As we cross the high-point of proxy and annual meeting season, Equilar and the NYT recently released their annual look at CEO pay levels for the 200 highest-paid CEOs. Liz blogged about one aspect of the analysis.
It’s also worth visiting Equilar’s interactive chart that analyzes the pay of the 200 CEOs included in the study. It’s sortable by total compensation, change in comp value year over year, the company’s CEO pay ratio and median employee pay, company revenue and change in revenue year over year. Here are some of the findings:
For the first time since 2014, none of the 10 highest-paid CEOs had been in the top 10 in the previous study. Only one of the 10 highest-paid CEOs has been among the top 10 in the past (Regeneron’s CEO). This trend is due chiefly to the fact that there were five newly public companies represented among the top 10, as well as a CEO recently new to his position (DaVita’s CEO).
COVID-19 has had an uneven effect on corporations, often dependent on industry, but the market overall has reached continual highs in the past year. While CEO pay increased due to rising equity values, cash compensation (salary and bonus) was lower in 2020 than the previous year on balance, even among these highest-paid executives. Salary for Equilar 200 CEOs dipped 3.7% at the median from the previous year, while the median cash bonus fell 5.2%.
Meanwhile, median employee pay for the firms included on this year’s list actually increased, albeit modestly, rising 1.9%. While it would be difficult to argue that CEOs suffered as employees benefited in 2020, fixed pay for executives was held to the same standards as that of the median employee across the market in 2020.
Tune in tomorrow for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze this year’s wild say-on-pay results, key 2021 lessons, ongoing pandemic-related issues, ESG metrics, CEO pay ratios, status of SEC rulemaking, and what to start thinking about for next year.
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This recent Glass Lewis blog looks at what can go wrong with ESG oversight – and how it can connect to, and impact, executive pay votes. The situation discussed in the blog involves Rio Tinto, a mining company dual listed in both Australia’s ASX 100 and the UK’s FTSE 350. At the company’s 2021 annual meeting, more than 60% of votes cast voted against its remuneration report, which serves as a retrospective, advisory look at the last year’s pay decisions. Here’s an excerpt:
Shareholder concerns centred on the company’s destruction of two ancient rock shelters in the Juukan Gorge, and its subsequent response. The blasting, which caused irreversible damage to a 46,000-year-old Aboriginal cultural heritage site in the Pilibara region of Western Australia, occurred in May 2020 as part of the expansion of an iron-ore mine.
The board review of the matter found certain executives, including the group chief executive, responsible failure to implement an adequate heritage management system. The company then determined that the group chief executive wouldn’t be entitled to receive any bonus awards for FY2020 and also said a reduction would be applied to LTIP awards that were due to vest in 2021. Stakeholders didn’t think the financial penalties were adequate and the executives involved retired, and the board chair announced an intention to retire at the conclusion of the company’s 2022 annual meeting.
Even with all this, investors weren’t happy and ultimately voted against the company’s renumeration report. The terms of the group chief executive’s departure apparently made the situation worse because as a good leaver, all of his outstanding awards will vest as scheduled, subject to pro-rating for the time worked and achievement of applicable performance conditions.
This case shows the importance of ESG oversight and that investors may look beyond the initial matter and consider related compensation decisions too. For executives involved in perceived ESG missteps, this case shows the potential of a wide-reaching effect.
This recent Pay Governance Survey of 30 big UK & EU companies shows that nearly all of them have included ESG metrics in their incentive plans – compared to about 20% of US companies that were surveyed earlier this year. The European companies also had a much higher rate of ESG inclusion in long-term incentive plans (41%). These practices are worth a look, because they could foreshadow investor expectations here in coming years. Here are some predictions:
• The prevalence of ESG metrics in incentive plans is much higher in the UK and EU compared to the US, and it is likely the US will close the gap within the next 2-3 years based on past trends (for example, Say on Pay was first adopted in the UK and EU) as well as potential enhanced regulatory requirements (current S.E.C. review of 2010 interpretative release) and investor and societal pressures to prioritize ESG;
• Both UK/EU and US companies will increase the inclusion of ESG metrics in their respective long-term incentive plans as investors and regulators focus on how companies intend on achieving their long-term sustainability goals;
• The types of ESG metrics and plan designs used by both UK/EU and US companies are largely the same,including the use of scorecards, quantitative and qualitative goals,and relatively modest weightings; and
• Once adopted, it will be difficult to turn back,and many US companies are conducting their materiality assessments to select the metrics and goals that will have the greatest impact on the company’s long-term performance. Thus, as noted in our previous Viewpoint, we continue to believe “many [US] companies will use 2021 as a ‘launching pad’ for finalizing and rolling out ESG metrics” in 2022 incentive plans.
The survey says that with respect to Environmental metrics, reduced carbon emissions/greenhouse gas was the number one metric selected by UK/EU companies followed by waste reduction. Among US companies,energy efficiency/renewable energy was the top metric followed by reduced carbon emissions/greenhouse gas.
Diversity was the top Social metric among UK/EU and US companies. US companies also selected a companion metric – inclusion and belonging – at a much higher rate (43% compared to 19%).
This NYT article analyzes whether execs are receiving outsized stock awards that end up widening the gap between CEOs and ordinary workers. It focuses on the 200 highest-paid CEOs – 8 of whom earned more than $100 million in total compensation last year. Here’s an excerpt:
CEOs in the survey received 274 times the pay of the median employee at their companies, compared with 245 times in the previous year. And CEO pay jumped 14.1 percent last year compared with 2019, while median workers got only a 1.9 percent raise.
Last year’s colossal awards sprouted from a well-developed corporate compensation culture, in which boards, consultants and executives preach the gospel of “pay for performance,” which typically links CEO compensation to the company’s stock price. But this approach can lead to enormous payouts if stocks go up. The S&P 500 returned nearly 18 percent in 2020, including dividends, and CEOs reaped handsome rewards. But the question is, how much do they really deserve?
“They are emphasizing performance equity awards so much and ignoring how big they are,” said Michael Varner, director of executive compensation research at CtW Investment Group. “This is one of the chief culprits of the continuing rise in executive pay over the decades.”
The article spends quite a few paragraphs focusing on big payouts that CEOs can achieve if the stock price performs over a long period. You can feel the companies’ frustration in having to respond to some of these media inquiries – explaining repeatedly that the execs don’t actually get the payout until they achieve the milestones, or pointing to SEC filings that say that. But at the end of the day, if activists and others have decided that the company is contributing to inequality, it’s very difficult to communicate a $5 billion award in an appeasing way.
An online fashion retailer out of the UK is linking executive pay to improvements in supply chain workers’ rights – in response to government pressure to do so. Although it’s hard to imagine regulators here requiring particular metrics, it’s not a stretch that investors would carry that mantle.
In this case, allegations of mistreatment sparked a £1bn hit to the company’s share price and resulted in one of the company’s largest shareholders divesting its holdings. Here’s more detail on the comp plan that’s being submitted for shareholder approval this week (see pgs. 71 & 81 of the annual report):
– Vesting of 15% of executive awards depends on the company successfully implementing its “Agenda for Change” program to fix supply chain issues (the “Agenda for Change” includes 6 steps to enhance the company’s supplier audit & compliance procedures, including publishing a full list of its UK suppliers)
– 3-year performance period
– Payout is also tied to stock price performance (could pay up to £150m in total if shares rise by 66% over three years from June 2020)
– Payout decisions will be made by independent compensation committee
Meanwhile, according to the Glass Lewis Controversy Alert, the proxy advisor remains concerned about the company’s ability to mitigate its risk of “modern slavery” issues and is concerned that the board was aware of issues in 2019 and failed to take adequate action prior to this issue emerging in the media in mid-2020. In light of those concerns, it’s recommending against reelection of the company’s co-founder and executive director. ESG issues could have a real impact at this meeting.
According to data from ISS Corporate Solutions, 14 S&P 500 companies had failed to receive majority support for say-on-pay as of June 1st – which compares to 12 companies failing during all of last year. This FW Cook blog says that the prior record for failures at big companies was 13, set back in 2012. With votes yet to occur at about a quarter of the S&P 500, a recent FT article predicts that we may see up to 20 failed votes this year -that’s not even counting companies outside the S&P 500. An even bigger group will feel the heat to show “responsiveness,” since ISS and Glass Lewis policies put the heat on boards for any say-on-pay votes that get less than 70% and 80% approval.
What’s causing the backlash? Lynn blogged last week that ISS may be wielding greater influence. The FW Cook blog also points to discretionary pandemic-related adjustments as contributing to the voting results this year.
Sometimes high-level benchmarking data is just what you need. One place to look for Russell 3000 executive compensation and governance trend data is Main Data Group’s interactive tracker. The firm updates the data daily and culls data from recent proxy statement, 10-K and 8-K filings.
Check it out, among other things, you’ll find that among Russell 3000 that have female NEOs, it’s most commonly 1-2 women. For executive compensation data, you can filter the information by sector and revenue category, and it includes data on CEO salary, pay ratio and stock ownership guidelines.
ESGauge, The Conference Board and Semler Brossy recently issued a director compensation report reviewing trends and developments at Russell 3000 and S&P 500 companies. The report covers a lot of ground and includes observations about a few things to watch as we move forward from the pandemic and 2020. Due to market volatility over the last year and focus on board diversity, the report says companies may need to find ways to keep their director compensation programs attractive to new slates of director candidates. Here’s an excerpt:
Recruiting a new breed of diverse directors with different experience and skills may require significant changes to director pay structures, including adjusting compensation levels upwards to make posts more attractive to in-demand talent. For directors who are not former CEOs, having pay in the form of equity that is likely locked up until retirement may not be much of an incentive to join a board, leading companies to seek new, creative solutions such as signing equity grants or different equity/cash ratios.
In the face of economic concerns, companies are reluctant to permanently increase compensation levels for newly recruited directors; therefore, they may favorably view the use of sign-on equity grants or the offer of a choice among compensation packages with different equity/cash mixes. Some directors, especially those who may not be coming to the board with a long career as a corporate executive, may benefit from these one-time grants and a somewhat higher portion of cash compensation. To avoid any negative attention from proxy advisors or shareholders’ concerns, boards should disclose such awards and explain their rationale, especially that they are non-recurring payments (if that is indeed the case).
Another item to watch includes committee compensation, which the report says could face a reshuffle as workloads change among committees due to the prevalence of ESG-related considerations. Also keep potential ceilings for director pay on the radar as the report says they could become more common.
Back in March, I blogged about a report summarizing say-on-pay vote outcomes over the past 10 years, along with data showing the potential impact of proxy advisor vote recommendations. A report from Willis Towers Watson provides 2021 vote trend data based on voting results from January 1 through May 14. The data appears to show a measurable impact from ISS vote recommendations and that the impact of an ISS “against” recommendation has strengthened compared to last year. Here are a few highlights:
Russell 3000 say-on-pay
– Average shareholder support: 90%
– ISS negative vote recommendation: 10%
– Difference in average support between an ISS “for” and “against” vote recommendation: 35%, which is up from 29% in 2020
– Rate of “high” ISS concerns related to pay-for-performance among proposals that received an ISS “against” recommendation: 73%
S&P 1500 equity plan voting results
– Average shareholder support: 91%
– ISS negative vote recommendations: 15%
– Difference in average support between an ISS “for” and “against” vote recommendation: 24%, which is up from 18% in 2020
Also, see Semler Brossy’s most recent report on Say-on-Pay vote results this year, it includes similar findings about the potential impact of ISS “against” vote recommendations.