Last week, Liz blogged on TheCorporateCounsel.net about BlackRock’s 2022 engagement priorities. BlackRock Investment Stewardship also published their approach to engaging with companies on compensation that would help maximize long-term shareholder value. BIS noted that “appropriate and transparent compensation policies are a focus in many of BIS’ engagements,” and they want to see companies clearly connect the dots between compensation and long-term financial performance. This includes disclosing how short- and long-term incentive plans work together to lead to long-term value.
BIS also observed that sustainability-related criteria continue to rise in popularity in incentive plans – here’s an excerpt of what they want to see & what they anticipate seeing:
BIS does not have a strong view on the use of sustainability-related performance criteria, but believes that where companies choose to include them, they are best aligned with shareholders’ interests when they: 1) address issues that are material to a company’s business model; 2) are aligned with long-term strategic priorities; and 3) incorporate the same rigor as with other financial or operational targets. It is helpful when companies integrating sustainability-related criteria in their incentive plans clearly explain the connection between what is being measured and rewarded and the company’s strategic priorities. Not doing so may leave companies vulnerable to reputational risks and/or undermine their sustainability efforts…
As companies navigate the global energy transition, we anticipate more incentive plans will include relevant greenhouse gas emissions reduction targets or transition-related metrics. Appropriate use of financial and other metrics aligned with long-term climate risk management – as well as investment in clean energy and product innovation – are increasingly important as companies look to position their business models to transition over time to a net zero economy.
In their memo, BIS also stated a preference for engaging with the relevant directors regarding compensation policies or outcomes – so companies should take that into account during the engagement planning stage. In addition, BIS prefers to engage on proposed compensation policies and plans “in final, or near final, stages” – backed by rationale on how the plans tie to long-term value creation, so companies should consider putting BlackRock later in their engagement schedule.
Countries & companies alike have been taking action against Russia, including with sanctions and pausing sales. Russia has also been taking its own actions – including blocking Facebook – which reinforces the point that companies need to be cognizant both of their actions and the Russian government’s actions. To that end, a member recently posted this question in our Q&A Forum (Topic #1403):
I saw a note that as of March 2, 2022, US companies can no longer engage in share transactions with Russian residents, unless expressly allowed by the Russian Government, which is unlikely to give permission. This encompasses both the issuance of shares for consideration and without consideration.
The implication is that any ESPP purchases, option exercises and RSU vestings should be suspended as of March 2, 2022.
I’m not able to find much more about this. Do you know whether it’s correct and where it is coming from?
Liz responded:
From what I hear, this is accurate. The issuance of foreign shares to Russian residents is prohibited by the new exchange control restrictions in Russia without Central Bank approval (Decrees No. 79 & 81). So, this restriction came from the Russian government. The risk is a fine to employees receiving those shares.
Companies should look at the plan documents to determine whether they allow for suspension of share issues / ESPP participation when not in compliance with applicable laws. Because there are a lot of restrictions on all types of financial transactions right now, cash settlement can be an alternative but would need to be carefully handled and properly accounted for.
Shareholder proponent As You Sow recently issued its 8th annual “100 Most Overpaid CEOs” report, which is available for download on their website. Here’s how they identify “overpaid” CEOs:
To identify the 100 Most Overpaid CEOs, we evaluate the CEO pay at S&P 500 companies using data provided by Institutional Shareholder Services (ISS). Further data and analysis provided by HIP Investor computes what the pay of the CEO would be, assuming such pay is related to cumulative Total Shareholder Return (TSR) over the previous five years, using a statistical regression model. This provides a formula to calculate the amount of excess pay each CEO receives. We then add data that ranks companies by what percent of company shares voted against the CEO pay package.
A newer calculation of shareholder votes by Insightia uses only the votes of institutional investors (those required to file SEC Form 13F) in both the numerator (shares voted against) and denominator (total shares voted) to calculate percentage opposition. This calculation gives a more accurate indication of institutional investors’ level of dissatisfaction, most obviously in cases where insiders own a particularly large portion of stock or there are dual class shares. More information on this and a comparison between reported votes and what we are calling “institutional votes” can be found in Appendix B. Finally, we rank companies by the ratio of the CEO’s pay to the pay of the median company employee.
The rankings of companies by excess CEO pay and by shareholder votes on CEO pay are each weighted at 40 percent. The final ranking based on CEO-to-worker pay ratio is weighted at 20 percent. The complete list of the 100 Most Overpaid CEOs using this methodology is found in Appendix A. The regression analysis of predicted and excess pay calculated by HIP Investor is found in Appendix C, and its methodology is explained further there.
Here’s an interesting nugget from page 7 about the correlation between proxy advisor recommendations and CEOs on the list:
In 2021, ISS recommended voting against 11 percent of the CEO pay packages at S&P 500 companies and against 45 percent of the 100 Most Overpaid CEOs. These percentages are based on the ISS “standard” policy. ISS also offers voting recommendations based on other policies (e.g., a Socially Responsible Investor (SRI) policy, a public pension fund policy, and a Taft-Hartley policy). Differences between the standard and SRI policy are minimal on compensation issues…
The ISS Taft-Hartley policy was designed to appeal to Labor Union pension funds. This season, the Taft-Hartley policy recommended voting against 65 percent of the 100 Most Overpaid CEO pay packages. The most significant difference between the Taft-Hartley policy and the standard policy seems to be a sentence in that policy that says votes against can be triggered when “the board has failed to demonstrate good stewardship of investors’ interests regarding executive compensation practices.” The public pension fund policy closely tracks the Taft-Hartley policy on compensation.
Glass Lewis uses a model comparing CEO pay in relation to company peers and company performance compared to peers. It awards letter grades between “A” and “F.” An “A” means that the percentile rank for compensation is significantly less than its percentile rank for company performance. In 2021, Glass Lewis recommended shareholders vote against 12.4 percent of CEO pay packages at S&P 500 companies and against 50 percent on the 100 Most Overpaid CEOs list. This is a 14 percent increase in vote against recommendations for the 100 Most Overpaid CEOs. These percentages are based on the Glass Lewis “standard” policy. Glass Lewis also offers ESG and Taft-Hartley policies. The ESG policy voted against 57 percent of the 100 Most Overpaid CEOs list and the Taft-Hartley policy voted against 52 percent.
So, if your CEO is on this list, it’s a signal that you should pay extra attention to your proxy statement communications – including how you’re justifying the pay package and disclosing the actual and potential payouts. We have a lot of resources on this site to help you with that. Check out the “Say-on-Pay Solicitation Strategies” and “Say-on-Pay Disclosure Issues” chapters of Lynn & Borges’s “Executive Compensation Disclosure Treatise”. Visit our “Determining How Much Pay is Appropriate” Practice Area for guidance on pay decisions.
I blogged yesterday about the “against” recommendation that ISS is making for Apple’s say-on-pay resolution. While you don’t have to be making $82 million grants to get dinged for a lack of performance criteria or disclosure, mega grants do tend to draw extra scrutiny.
Problematic pay practices that lead to low say-on-pay support are also “blood in the water” for activists. GE received this letter from SOC Investment Group (formerly CtW) urging a refreshment of the company’s compensation committee in light of their 2020 decision to lower performance hurdles associated with a previously granted award, which they did by granting a replacement award that year (valued at $60 million at target). The letter reiterates concern that the activist expressed last year, which preceded a failed say-on-pay vote and several committee members receiving less than 80% support in the director election. Now, SOC says that the company hasn’t demonstrated responsiveness.
Recently, the Financial Times reported that proxy advisor ISS would recommend an “against” vote for Apple’s say-on-pay resolution this Friday – due to concern with the $82 million in stock awards that CEO Tim Cook received last year. According to this CNN article, ISS took issue with a lack of performance criteria for a portion of the award & what it views as inadequate disclosure on whether future awards will be granted. ISS also dislikes the size of this mega grant, even though it’s the first award that Cook has received since 2011.
Over the weekend, Norges Bank – which operates Norway’s $1.3 trillion sovereign wealth fund and has a policy to publish voting instructions 5 days before a portfolio company’s shareholder meeting – also said that it would vote against the pay package (and support 4 of 6 shareholder proposals). Regarding say-on-pay, Norges says:
A substantial proportion of annual remuneration should be provided as shares that are locked in for five to ten years, regardless of resignation or retirement. The board should provide transparency on total remuneration to avoid unacceptable outcomes. The board should ensure that all benefits have a clear business rationale. Pensionable income should constitute a minor part of total remuneration.
Apple’s management is getting love from some notable shareholders, though. I blogged yesterday on TheCorporateCounsel.net that Warren Buffett is in favor of rewarding Mr. Cook for the tech company’s performance. Berkshire Hathaway owns 5.56% of Apple’s outstanding shares – more than the Norwegian sovereign wealth fund.
Emily blogged last fall that women execs are getting stuck at the median due to pay benchmarking practices. Morningstar is now out with data showing that the pandemic also widened the gender pay gap in the C-suite – a reversal of the narrowing that occurred from 2015 – 2019. A big reason for the disparity is that the largest equity grants have been going to men – another issue that Emily & the NASPP recently noted. Here are a few key takeaways from data expert Jackie Cook and her Morningstar team:
– Female C-suite pay as a percentage of pay earned by their male counterparts reached a record low for the nine-year period since 2012. On average in 2020, women with C-suite positions earned only $0.75 for every $1.00 earned by men at the top of the corporate ladder, down from $0.88 for every dollar in 2018. Median female pay for NEOs was 81% that of pay for male NEOs in 2020.
– Overall, S&P 500 C-suite pay rose by 24% from 2012 to 2020. However, this increase breaks down to a 27% increase for men in the C-suite, compared with 10% for women.
– While women made incremental inroads into corporate America’s C-suites, they’ll have to wait until at least 2060 to reach parity at the present rate of progress. The number of women holding NEO positions at S&P 500 companies increased by only 6 percentage points over the most recent nine years for which data is available (to 14% in 2020, up from 8% in 2012).
– Just over half of S&P 500 C-suites (56%) had at least one female NEO in 2020, up from one third (34%) in 2012. However, C-suites have been slow to advance a second female executive, as only 16% of C-suites had two or more female NEOs in 2020, up from 7% in 2012. And at the very top, progress is even slower: The number of woman-headed S&P 500 companies inched up to 5.5% from 4.3%.
The article notes that a shareholder resolution about internal pay equity received 40% support at Microsoft last fall – and a similar resolution is going to a vote at Apple this Friday.
We’ve posted the transcript for our recent webcast: “The Latest – Your Upcoming Proxy Disclosures.” Topics covered in this wide-ranging program by Compensia’s Mark Borges, Hogan Lovells’ Alan Dye, MoFo’s Dave Lynn and Gibson Dunn’s Ron Mueller include:
– Virtual annual meetings
– Say-on-pay trends
– Lingering pandemic-related issues
– Disclosures around performance-based compensation, ESG and perquisites
– Shareholder proposals
– Clawbacks, director compensation and CEO pay ratio considerations
I previously blogged about some stats around DEI metrics for the 100 largest companies in the Fortune 500 & those that were publicly committed to improving DEI performance. If you’re looking for more stats for benchmarking purposes, here are some survey results from Pearl Meyer that analyzed, among 421 total respondents, 111 companies in the financial industry and how they track & utilize DEI in executive compensation. Highlighted below are some of the findings:
– Close to 30% of financial institutions in the survey reported that DE&I are included in annual incentive plans with a smaller percentage (14%) including in long-term incentive plans.
– Over 85% of financial industry respondents report that they feel little, no pressure or are neutral about putting DE&I measures in incentive plans, while all industry response was closer to 75% in those categories.
– For those financial institutions that do not include DE&I in incentive plans, 43% believed “DE&I is an expectation for our executives and it does not need to be further reinforced through incentive plans.”
– The financial industry utilizes ESG scorecards at a lower percentage than all industry respondents; included now at 27% vs 44% and with 46% of financial industry respondents reporting that they have not and do not plan to utilize ESG scorecards to discuss DE&I metrics.
Compensation is still a big wrench in the employee retention toolkit – and we’ve previously blogged about companies projecting workforce base salary increases given the context of high inflation and labor shortages. With the backdrop of shareholders increasingly pushing for gender and racial pay equity audits, companies may want to plan for a pay equity audit so those planned base salary increases don’t inadvertently widen unequal pay disparities.
Payscale recently released its 2022 Compensation Best Practices Report (download required), which collected responses from 5,578 respondents between November 2021 to January 2022 – and here’s what they’re saying about pay equity initiatives: “Two thirds of respondents reported that pay equity is a planned or current initiative at their organization. This is a 20 percent increase compared to 2021. As in previous years, we also see a clear difference in commitment to pay equity analysis between top performing organizations (67 percent) and non-top performing ones (58 percent).”
As always, you can check out our “Internal Pay Equity” Practice Area on CompensationStandards.com for best practices on conducting pay equity audits.
Compensation Advisory Partners released a new “CEO Pay Ratio Tracker” that is sortable by revenue & market cap and shows data by sector. We’ve blogged a couple of times about tools like this – and we also post them in our “Pay Ratio” Practice Area. They’re all helpful, but this one is nice if you’re looking for something simple & clean.