I’ve previously described costs & disclosure approaches for executive security arrangements. Unfortunately, these arrangements are top of mind for many companies right now. This Baker McKenzie blog discusses the personal & corporate tax issues to consider if you are enhancing your security programs. And here’s a reminder that John shared yesterday on TheCorporateCounsel.net:
In light of the shocking murder of UnitedHealth’s CEO last week and the risk that similar events may occur in the future, many companies are enhancing security arrangements for their executives or establishing those arrangements for the first time. While companies may be inclined to conclude that these security arrangements are a necessary business expense, they need to be aware that the SEC typically views them as “perks” subject to disclosure in proxy materials. This excerpt from Chapter 7 of our Executive Compensation Disclosure Treatise (available on CompensationStandards.com) explains the SEC’s position:
From the company’s perspective, [personal security] expense is integrally and directly related to the performance of its executives’ duties—necessary to ensure their safety, particularly where they frequently travel internationally or their celebrity makes them an inviting target for kidnapping or other personal injury.
Notwithstanding these beliefs, the SEC has expressly stated that it considers expenditures incurred to ensure the personal safety of a named executive officer to be a disclosable perquisite. Specifically, the SEC has held that business purpose or convenience does not affect the treatment of an item as a perquisite where it is not integrally and directly related to the performance by the executive of his or her job.
Accordingly, a company’s decision to provide an item of personal benefit for security purposes does not affect its characterization as a perquisite. For example, a company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.
Companies should also note that as part of its qualitative evaluation of executive comp programs, ISS has sometimes been critical of the amounts expended for executives’ personal security arrangements. Whether recent events will prompt the SEC to take a more nuanced position or ISS to reconsider what security expenditures should be regarded as “excessive” remains to be seen.
I blogged a few months back about comment letters that the Corp Fin Staff has started to issue for disclosures that may implicate a clawback recovery analysis. Although comment letters are always specific to the particular company and its circumstances, they also give the rest of us insight into issues that the Staff is prioritizing in its reviews. Now, more comments are rolling in. Here are a couple of tips based on recent correspondence:
– If you check the second box on your 10-K cover page, the Staff expects to see disclosure about a recovery analysis (see this comment letter).
– If you disclose a recovery analysis, make sure to include an Interactive Sata File in accordance with Rule 405 of Reg S-T (see this comment letter – and this FPI comment letter).
Wilson Sonsini has released its 2024 Silicon Valley 150 Corporate Governance Report, which analyzes governance and proxy season trends among the Valley’s largest public companies. Lots of interesting stuff in here – including commentary & data points for say-on-pay, pay ratio, perks, and pay versus performance. Beginning on page 55, the report looks at clawback policy trends in the SV 150. Here are a few takeaways:
– Companies that adopted the required new NYSE/Nasdaq clawback policy overwhelmingly kept those policies strictly on terms with the NYSE/Nasdaq requirements (although a handful went beyond, either in terms of officers covered or types of conduct that could result in a clawback).
– Even companies with more than one clawback policy only filed the one required NYSE/Nasdaq policy with the 10-K — although surprisingly 7 companies that were required to file their policy missed the requirement altogether and didn’t file it (note to form checkers in 2025 . . .).
– At least 67 of the companies kept their old clawback policy too and describe the terms in their proxy statement.
As we’ve noted, proxy advisors – and some investors – are now factoring the scope of clawback policies into their voting decisions.
Meredith recently shared info about ISS’s peer group review & submission window, which has now passed. Glass Lewis has also opened its peer group submission window for companies with meetings from March 2025 to September 2025, and it runs through this Thursday, December 12th. Glass Lewis uses company-selected peers as part of its say-on-pay analysis.
On its website, the proxy advisor walks through how and why to submit your peer group – as well as info about its methodology. Here are reasons you might want to submit an update:
– You recently disclosed an updated peer group on your website, Form 8-K, or elsewhere in the public domain, but it’s not in your latest Form DEF 14A or Management Information Circular.
– Your most recent proxy statement includes two peer groups (e.g., one for fiscal 2023 and another for fiscal 2024). Confirm your preferred peer group for Glass Lewis’ peer group selection process by submitting it.
– You publicly disclosed your fiscal 2023 peer group with changes for fiscal 2024, but without listing the full fiscal 2024 group. Submit an update to confirm the fiscal 2024 peer group.
There’s no need to submit an update if there’s been no change in the group you disclosed for your most recent annual meeting. Glass Lewis will use that same group in its analysis for 2025 if you don’t send any update.
If you’re looking for a resource that covers peer group info for both ISS & Glass Lewis, check out this Compensia alert, and you can also visit our “Proxy Advisors” Practice Area.
We’ve posted the transcript for our webcast “Surviving Say-On-Pay: A Roadmap for Winning the Vote in Challenging Situations” – full of practical tips for say-on-pay scenarios that companies frequently encounter – from D.F. King’s Zally Ahmadi, Compensia and CompensationStandards.com’s Mark Borges, Orrick’s JT Ho, Foot Locker’s Jenn Kraft, and Tesla’s Derek Windham. They covered the following topics:
You will definitely want to check this out as we enter the proxy season, and the transcript is a low-time-and-effort way help you think through any changes you want to make on how you approach your say-on-pay proposal in 2025.
Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
You probably saw yesterday’s Wall Street Journal article on the Delaware Chancery’s latest decision related to Elon Musk’s 2018 Tesla pay package. There are very few takeaways for executive compensation professionals in the decision, but it seems worthy of addressing here — even if only for its novelty. So, keeping with the theme of my April post on Tesla’s proxy filing — including the proposal requesting that stockholders ratify said pay package after the Chancery Court ordered it rescinded — here are five things to know about the latest decision:
– This opinion was still at the Chancery Court level — penned by Chancellor McCormick, who was also responsible for the initial post-trial decision ordering rescission of the award. The order addressed the defendants’ motion to “revise” the post-trial opinion based on the stockholder vote and plaintiff attorneys’ petition for fees and expenses.
– Chancellor McCormick used this opportunity to clarify/emphasize a few points from the initial post-trial opinion. Specifically, that the decision did not hold that the Tesla board should have paid Musk nothing. She says, “there were undoubtedly a range of healthy amounts that the Board could have decided to pay Musk. Instead, the Board capitulated to Musk’s terms and then failed to prove that those terms were entirely fair.” She also clarified that none of the legal theories applied in the opinion were novel — if anything was novel in the opinion, it was simply that those legal principles had not previously been applied by the court to Musk vis-a-vis Tesla.
– The opinion considered events post-dating the initial post-trial decision, including the actions of the single-member special committee that was formed to assess the redomestication of Tesla to Texas and whether Musk’s 2018 award should be submitted to a second stockholder vote and the 2024 stockholder vote intended to “ratify” the award.
– Chancellor McCormick found that the “ratification” argument had four fatal defects — three expected, one surprising.
First, there are no procedural grounds for flipping the outcome of a post-trial decision based on evidence created after trial. Procedural rules allow the court to reopen the trial record for newly discovered evidence (“in existence at the time of trial”) but not newly created evidence. From a policy perspective, if this was allowed, “lawsuits would become interminable” and it would “eviscerate the deterrent effect of derivative suits.”
Second, as an affirmative defense, common-law ratification is waived if not timely raised. And, “wherever the outer boundary of non-prejudicial delay lies,” raising the defense “six years after this action was filed, one and a half years after trial, and five months after the Post-Trial Opinion” was too late.
Third, in a conflicted-controller transaction, the “maximum effect” of stockholder ratification is to shift the burden of proving entire fairness; it doesn’t shift the standard of review, which would require MFW’s additional protection of an independent committee and conditioning the transaction on the dual protections before negotiations. Defendants tried to argue that MFW was invoked after the post-trial opinion, to which the opinion says, “One does not ‘MFW‘ a vote, which is part of the MFW protections; one ‘MFW‘s a transaction.”
Finally, the proxy statement contained material misstatements. Tesla went to great lengths to avoid any argument that this second vote was not fully informed — having annexed 10 documents to the proxy, including the opinion and the special committee’s report to the board. But the legal impact of the stockholder ratification was unclear — and, trying to be transparent, the proxy said as much. That was a problem. “To be fully informed for ratification purposes, ‘the stockholders must be told specifically . . . what the binding effect of a favorable vote will be.’” Plus, the proxy used phrases like “extinguish claims,” “any wrongs … should be cured” and the disclosure deficiencies “corrected,” which were “materially false and misleading.”
– Using “sound” methodology, the plaintiff’s attorneys asked for $5.6 billion in freely tradeable Tesla shares as attorney fees. To this, the opinion says, “in a case about excessive compensation, that was a bold ask.” To avoid a windfall and reach a reasonable number, the opinion adopts the defendants’ approach of using the $2.3 billion grant date fair value to value the benefit achieved and applies 15% to that amount, resulting in a (still massive) fee award of $345 million.
This article from Meridian Compensation Partners addresses managing a company’s run rate — the number of shares granted from the incentive pool during the year divided by the average common shares outstanding used for basic EPS. The article notes that, last year, the ten top shareholder return performers in the S&P 500 increased their run rate by an average of approximately 5% year over year, while the bottom ten increased by about 40% on average. While the article discusses three approaches to comparing run rate relative to peers — gross shares granted at target, gross shares earned and net number of shares granted (excluding forfeitures and cancellations) — Meridian recommends using target number of shares granted for the best comparative assessment.
Going into 2025, for companies experiencing depressed stock prices, significant volatility or an otherwise high relative run rate, the post has this reminder of various options to reining in dilution:
– Apply a long-term stock price average to derive the number of shares: Use a 6- or 12-month stock price average that may smooth out temporary dips.
– Below the executive level, grant a portion of the intended equity value in restricted cash: Maintains employee satisfaction and retention without diluting shareholders (at the expense of reducing alignment with shareholders).
– Reduce equity eligibility: Reserve equity for positions that are difficult/impossible to recruit and retain without equity awards.
– Reduce vesting period in connection with a lower grant date value: Annualized value delivered will feel similar to the employee despite a smaller number of total shares granted.
– RSUs in lieu of stock options: RSUs provide greater retention, cannot be underwater and use fewer shares for a given targeted dollar amount.
– Reduce dollar value of equity awarded: When a company’s share price decrease is precipitous (e.g., energy companies in 2020), companies may decrease the dollar value of equity awarded to manage both the run rate and upside leverage on share price rebound.
Last week, Glass Lewis released this special report (available for download) on its approach to analyzing equity plan proposals. The report reviews the proxy advisor’s Equity Compensation Model — the tool used by its analysts to assess share request proposals put forth by U.S. companies — in detail and discusses equity plan proposal trends from the 2024 proxy season.
The model includes eleven quantitative and qualitative tests that gauge:
– The potential dilution and overall costs of the proposed plan,
– If the company already has enough shares for near-term granting,
– If the proposed share pool is excessively large, decreasing the frequency in which shareholders will have a say on the company’s equity compensation program, and
– If the company’s actual share usage aligns with shareholders’ values.
Glass Lewis’ four cost-based tests evaluate actual and projected costs to shareholders relative to industry peers. Potential dilution as measured by overhang is evaluated on both absolute and relative bases. The results of the remaining quantitative tests are compared to fixed benchmarks, adjusted to incorporate sector-specific considerations or changes to the size of the employee base at the company. Additional tests measure how well the qualitative features of the proposed plan follow best practices in pay governance.
For the 2024 proxy season, the “dilution exceeds peers” test was most commonly failed — though the report notes that a mere 6% of proposals that failed this test actually received an against recommendation after the full, holistic assessment. The next most failed test was the “pace of historical grants” test, which finds the ratio of the company’s net recent grants to its total shares outstanding and compares that to an industry benchmark. In terms of the test most correlated to against recommendations, the “expensed cost as a percentage of operating metrics” and “projected cost as a percentage of operating metrics” were most correlated. A majority of proposals that failed either test ultimately received an against recommendation.
Glass Lewis has recently been emphasizing how its approach to executive compensation is both “holistic” and “case-by-case,” and this is again reiterated in this report.
In some tests, the model uses historical practices to forecast future granting behavior. However, it may be the case that such historical data no longer apply to companies that have experienced significant transformations such as large mergers. As a result, each company that presents a proposal to Glass Lewis’ clients for vote is evaluated on a case-by-case basis to ensure that all tests used in the model are applicable. When a transformative event or a contravening factor is identified, Glass Lewis refrains from using the full model, though unimpacted tests remain part of our assessments.
With ISS’s FAQ update last month, there is now one more reason to review your company’s approach to clawback policies and provisions. A recent Debevoise memo summarizes key voting policies on this topic:
– ISS recently clarified in its FAQs on executive compensation policies that, for purposes of ISS’s say-on-pay vote recommendation, clawback policies must explicitly cover all time-vesting equity awards in order to receive credit for a “robust” clawback policy. This is consistent with the view ISS had already taken for purposes of analyzing equity-based incentive program proposals under its Equity Plan Scorecard (“EPSC”) policy. Under ISS’s FAQs on Equity Compensation Plans, in order to receive EPSC points for the clawback policy factor, an issuer’s clawback policy should authorize recovery upon a financial restatement and cover all or most equity-based compensation for all NEOs, including both time- and performance-vesting equity awards.
– Glass Lewis’s view on clawback policies under its 2025 U.S. Benchmark Policy Guidelines is that effective clawback policies should provide companies with the authority to recoup incentive compensation (whether time-based or performancebased) in the event of a restatement of financial results or similar revision of performance indicators upon which the awards were based. In addition, recovery should be available when there is evidence of problematic decisions or actions, such as material misconduct or a material reputational failure, material risk management failure or material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Glass Lewis expects that this authority to recoup should be provided regardless of whether the employment of the executive officer was terminated with or without cause.
– BlackRock’s view, expressed in its 2024 Proxy Voting Guidelines for U.S. Securities, is that it favors prompt recovery from any senior executive whose compensation was based on faulty financial reporting or deceptive business practices. This includes DoddFrank-compliant policies and broader policies requiring recovery from (or the foregoing of) the grant of any awards by any senior executive whose behavior caused material financial harm to shareholders, material reputational risk to the company or resulted in a criminal investigation, even if such actions did not ultimately result in a material restatement of past results. BlackRock generally supports shareholder proposals on these matters unless the company already has a robust clawback policy in its view.
The memo notes that even for the largest U.S. companies – most of whom already have policies or provisions that go beyond Dodd-Frank requirements (e.g., additional triggers, a broader group of covered employees, etc.) – it’s a good time to take a fresh look at policies. And companies that don’t go beyond what’s mandated may want to discuss whether to change that. In addition to proxy advisor and investor positions, compensation committees should consider the DOJ’s pilot program and company-specific factors. The Debevoise team recommends taking these steps:
1. Where companies have existing discretionary policies, companies should review these policies to confirm whether any standalone clawback policy or related terms set forth in an incentive plan are sufficiently rigorous under proxy advisor or shareholder guidelines. Consider whether any changes are appropriate for the organization.
2. For companies without existing discretionary policies, consider whether the board should have the authority to recoup compensation in other circumstances to comply with proxy advisor guidelines or to otherwise strengthen the company’s corporate governance program. While industry and peer benchmarking can be instructive, companies should design discretionary policies that reflect their own unique risks and organizational and compensation structures.
3. Engage with legal counsel to ensure that all clawback policies are enforceable under state laws and are integrated into agreements where appropriate.
Programming Note: Happy Thanksgiving, everyone! We’ll see you back here next week.
It’s hard to believe we are rolling into Year 3 of pay versus performance disclosures. Glass Lewis already incorporates this data as a supplemental quantitative factor in its executive compensation analysis (pg. 53), but ISS and many investors are still in “wait & see” mode. This Semler Brossy memo predicts that the “Compensation Actually Paid” metric will become a more valuable data point over time. Here’s why we aren’t there yet:
One way to think about full-tenure CAP is that it is the best possible running estimate of what compensation has been and could be delivered. The annual fluctuations in unvested equity values net themselves out over time and end up showing the tallied value of compensation the moment someone could have taken their pay off the table. Even the method for calculating stock options gives credit to the long lifespan of this vehicle. By using a Black Scholes calculation at the time of vest, CAP gives credit to the long life of a stock option, even if it is “underwater” when it vests (but still has economic value). It shows a credible estimate of what could be delivered to the executive the moment it was theirs to take.
The problem is that each individual year of disclosure is meaningless in isolation. Most years are overly influenced by the change in value of outstanding equity, not the full tallied value. When there is a big negative CAP value, it’s hard to make sense of it unless you know how much the outstanding equity was initially worth. There isn’t a clear story to tell unless you can compare the full tallied value of SCT and CAP numbers.
But:
Once full-tenure CAP is available, CAP/SCT ratios become powerful because they are apples-to-apples comparisons of everything that was awarded and what it turned into (i.e., the actual compensation outcomes that were delivered) in a manner that allows for comparison across organizations. In the first two years of PVP reporting, only 84 companies in the Russell 3000 had new CEOs join in the window that would provide enough information to look at full-tenure CAP.
By 2025, organizations will be required to report five full years of data. As CEO transitions occur over time, the data set of full-tenure CAP/SCT ratios will get richer and allow for benchmarking. There will also be the opportunity to assess and develop clearer market standards for a reasonable relationship between full-tenure CAP and SCT.
Taking a closer look at the 84 companies that report “full-tenure CAP,” the memo shows how the data can raise questions (or tell a story):
– Agricultural retail company. The CEO’s full-tenure CAP/SCT was higher than relative performance due to a strong leverage profile in its long-term incentive (LTI) structure (25% options and 50% performance stock units [PSUs]) and a 200% payout on PSUs in recent years. This outcome begs the question: Has performance justified the payouts?
– Pharmaceutical company. The organization had low full-tenure CAP/SCT and flat performance due to a 100% stock option design. The CAP values decreased as options neared vesting without price improvement, and the Black Scholes calculations remained low. This scenario raises the question: Is the design working, or are there any retention risks to address?
I’m willing to bet that there are diligent compensation committee members (and advisors) who would intuitively know that something is amiss in these types of scenarios. At some point, full-tenure CAP could give them another data point to help articulate concerns. . . hopefully before an investor brings it to their attention.