is much more direct! Carl Icahn isn’t waiting around for low say-on-pay votes to tip him off to vulnerable directors. He’s just finding the high pay ratio. That’s the vulnerability.
While this might seem like a very odd-duck scenario, keep in mind that the SEC’s universal proxy rules go into effect later this year and will make it much easier for concerned shareholders to try to nominate dissidents to your board. If the pandemic didn’t already spur compensation committees to take a close look at wage inequality when setting CEO pay, maybe proxy contests will. Better to give your directors a heads up now versus when activists are at the gate.
Stay tuned for an announcement soon about our October “Proxy Disclosure & Executive Compensation” Conferences…and more. We’ll be discussing what boards and their advisors should be doing to protect themselves from this type of situation – and you won’t want to miss it. Hat tip to one of our speakers, Georgeson’s Hannah Orowitz, for alerting me to this proxy contest.
Approximately 35% of AmerisourceBergen shareholders recently voted in favor of a policy that would prohibit the exclusion of legal & compliance costs from financial performance metrics used to determine executive pay, according to the company’s Form 8-K. The policy was requested via a Teamsters shareholder proposal (pg. 87) – which took issue in particular with excluding $6.6 billion of opioid-related expenses. According to a CII write-up, the level of support surpassed a majority when looking only at shareholders not affiliated with the 20% stake in the company held by Walgreens.
While the magnitude of this adjustment is large, the proposal shows that shareholders haven’t lost track of the issue of non-GAAP adjustments that tend to ensure higher payouts. This topic is also reappearing in connection with the re-opened comment period for the SEC’s proposed pay-for-performance disclosure rule – as Emily recently noted.
To mark Equal Pay Day earlier this month, Arjuna Capital & Proxy Impact issued their 5th annual “Racial & Gender Pay Scorecard” – which shows that 7 companies now earn an “A” grade out of the 57 surveyed. That’s up from 5 last year. The companies that appear in the scorecard have all at one point received shareholder proposals to improve their public pay equity disclosures. Over the past 7 years, 143 proposals have been filed at more than 80 companies, according to a press release from Arjuna.
This was a hot topic during our “Top Compensation Consultants Speak” webcast last week. Panelists noted that many companies have reported strong “pay equity” performance (equal pay for similar job levels). Now, investors and regulators are pushing toward the next frontier – “unadjusted pay gap” disclosure – which compares median pay without regard to job level and may be indicative of barriers to advancement. The unadjusted pay gap remains less transparent and persistently large – and was exacerbated by the pandemic.
On the scorecard, “F” grades are awarded to companies that don’t disclose quantitative racial & gender pay gaps. 24 companies fall in that category. Another 9 companies received lower scores than the prior year because they had previously committed to report information and, according to Arjuna, haven’t followed through. 13 companies improved their scores year-over-year. The Scorecard grades companies across 5 categories, looking at performance within industry sectors as well as across all sectors:
1. Racial Pay Gap
2. Gender Pay Gap
3. UK Pay Gap
4. Coverage
5. Commitment
Here’s how the scores are calculated:
The Racial & Gender Pay Scorecard assesses companies’ pay equity data against best-practice pay equity reporting standards, which consist of two important elements: (1) unadjusted median pay gaps, assessing how jobs are distributed by race and gender and which groups hold the high-paying jobs, and (2) statistically adjusted gaps, assessing pay between minorities and non-minorities, men and women, performing similar roles. While statistically adjusted gaps provide one piece of the story, median pay gaps are a tougher and more revealing standard. Median pay gaps show, quite literally, how the company assigns value to its employees through the roles they inhabit and the pay they receive.
It’s worth flipping through the 29-page report because it summarizes recent regulations on this topic, as well as investor initiatives & outcomes (I blogged a couple of weeks ago about a notable approval). Also check out this Orrick page that shows pay equity & pay transparency laws by state and tracks how companies have responded to pay equity shareholder proposals.
As workforce issues continue to take the spotlight, visit our “Gender & Racial Pay Equity” Practice Area on this site for a library of resources to tackle this evolving challenge. We’re also covering the broader topic of advancing diversity, equity & inclusion on our brand new site, PracticalESG.com. Check out Ngozi’s blog yesterday about helping women overcome imposter syndrome in the workplace – and register today for our upcoming free DEI workshop series.
Emily blogged a few weeks ago about restrictions out of Russia that broadly prohibit transactions that transfer equity from companies in an “unfriendly country” (e.g., the US) to Russian residents. This new Orrick memo provides an update:
On March 18, 2022, the Russian Central Bank clarified that the restrictions imposed under Decree No. 81 (see our earlier alert below) do not apply if a Russian resident acquires shares from a company of an “unfriendly” country, as long as:
– the shares are held by a foreign entity outside of Russia;
– the money used to acquire those shares was already in a foreign bank account; and
– such funds and accounts have been previously disclosed to the Russian tax authorities in accordance with Russian law.
However, despite the above clarifications that seem to loosen the prior rules, we still urge caution and would not recommend proceeding with any share transactions, including the issuance of shares upon RSU vesting. See further details below. It is also important to note that Russian residents are still prohibited from remitting funds abroad to acquire shares of a US company.
The memo goes on to explain that the Central Bank’s clarification doesn’t specifically address RSUs, and there’s still a lot of uncertainty around “permitted payments.” The Orrick team recommends that companies continue to formally suspend any outstanding stock awards to Russian residents for the time being. ESPPs are also dicey.
There are lots of considerations at play when setting executive compensation programs at public companies – you want to be able to retain and motivate your executives without making your shareholders and proxy advisors balk. On the flip side, we normally think private company compensation is a bit more unfettered – private company compensation committees have a bit more breathing room when it comes to creative pay packages.
Below is an excerpt from a blog post from Bill Reilly at Pearl Meyer, where he discusses that despite that freedom, private company compensation committees are taking a page out of the public compensation committee playbooks.
– Goals and Metrics. As public companies begin to incorporate more qualitative, nonfinancial incentive metrics (often focused on environmental, social, and governance issues) into executive pay plans, private companies are gradually increasing their focus on long-term incentive awards. This is bringing private company pay practices more in line with the public companies that are competing for the same talent.
According to the survey, 100 percent of public company respondents said their organizations provide senior executives with a long-term incentive opportunity. Private, for-profit companies aren’t far behind at 76 percent. In fact, private, for-profit organizations were twice as likely as public companies—30 percent of respondents versus 15 percent, respectively—to have recently increased (or be planning to increase) long-term incentive participation levels.
– Structure and Governance. To further improve their executive pay programs’ effectiveness, private companies are increasingly adopting broader market corporate governance practices. These include having formal, documented compensation philosophies, adopting clawback policies, using tally sheets, and having oversight from a truly independent compensation committee with a charter that clearly outlines its role and authority.