Similar to the current situation in which we find ourselves, there was some head-scratching when the SEC originally proposed pay vs. performance rules in 2015. For a few years, though, some companies were voluntarily disclosing a “pay vs. performance” graph in the proxy statement – as an acknowledgement of the proposal and also because investors & proxy advisors were incorporating “pay-for-performance” metrics into say-on-pay models.
Yet, as we’ve noted, those disclosures have been dropping off. A recent Equilar blog underscores that trend:
In 2021, just 9% of the Equilar 100 — the 100 largest U.S. public companies by revenue—disclosed a graph that showed the relationship between their executives and financial performance. While this is up one percentage point from 2020, the figure is down overall by nearly 50% since 2017 when 18.2% of companies disclosed a Pay for Performance graph. The percentage of companies that disclosed a Pay for Performance graph has also declined from 2017 to 2020, before slightly rebounding in 2021. Of course, given the SEC’s August announcement, the prevalence of disclosures will certainly accelerate in the coming years.
The question is, will these voluntary disclosures fall by the wayside in 2023, now that the SEC has mandated a format for pay vs. performance disclosure? My guess is that they will. There are already going to be multiple defined terms between the CD&A, executive compensation tables, and the new pay vs. performance disclosures. It will be important to tell a clear story, and adding yet another graph to the mix may not be the best way to do that. On the other hand, if the mandated format suggests that pay & performance are misaligned at certain companies, perhaps they will use supplemental disclosures to overcome that.
We’ll be discussing the pros & cons of voluntary supplemental pay vs. performance disclosures at our November 10th special session – 3 hours of practical guidance on complying with this new rule. Register today!
Yesterday, the SEC posted a Sunshine Act Notice for an open meeting of the Commissioners to be held next Wednesday, October 26th. Corp Fin Staff will also be attending – Renee Jones, Erik Gerding, Elizabeth Murphy, Lindsay McCord, and others. After years of anticipation, the agenda includes:
The Commission will consider whether to adopt rules to implement of Section 10D of the Securities Exchange Act, as added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
We had a great session at our Executive Compensation Conference last week about what you need to think about when reviewing and updating your clawback policy in light of recent enforcement activity and these expected final rules. If you missed it, you can still get access to the on-demand archives of this session and all of the other practical guidance from our Conferences by emailing sales@ccrcorp.com. Stay tuned for more guidance as we receive and analyze the final rules.
In the meantime, here are some of my latest blogs on this topic – and more guidance is available in our “Clawbacks” Practice Area:
It’s hard to believe that the ISS Equity Plan Scorecard has been around for only eight years. Given the prominent role it plays in submitting equity plans for shareholder approval, it feels like it’s been here forever. This recent blog from ISS Corporate Solutions takes a closer look at the “Plan Features” & “Grant Practices” pillars – both of which are intended to balance shareholder protection interests with flexibility for plan administrators. Specifically:
Plan Features: one factor in evaluating the “Plan Features” pillar is minimum vesting. Most companies stipulate a minimum vesting period of a certain number of years from the date of grant of an award where the minimum criteria apply. While these vesting requirements apply to all award types as stipulated in the plan, some plans allow for a carve-out for a certain number of shares where these restrictions do not apply and the administering committee may establish lesser restrictions or none at all. Typically, the carve-out applies to 5% of the shares authorized for issue.
Grant Practices: Another place where shareholder comfort and administrator flexibility intersect is on the topic of post-exercise/post-vesting shareholding requirements. Some administering committees think of holding periods as fixed time periods necessary to attain minimum ownership levels.
In that view, a company may specify that a newly hired or promoted executive has a certain number of years to attain the ownership levels that are set. If an executive officer fails to meet that target, he/she may be required to hold a minimum of the net shares resulting from any future vesting of equity-based awards until the minimum ownership guidelines are met. Through this approach, holding periods can be used as a vehicle to accelerate the attainment of minimum ownership levels.
… Administering committees have flexibility to adopt palatable alternatives like 12-month post-exercise or post-vesting holding period or hold-to-end of employment/retirement policies which in turn translate into a longer-term view on stock price performance that would be welcomed by shareholders.
The blog gives example disclosures for each of these items. Make sure to also check out Chapter 15 of Lynn & Borges Executive Compensation Disclosure Treatise for more guidance on ISS’s Equity Plan Scorecard and all of the disclosure that’s required when you’re submitting a plan for shareholder approval.
A recent memo from Compensation Advisory Partners looks at 2022 CFO pay relative to CEOs, based on 130 companies with median revenue of $14 billion. Like CEOs, it’s safe to say that CFOs are doing pretty well this year, due to strong 2021 performance. Here’s what the data shows for total compensation:
– 2021 saw the largest year over year increases at median in the last 10 years; the last time we saw increases in the 15% – 20% range was after the financial crisis in 2008/2009.
– Median 2021 increases in actual total direct compensation (i.e., cash plus equity) for CEOs and CFOs were 18% and 17%, respectively, substantially higher compared to 2020 (3% and 4%, respectively) driven by large increases in variable incentives (annual incentive payouts and long-term incentive awards).
– As in prior years, CFO total compensation continues to approximate one-third of CEO total pay.
The report also looks at 10 years of changes in total comp. Here’s an excerpt:
CFO pay has generally tracked with CEO pay, though CEO pay has had higher highs and lower lows, as is expected for the top role. There is only one year – 2012 – that CEO pay fell compared to the prior year, but increases at median were less than 5% for most of the last 10 years for both CEOs and CFOs. 2021 saw by far the largest increases in total compensation, reflective of strong 2021 performance and compounded by below-average increases in 2020.
With 2022 being a more difficult year for stock price performance, the report says that payouts to CFOs are not expected to jump by as much next year.
We are wrapping up Conference week! Today is our “19th Annual Executive Compensation Conference” – Wednesday & Thursday were our “2022 Proxy Disclosure Conference.” Both conferences are paired together and they’ll also be archived for attendees until next August. If you missed these conferences or our “1st Annual Practical ESG Conference” but want to purchase access to the archives, email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that. Here’s more info for people who are attending:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform, then follow the “Proxy Disclosure/Exec Comp” tab to see the agenda for today, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who have registered for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: We are applying for up to 15 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
You can still register to view today’s event and get on-demand archive access to all of the Proxy Disclosure and Executive Compensation Conference from this week! Email sales@ccrcorp.com or call 1-800-737-1271, Option 1. Archives and transcripts will be available on-demand until July 31, 2023, to help you navigate challenging proxy season issues.
One of the sessions that I am most excited for at tomorrow’s “19th Annual Executive Compensation Conference” is the panel on key compliance steps for the SEC’s new pay versus performance rules. This session includes FW Cook’s Bindu Culas, Weil Gotshal’s Howard Dicker, Ropes & Gray’s Renata Ferrari, and Latham’s Maj Vaseghi. When the rules were issued in August, we immediately extended the time slot for this session, so that we could give due attention to the complexities of the rule and the initial action items that are needed to comply.
However! There is a lot to talk about – more than can be covered in just one hour. This recent memo from Sustainable Governance Partners highlights one aspect – whether the newly mandated pay versus performance disclosure will affect investors’ voting decisions. Here’s an excerpt:
At this point… we think the jury is still out. These requirements are intended to greatly improve transparency and standardize the calculations and presentation of this data, thereby providing investors with consistent, comparable information from all companies. Ideally, the end result is better-informed voting decisions. But as we know, sometimes standardization comes at the cost of nuance; and many will note the burden of further disclosure, namely the calculation of Compensation Actually Paid. It’s undoubtedly more complicated than dropping a grant date fair value into the Summary Compensation Table, as equity awards need to be re-valued at the end of each year or at the time of vesting.
Perhaps like the CEO Pay Ratio disclosure, the utility of the PVP disclosure will begin to grow over time. In the first year of this disclosure, however, we expect PVP disclosure will not be widely influential on institutional investors or the proxy advisors, each of which will have little time to incorporate this new data into their quantitative pay and performance models.
Ultimately, the usefulness of this disclosure will be determined by the market. Do investors feel better informed? Does the disclosure properly identify pay and performance disconnects? As issuers engage with institutional investors this Fall, we recommend asking investors for their thoughts on the new disclosure – in particular, how they will be using the new disclosure to evaluate and/or compare executive compensation plans.
Because of all of the questions that are arising with this rule – and the work that will be required – we are hosting a 3-hour special session on November 10th from 1-4pm Eastern. This special session will be a critical follow-up discussion to the panel at this Friday’s conference.
Our November 10th special session will dive into the many interpretive questions that advisors and boards are struggling to understand (with Sidley’s Sonia Barros, Compensia’s Mark Borges, WilmerHale’s Meredith Cross, EY’s Mark Kronforst, and Morrison Foerster’s Dave Lynn), the big picture impact (panelists include SGP’s Rob Main and ISS Corporate Solutions’ Jun Frank), and walk through a sample disclosure that Mark Borges & Dave Lynn are preparing (with additional commentary from Fenwick’s Liz Gartland and Gibson Dunn’s Ron Mueller). Sign up now, and join us on November 10th.
Make sure to also keep watching our “Pay-for-Performance” Practice Area for new memos about this rule, as we all process what compliance will look like. Although a number of heavy-hitter law firms, compensation consultants and trade organizations are urging the SEC to postpone the compliance date for these rules until the 2024 proxy season, there is no sign yet that the SEC is going to do that. Full steam ahead…
Today is the second day of our “2022 Proxy Disclosure Conference” – tomorrow is our “19th Annual Executive Compensation Conference.” Here’s more info:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Proxy Disclosure/Exec Comp” tab to see the agendas for each day, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: We are applying for up to 15 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
It is not too late to register for our Conferences today! You can sign up for today’s “2022 Proxy Disclosure Conference” and tomorrow’s “19th Annual Executive Compensation Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271, Option 1. If you have missed any of the Conference, archives and transcripts will be available on-demand afterwards!
Last week, the Economic Policy Institute published an annual report on CEO pay – which shows that when it comes to total compensation, public company CEOs are leaving the rest of us in the dust, especially rank & file employees. As I’ve written before, most of this is because of equity awards (which are in theory designed to motivate executives to achieve strategic goals and don’t hit cash flows).
The researchers for this particular report used a “realized pay” measure that counts stock awards when vested and stock options when exercised, but the numbers would’ve been high if they looked at grant date fair value, too. They also excluded Elon Musk’s compensation as an outlier. Here are the key findings:
– Growth of CEO compensation (1978–2021). Using the realized compensation measure, compensation of the top CEOs increased 1,460.2% from 1978 to 2021 (adjusting for inflation). Top CEO compensation grew roughly 37% faster than stock market growth during this period and far eclipsed the slow 18.1% growth in a typical worker’s annual compensation. CEO granted compensation rose 1,050.2% from 1978 to 2021.
– Growth of CEO compensation during the pandemic (2019–2021). The dramatic increase in CEO compensation during the pandemic is remarkable. While millions lost jobs in the first year of the pandemic and suffered real wage declines due to inflation in the second year, CEOs’ realized compensation jumped 30.3% between 2019 and 2021. Typical worker compensation among those who remained employed rose 3.9% over the same time span.
– Changes in the CEO-to-worker compensation ratio (1965–2021). Using the realized compensation measure, the CEO-to-worker compensation ratio reached 399-to-1 in 2021, a new high. Before the pandemic, its previous peak was the 372-to-1 ratio in 2000. Both of these numbers stand in stark contrast to the 20-to-1 ratio in 1965. Most importantly, over the last two decades the ratio has been far higher than at any point in the 1960s, 1970s, 1980s, or early 1990s. Using the CEO granted compensation measure, the CEO-to-worker compensation ratio rose to 236-to-1 in 2021, significantly lower than its peak of 393-to-1 in 2000 but still many times higher than the 44-to-1 ratio of 1989 or the 15-to-1 ratio of 1965.
– Changes in the composition of CEO compensation. The composition of CEO compensation is shifting away from the use of stock options and toward the use of stock awards. Vested stock awards and exercised stock options averaged $21.9 million in 2021 and accounted for 80.1% of the average realized CEO compensation.
– Changes in the CEO-to-top-0.1% compensation ratio. Over the last three decades, compensation grew far faster for CEOs than it did for other very highly paid workers (the top 0.1%, or those earning more than 99.9% of wage earners). CEO compensation in 2020 (the latest year for which data on top wage earners are available) was 6.88 times as high as wages of the top 0.1% of wage earners, a ratio 3.7 points greater than the 3.18-to-1 average CEO-to-top-0.1% ratio over the 1947–1979 period.
– Implications of the growth of CEO-to-top-0.1% compensation ratio. The fact that CEO compensation has grown far faster than the pay of the top 0.1% of wage earners indicates that CEO compensation growth does not simply reflect a competitive race for skills (the “market for talent”) that also increases the value of highly paid professionals more generally. Rather, the growing pay differential between CEOs and top 0.1% earners suggests the growth of substantial economic rents (income not related to a corresponding growth of productivity) in CEO compensation. CEO compensation, it appears, does not reflect the greater productivity of executives but the specific power of CEOs to extract concessions — a power that stems from dysfunctional systems of corporate governance in the United States. Because so much of CEOs’ income constitutes economic rent, there would be no adverse impact on the economy’s output or on employment if CEOs earned less or were taxed more.
Look, I very much support responsible pay and minimizing wage inequality. But I’m not completely sold on the implication that companies should use these particular conclusions as a basis to rein in CEO pay. That’s because other “highly paid professionals” may not be part of the specific CEO labor market that companies are trying to draw from for the top leadership spot, and boards seem to think that a high-performing CEO can make a real difference in company performance for shareholders and other stakeholders.
Unfortunately, when it comes to responsible pay practices, reports like this seem to contribute more to the trend of “shouting past each other” than they do of making a real difference, at least from the perspective of structuring executive pay. Yet, if the purpose of this report is to create an “outrage tool” that will lead to public policy and tax changes, maybe it’s doing the job – because the numbers are pretty eye-popping. The report recommends several policy changes that get proposed from time to time:
We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so. Such policies could include reinstating higher marginal income tax rates at the very top; setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation; using antitrust enforcement and regulation to restrain the excessive market power of firms—and by extension of CEOs; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.
Companies that are able to keep pay ratio in check will be less at risk of significant adjustments or consequences if any of these changes come to pass – and have the added benefit of being considered responsible corporate citizens, with one less point that can be weaponized in a proxy contest. Visit our “Pay Ratio” Practice Area for more on this topic – including guidance on “pay ratio” taxes at the state level.
Today and tomorrow is our “2022 Proxy Disclosure Conference” – Friday is our “19th Annual Executive Compensation Conference.” Here are the agendas: 18 substantive panels over 3 days – including an interview with Renee Jones, the Director of the SEC’s Division of Corporation Finance. Here’s more info:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Proxy Disclosure/Exec Comp” tab to see the agendas for each day, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: We are applying for up to 15 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
It is not too late to register for our Conferences today! You can sign up for today’s “2022 Proxy Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271, Option 1. If you have missed any of the Conference, archives and transcripts will be available on-demand afterwards!
As You Sow, a well-known shareholder proponent that added a focus on executive compensation 8 years ago with its annual report on the “100 Most Overpaid CEOs”, recently published a new report that grades “pay for climate performance” – based on 2021 arrangements that were disclosed in 2022 proxy statements. It’s 38 pages and available for download on As You Sow‘s website. Here are some aspects that companies and executive compensation teams may find useful:
– Which companies are most at risk for questions about this?As You Sow analyzed the 2021 CEO compensation packages of the 47 U.S. companies included in the Climate Action 100+ (CA100+) Initiative. CA100+ is an investor-led initiative with $68 trillion in assets under management working to ensure that the world’s largest corporate GHG emitters take action to reduce emissions (see my Proxy Season Blogs on TheCorporateCounsel.net for “8 Fast Facts” about CA100+ and recentupdates). As You Sow says that the CA100+ companies are responsible for 80% of corporate emissions and, thus, incentivization for emissions reduction performance in these companies is particularly timely.
– What’s the “gold standard” according to As You Sow? For this report, companies were assessed on these factors:
1. Inclusion of a climate metric in the 2021 CEO pay package, with higher grades for incentives tied to emissions reductions and alignment with 1.5° C goals;
2. Inclusion of measurable climate metric and measurable pay;
3. Inclusion of climate metric in the long-term incentive plan; and
4. Climate metrics and compensation disclosures are transparent and measurable.
– How did everyone do? The highest grade was a “B” – earned by Xcel Energy for linking CEO pay to emissions reduction performance in the long-term incentive plan, with a measurable amount of pay related to achievement of reduction goals. 15 companies have some type of climate-related incentive tied to compensation. 89% of the assessed companies received “D” or “F” grades.
Here’s more detail about metrics disclosure:
In our survey, multiple companies include “reduce emissions” as a climate “metric” without specific targets for how much emissions reduction would be required to receive a bonus. Others use “progress towards” or “demonstrate leadership to” emissions reduction without disclosed target levels. Others point to milestones achieved without having initially set measurable targets. None of the above is adequate.
Backward looking milestone reflections in support of awards given are not equivalent to pre-determined metric targets. Compensation packages should include clear disclosure – ideally in chart form – that indicates the target levels set and details the threshold, target, and maximum performance required for payout. Clear information regarding prior year achievements, a baseline time period, and linking CEO pay directly to emission reduction targets in company climate transition plans can further clarify for investors whether the metrics set adequately drive climate-related progress. Some investors vote against CEO pay packages where future financial achievement is set below the actual achievement from the prior year and this practice could beneficially extend to climate metrics.
The report points to Marathon Petroleum as a good example of payout disclosure using an ESG scorecard. However, As You Sow awarded the company only a “C-” for its efforts.
As You Sow says the report is a “first step in assessing how effectively companies are currently linking GHG emissions reduction incentives to CEO pay.” So, they left some room for improvement with these grades. The report notes that 69% of S&P 500 companies say that they are including ESG metrics in compensation packages for 2022.
Visit our “Sustainability Metrics” Practice Area for guidance on establishing and disclosing these arrangements, and tune in to our “1st Annual Practical ESG Conference” today for practical info on carbon accounting and other data control issues that can make or break a company’s ability to incorporate ESG metrics into compensation plans.