Mastercard is going “all in” with motivating corporate ESG performance. In its recently filed proxy statement, the company says that investors approved of the ESG modifier that it applied in 2021 to annual incentives for senior execs (including NEOs). Due to that warm reception, it’s expanding the ESG incentive structure to all employees.
This is one of the first companies to make this move, but it may be something that becomes more common. The other piece of this that may signal a broader shift and give a roadmap to other companies is that the metric is based on emission reduction goals and disclosure. I’ve blogged that human capital, culture & DEI metrics tend to be more common for US companies right now – but there are some examples of environmental-related goals, and now we can add a high-profile company to the list. Page 88 of the proxy explains:
In addition to the annual incentive changes described on pg 77, the operational carbon neutrality metric was replaced for 2022 by two environment-based metrics measuring performance against our 2025 SBTi goals of reducing Scope 1 and 2 carbon emissions (based on a 2016 base year) and supplier engagement responsiveness to reporting to the CDP and disclosing greenhouse gas emissions information. The ESG modifier was also expanded to apply to all employees across the company (for 2021, the ESG modifier applied only to our senior executives, which includes our NEOs).
This is a development worth noting because it comes at the same time that two bigger trends are advancing. First, compensation committees are expanding to oversee broader “human capital” issues – including employee pay programs, employee morale, and employee impact performance. Simultaneously, there are broader calls for directors to oversee ESG strategy & performance. Encouraging rank & file employees to achieve ESG goals may be a way for some companies to kill two birds with one stone.
As always, your mileagemay vary. In order to be able to pay for ESG performance and avoid unintended consequences, you need to be able to set a workable strategy, measure performance, and disclose results. Are you and your comp committee ready? In addition to the executive pay disclosure issues that we can help you tackle on this site, we have a bunch of resources to help with the ESG journey over on PracticalESG.com – sign up today and join a growing group of impressive members.
Nearly all big companies use long-term incentive plans to encourage performance over periods greater than one year – and these plans often represent the most significant portion of executive pay. With pay-for-performance in the spotlight, Compensation Advisory Partners recently analyzed LTIP structures and payouts across 120 companies with median revenue of $36B and performance cycles ending in 2015 through 2020. Here are some takeaways from their new memo:
– Based on CAP’s analysis of LTI payouts from 2015-2020, the degree of difficulty (or “stretch”) embedded in long-term performance goals translates to:
• A 95% chance of achieving at least Threshold performance
• A 70% chance of achieving at least Target performance
• A 20% chance of achieving Maximum performance
– 97% of companies in the study use LTIPs – with 97% denominated in stock (vs. cash)
– 97% use a 3-year performance period – 3% use a 4-year or 5-year cycle
– The most common long-term performance plan metrics are relative Total Shareholder Return (TSR), Return measures, and Earnings per Share (EPS). Many companies use a combination of financial and stock price metrics to balance line-of-sight for executives and direct alignment with shareholder outcomes.
– Target performance goals are most often set in line with the company’s business plan for absolute metrics or at median of the comparator group for relative metrics. Proxy advisory firm, Institutional Shareholder Services (ISS), has pushed for companies to set target goals for relative TSR above median of the comparator group. We have seen some companies follow this guidance in paying at target for performance at the 55th or 60th percentile; however, most companies continue to pay at target if TSR results are at median vs. the comparator group.
With the “Great Resignation” comes lots of creative ideas on retention & compensation. Some companies are trying to stay ahead of the curve by offering crypto as compensation, but we’re still watching the legal framework develop around this area. Here’s a Hunton Andrews Kurth blog outlining some of the regulatory risks that companies should watch as they consider offering cryptocurrency as compensation:
– Form of Payment – Cash or Negotiable Instrument. The federal Fair Labor Standards Act requires employers to pay minimum and overtime wages in “cash or negotiable instrument payable at par.” This has long been interpreted to include only fiat currencies—monies backed by a governmental authority. As non-fiat currencies, cryptocurrencies therefore fall outside the FLSA’s definition of “cash or negotiable instrument.” As a result, an employer who chooses to pay minimum and/or overtime wages in cryptocurrency may violate the FLSA by failing to pay workers with an accepted form of compensation. In addition, various state laws make the form of wage payment question even more difficult.
– Volatility Concerns. When compared to the rather stable value of the U.S. dollar, the value of cryptocurrencies is subject to large fluctuations…Such volatility can give payroll vendors a nightmare and can, in some instances, lead to the under-payment of wages or violation of minimum wage or overtime requirements under the FLSA.
– Tax and Benefits Considerations. Aside from wage and hour issues, the payment of cryptocurrency implicates a host of tax and benefits-related issues. The IRS considers virtual currencies to be “property,” subject to capital gains tax rates. It has also confirmed in guidance materials that any payment to employees in a virtual currency must be reported on a W-2 based upon the value of the currency in U.S. dollars at the time it was delivered to the employee. This means that cryptocurrency wage payments are subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. For 401k plan fiduciaries, the Department of Labor recently issued guidance that should serve as a stern warning to any fiduciary looking to invest 401k funds into cryptocurrencies.
We’ve posted the transcript for the recent webcast: “The Top Compensation Consultants Speak.” Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer shared their thoughts on:
– Key Issues and Considerations for Compensation Committees
– ESG & Human Capital Management Focus for Compensation Committees
– Gender and Ethnicity Pay Gaps and Pay Equity Issues
– Integrating ESG into Incentive Plans
– Latest SEC Rulemakings on Clawbacks and Pay-for-Performance
I blogged earlier this month about how say-on-pay is going in the 2022 proxy season. As a recap, we saw 3 companies failing from the Russell 3000 (so a 2.2% failure rate) and 8.9% of Russell 3000 companies received an “Against” recommendation from ISS as of March 31.
– Three Russell 3000 companies (2.1%) failed Say on Pay thus far in 2022. No companies failed since our last report.
– The percentage of Russell 3000 companies receiving greater than 90% support (71%) is similar to the percentage at this time last year (73%).
– The current Russell 3000 average vote result of 90.1% is similar to the index’s average vote last year, while the current S&P 500 average vote result of 85.6% remains well below last year’s average.
– The average Russell 3000 vote result thus far is 450 basis points higher than the average S&P 500 vote result; however, only 35 S&P 500 companies have held a Say on Pay vote thus far in 2022.
– 6% of Russell 3000 companies and 11.4% of S&P 500 companies have received an ISS “Against” recommendation thus far in 2022.
There’s been a lot of publicity around the pay inequality & high CEO pay ratios this season – that hasn’t translated into say-on-pay failures as of mid-April. With only 35 S&P 500 companies having held a say-on-pay vote so far, we’ve still got a long ways to go. As always, we’ll keep posting these stats in our “Say-on-Pay” Practice Area.
President Biden unveiled his 2023 budget proposal in late March – and John blogged over on TheCorporateCounsel.net about the proposed buyback restrictions & its potential impact on corporate buyback practices. A Meridian memo highlights two other proposed legislative topics under the proposal for companies to be cognizant of:
– Millionaire/Billionaire Individual Income Tax – 20% minimum individual income tax would be imposed on income of households with a net worth of more than $100 million (determined as assets minus liabilities). In addition, the 20% tax would be imposed on unrealized gains (including ordinary gains) of such households. Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once. The proposal would be effective for taxable years beginning after December 31, 2022.
– Increase in Top Marginal Individual and Corporate Income Tax Rates – Top marginal income tax rates for individuals and corporations would be 39.6% (up from 37%) and 28% (up from 21%), respectively. The top marginal individual income tax rate would apply to taxable income over $450,000 for married individuals filing a joint return, and $400,000 for unmarried individuals. After 2023, the thresholds would be indexed for inflation. The proposals would be effective for taxable years beginning after December 31, 2022.
A member recently posed this question in our Q&A Forum (#1408):
If an NEO at a SRC is contributing to a 401(k) plan, or a foreign equivalent, from their salary, would that be accounted for under the Salary column in the Summary Comp Table, or would it have to be separately accounted for in another column?
John responded:
If it’s just a contribution from the NEO, there’s no separate reporting, because the amounts contributed to the 401(k) plan were already reported in the salary column. If the company is making matching contributions, those are reported in the “All Other Compensation” column.
With new SEC rules, record support levels for shareholder proposals, and relentless regulatory & investor scrutiny, your proxy disclosures – and the actions that support them – are more important than ever. The Proxy Disclosure & Executive Compensation Conferences will inform you of what you need to know to protect your company and board. Get practical guidance about rule changes, staff interpretations, emerging disclosure risks, investor and proxy advisor positions, executive pay expectations, the board’s role, and more. Check out the agendas – 17 sessions over three days.
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Join us tomorrow, Wednesday April 13th at 2pm Eastern Time, for the first of PracticalESG.com’s 3-part DEI workshop series – “Collecting Diversity, Equity & Inclusion Data: What to Measure & Why” – to hear DiversityIQ’s Cheryl Cole, Fossil Group’s Sheri Crosby Wheeler, Aon’s Aria Glasgow, Pipeline Equity’s Katica Roy, Fortune’s Ruth Umoh, and NextRoll & PracticalESG.com’s Ngozi Okeh discuss, among other things:
– What data points are useful in driving DEI strategy & progress;
– How to measure diversity, equity & inclusion;
– How to account for intersectionality;
– Data traps to avoid; and
– How to use data to develop a unique business case for your corporate DEI initiative.
If you’ve not yet registered, you can still sign up here.
This PracticalESG.com workshop is free, courtesy of our wonderful sponsors, Morrison & Foerster and Holmes Murphy. A replay will be available to PracticalESG.com members – along with many other useful resources! If you’re working on ESG matters and haven’t already signed up for a PracticalESG.com membership, now is the time to get filtered & organized access to rapidly evolving ESG developments! You can become a member online or by emailing sales@ccrcorp.com.
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.