The Advisors' Blog

I’ve blogged before about resale restrictions on equity awards to private company employees – but it’s been a few years. Trading in pre-IPO shares has taken off since then – and Nasdaq just announced that it’s spinning off its private company trading platform in a deal with several big banks. If you’re working with private companies, it’s worth considering whether this affects the value or terms of employee awards. This WSJ article gives some info on who’s using the service:

Nasdaq says its private-market platform is already the leading venue for private-company tender offers. In such transactions, the holders of private-company shares are allowed to sell them within a specified window of time, usually to a large investor or to the company itself.

Cryptocurrency exchange operator Coinbase Global Inc. and cloud-software provider Asana Inc. are among the companies that used Nasdaq Private Market before their IPOs.

In the first six months of 2021, Nasdaq Private Market facilitated a record 57 private-company secondary transactions, according to the exchange operator. The platform handled $4.6 billion in total transaction value in the period, the highest level in three years, Nasdaq said.

– Liz Dunshee

As I blogged last week on TheCorporateCounsel.net’s Proxy Season Blog, ISS has opened its “Annual Benchmark Policy Survey” – as well as a separate “Climate Policy Survey.” The proxy advisor is gathering feedback that could affect how it’ll analyze say-on-pay and whether it will favor ESG metrics being added to comp plans. Here are the specific pay-related questions:

Non-Financial ESG Performance Metrics in Executive Compensation

The inclusion of non-financial environmental, social, and governance (ESG) performance measures and incentives in executive pay plans has become more prevalent in the past few years. For example, as of June 17, 2021, almost 30 percent (27.6%) of publicly traded companies across Europe, North America and Asia-Pacific had incorporated at least one E&S-related incentive metric into their compensation plans, against only 8.5 percent in 2017 (source: ISS-ESG Executive Compensation Analytics database).

Proponents argue that companies will take ESG issues more seriously and have better business outcomes if executive pay is linked to achievement of ESG performance measures such as its environmental footprint or social impact. Critics and skeptics are concerned that many ESG outcomes may be hard to quantify and that the more widespread use of such performance metrics could reward executives for vague and poorly-defined outcomes that should already be considered part of the executive’s job. The upward trend of companies incorporating non-financial ESG-related metrics into compensation programs appears to have been fortified by the recent pandemic and social unrest, which have led a number of companies to make public statements about their human capital, employee safety, environmental, and community support records and incorporate metrics related to these areas into their executive compensation plans.

Do you believe incorporating non-financial Environmental, Social, and/or Governance-related metrics into executive compensation programs is an appropriate way to incentivize executives? Please select the answer below that most closely reflects your view.

– No, non-financial ESG performance metrics are not usually relevant or effective as compensation program measures. Compensation programs should only use traditional financial performance measures, for transparency and to maintain alignment with shareholders’ financial interests.

– Yes, but such metrics should only be used in compensation programs if the metrics selected are specific and measurable, and their associated targets are communicated to the market transparently.

– Yes, when chosen well, even ESG-related metrics that are not financially measurable can be an effective way to incentivize positive outcomes that may be important for a company.

– Other (please specify)

If you answered “Yes” to the question above, which pay components do you consider to be the most appropriate for inclusion of non-financial ESG-related performance metrics if a company chooses to use them?

– Short-term incentives

– Long-term incentives

– Both short-term and long-term incentives – either can be appropriate, depending on circumstances

– Other (please specify)

Long(er)-term Perspective on CEO Pay Quantum

CEO pay quantum is an increasingly important factor for many investors in evaluating executive compensation programs. ISS’ quantitative pay-for-performance screen currently includes a measure that evaluates one-year CEO pay quantum as a multiple of the median of CEO peers.

Does your organization believe that ISS’ pay-for-performance screen should include a longer-term perspective (for example, a three-year assessment) of CEO pay quantum beyond the one-year horizon currently utilized in the ISS pay-for-performance quantitative screen?

– Yes, a longer-term perspective is relevant and would be helpful

– No, the most recent year’s CEO pay is the relevant measure for the quantitative model.

– Other (please specify)

Mid-cycle Changes to Long-term Incentive Programs

For the 2021 proxy season, mid-cycle changes to long-term incentive programs were generally viewed by ISS and many investors as a problematic response to the pandemic, given that many investors consider that long-term incentives should not be adjusted based on short-term (i.e. less than one year) market disruptions. However, some industries continue to incur severe negative economic impacts since the onset of the pandemic more than a year ago.

What is your organization’s view on mid-cycle changes to long-term incentive programs for companies incurring long-term negative impacts?

– Mid-cycle changes to long-term incentive programs should continue to be viewed as a problematic response to the pandemic

– Mid-cycle changes to long-term incentive programs may be reasonable for companies that have incurred long-term negative impacts from the pandemic

– Other (please specify)

These surveys are the first step in formulating 2022 voting policies. They’re open until August 20th at 5pm ET. As usual, ISS also will solicit more input in the fall through regionally-based, topic-specific roundtable discussions. There will also be a public comment period in October for all interested market participants on key proposed changes to voting policies, before the new policies are finalized.

– Liz Dunshee

Although only 7% of shareholder proposals this year have related to executive pay (and none have passed), proposals for compensation linked to environmental performance metrics have increased by 29%. That’s one of the takeaways from this new Sullivan & Cromwell memo, which takes a deep dive into shareholder proposal trends. Here’s an excerpt from page 26:

There was a steep decline in the number of compensation-related proposals between 2012 and 2017, in large part a result of mandatory say-on-pay votes becoming the primary mechanism by which shareholders express concerns over executive compensation. The number of compensation-related proposals leveled out between 2018 and 2020. Proposals submitted this year dropped by approximately 20% from full-year 2020 numbers (48 proposals compared to 58).

Consistent with 2019 and 2020, around half of these proposals reached a vote in 2021, although more avoided a vote as a result of withdrawals and fewer through the SEC no-action process this year. Compensation-related proposals tend to receive relatively low support (averaging 20%), and none passed this year (compared to one in 2020 and two in 2019, each of which were related to clawbacks, which remains the compensation proposal topic with the highest relative shareholder support). ISS supported 50% of the proposals on executive compensation that reached a vote this year, representing a decrease from 76% in 2020 and 70% in 2019, respectively.

The memo goes on to note that shareholder support has dropped for comp-related proposals, including ESG-type proposals, over the last few years. It attributes that to companies being proactive in adding ESG metrics to pay plans, and says that the lower prevalence of environmental metrics in plans (compared to “social” metrics) may be what’s causing proponents to hone in on that aspect with proposals.

As I blogged today on TheCorporateCounsel.net’s Proxy Season Blog, ISS just opened its annual policy survey – and it seeks feedback about including non-financial ESG performance metrics in executive compensation plans, among other executive pay topics.

– Liz Dunshee

Do you find yourself at a loss when it comes to the “share-based payments” note to financial statements? This 500-page KPMG Handbook has everything you want to know (and more) about FASB ASC Topic 718.

The Handbook includes a section on whether to classify awards as equity versus a liability, as well as info about the accounting consequences of award modifications, etc. While I would never attempt to give accounting advice, it’s at least helpful to have a resource to go to when questions arise.

– Liz Dunshee

With a tight labor market and executives & employees reconsidering the “nature of work” as we know it, compensation committees are now dealing with much more than “business as usual.” This memo from Tapestry networks recounts conversation themes from a recent meeting of over a dozen comp committee chairs. The directors are paying attention to how management understands and responds to changing employee expectations:

1. Companies are assessing workplace models for the post-pandemic future. Comp committees should encourage management to be transparent & maintain consistent messaging, and to focus on principles-based training for managers on the ground.

2. A tight labor market empowers employees to ask more of their employers. Companies need to gain insights into the needs & preferences of employees and implement narrowly tailored solutions, which may vary based on industry, regulatory & tax issues, and the specific employee base. The current emphasis on DEI initiatives is just one example of employees using their voice to shape corporate actions.

3. Greater expectations for DEI offer opportunities and raise questions. Board members should look beyond diversity training and coaching to more fundamental steps to improve performance. Have realistic expectations about the pace of progress.

4. Measuring DEI performance and linking it to compensation remains a challenge. One compensation chair said, “If you benchmark DEI against your industry, you’re not necessarily aiming high enough. Identify
New realities for the modern workplace the companies that are doing it right and hold them up as the standard.”

5. Directors want boards to drive DEI initiatives and results. Several members emphasized that directors must set DEI expectations, prioritize them at the board level, and demand results. To start, diversity in the C-suite helps set a tone of inclusion for the entire organization.

– Liz Dunshee

Under the EU’s existing “green taxonomy,” economic activities that meet certain conditions will be incentivized as “environmentally sustainable” investments across the Union. The European Commission is also looking at whether to expand the taxonomy to address “social” objectives. As this Linklaters blog points out, one issue being considered is whether businesses that want to qualify as “sustainable” in the EU will be required to link executive pay to ESG metrics.

Linklaters explains that a group of experts called the Platform on Sustainable Finance are helping the European Commission with its decision. They’ve published a draft report for comments (this fall, the PSF will make a recommendation to the European Commission, which will then publish its own report by year-end).

The PSF folks seem to conclude that while tying pay to ESG could make sense in light of the strategic importance of E&S goals, there are lots of challenges. The blog summarizes the findings:

The PSF report says that that ESG issues now sit at the heart of good business practice, and for some companies this has become a central strategic pillar. As a result, many companies around the world are linking executive remuneration to ESG goals: reducing carbon emissions, customer welfare or workforce diversity.

So the PSF conclude that executive pay linkage to ESG should be part of the EU taxonomy as it is a reflection of what is happening in the real economy.

The PSF say that businesses are concerned that linking EGS to pay could interfere with companies’ autonomy, but they suggest that companies could choose their own sustainability targets and would not need to incorporate a fixed list of indicators. An option would be to link ESG factors to the long term incentive (LTIP) structure and performance measures, possibly along with malus and clawback (withholding pay at the point of vesting, or recovering after payment). It would also be necessary to manage any unintended consequences of linking ESG to LTIPs, which might lead to, for example, greenwashing or gamification.

The PSF draft report identifies some challenges to this linkage:

1. The difficulty of developing criteria to increase diversity on boards because, for example, in some countries gathering information on employees´ ethnicity or sexual orientation is unlawful.

2 How this initiative would fit alongside the upcoming European Commission proposal on sustainable corporate governance, which is expected to address issues related to sustainability expertise in boards and make it compulsory to include sustainability metrics.

3. How this initiative would fit alongside the proposed regulatory technical standards for the Sustainable Finance Disclosure Regulation (SFDR), which already obliges financial market participants to take into account and disclose board gender diversity. This means that all financial products would have to report on diversity anyway.

4. Setting criteria on executive remuneration may prove to be extraordinarily complex due to the variety of long and short term variables and schemes, and could lead to unintended consequences. All this interlinks with companies’ own business models.

5. It is tricky to compare companies on sustainability-linked remuneration, especially if the targets vary between companies.

The PSF identify an alternative option of having rules around compensation structure, transparency and policy that responsible investors already apply when deciding whether or not to approve executive compensation at AGMs. But they say that this could be perceived as disproportionate and infringing national corporate governance models.

– Liz Dunshee

Most clients intuitively understand that delisting – or uplisting – will affect equity compensation plans, but forward-thinking advisors will also take a moment to highlight some of the less obvious nuances. This Thompson Hine memo (pg. 3) walks through how these events affect plan metrics, compliance, and the value of awards to employees. Here are the high points:

1. Metrics: If your stock is quoted on an over-the-counter market following delisting, your stock price may no longer accurately reflect the company’s true value. In such circumstances, different performance metrics (such as EBITDA) may be more appropriate for equity programs. Newly listed companies should make sure to look at peer data.

2. Employee Incentives: Delisting may reduce the attractiveness of equity incentives. First, your stock price may not be aligned with the company’s true value. Second, if after delisting the company also deregisters with the SEC (so-called “going dark”), the shares that employees receive upon exercise of their stock options or vesting of restricted stock will no longer be freely tradeable. Resale restrictions generally include a minimum one-year holding period. Third, if the company previously had any institutional investors, they may exit their positions in the company’s stock, and some brokerage firms may be unwilling to hold OTC securities.

3. Blue Sky Compliance: Using equity after going dark requires an exemption from registration under federal and state securities (known as “blue sky”) laws. Securities anti-fraud rules also continue to apply. The company will need an exemption from registration both to grant any future equity awards and to permit employees to exercise any stock options that may be outstanding at the time of going dark. Such an exemption is usually available, but companies should work with legal counsel to evaluate the eligibility criteria and any restrictions. In addition to federal laws, many states require a notice filing and a few states (such as California) impose more complexities.

4. Public Disclosures: Even after going dark, the company may want to provide scaled-down reports. Public information is necessary for sales by affiliates under securities resale laws.

5. Shareholder Numbers: After going dark, monitoring shareholder numbers is also important – if certain thresholds are crossed, the company will be required to reregister and file reports with the SEC.

– Liz Dunshee

We’ve posted the transcript for the recent webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures.” Mark Borges, Dave Lynn & Ron Mueller shared their latest takes on these topics:

1. Annual Meeting Experience
2. Say-on-Pay Results
3. Pandemic-Related Compensation Adjustments and Disclosures: Are They Behind Us?
4. ESG Metrics
5. CEO Pay Ratio
6. Director Compensation Disclosure
7. Perquisites Disclosure
8. Shareholder Proposals
9. Proxy Advisory Firm Interactions
10. Recent and Expected SEC Rulemaking

For more info on these topics (and more) as we head into the 2022 proxy season, register now for our “Proxy Disclosure & Executive Compensation Conferences.” This virtual event is happening October 13th – 15th in a live & interactive format – i.e., you’ll be able to ask questions of our all-star panelists. The panels will also be archived for later viewing by attendees, and transcripts will be available. Here’s the agenda – 18 panels over 3 days!

– Liz Dunshee

I blogged a couple of years ago that part of the reason Carlos Ghosn said that he restructured and hid his pay was because he was worried that people in Japan, where Nissan is headquartered, would criticize his high levels of compensation. This new book delves into the whole saga – and acknowledges “culture clashes” as a big factor in Ghosn’s unraveling.

The book looks like a very interesting read, but you probably don’t need 400 pages to tell you that international operations are full of complexities. What’s highlighted here is that if you have executives in countries that traditionally frown upon huge pay packages (e.g., France, Japan), you may want to think twice before paying them according to US benchmarks.

Programming Note: The Advisors’ Blog will be off the rest of this week, returning next Monday.

– Liz Dunshee

As the dust settles from this year’s annual meeting season, in the weeks ahead we’ll likely start hearing of company plans and potential strategies in response to low say-on-pay vote results. For those who might be starting to think ahead, I’ve resurrected a blog posted last year highlighting actions tech companies took in response to low say-on-pay vote results.  As we learn more about this season’s results, we’ll post more, but here’s the repost of last year’s blog entry:

Earlier this year, I blogged about disclosure of investor engagement following a failed or low say-on-pay vote result.  With a failed or low say-on-pay vote result, most companies will consider a variety of actions and a recent Compensia memo reviewed low say-on-pay vote results at technology companies to help shed light on actions companies took. Each company will make decisions about changes to compensation design or structure based on its own circumstances, although it’s helpful to know what other companies have done if you find yourself dealing with this issue.

A low say-on-pay vote result is described as a vote that failed to win shareholder support or for ISS, a vote receiving less than 70% support, and for Glass Lewis, less than 80% support.  Some of the most common actions companies took (the memo delves further into each category of changes) include:

– Long-term incentive design changes – 92%

– Enhanced CD&A/outreach – 76%

– Performance share design changes – 60%

– Short-term incentive design changes – 44%

Compensia also found what it describes as “more dramatic” actions – 52% of the observed companies made a change to the membership of their Compensation Committee in the two years following an unfavorable result, while 36% of the companies subsequently changed their independent compensation consultant. Although the reasons for such changes usually cannot be directly attributed to the say-on-pay vote, it is possible that, in the course of their review, the Board of Directors determined that a fresh point of view might benefit the oversight of the executive compensation program.

Last, it’s also worth noting that the memo says although the size of a CEO’s pay package is generally a key factor in the analysis of a say-on-pay proposal, Compensia’s research was inconclusive as to whether a failed vote or low support ultimately resulted in a reduction in CEO pay in a subsequent year.  The memo suggests when evaluating a failed or low say-on-pay vote result that companies consider the absolute level of CEO pay as a potential issue and whether a reduction is appropriate in light of shareholder concerns.

– Lynn Jokela