Last summer, Liz blogged about suggestions to broaden the role of the compensation committee to focus on the company’s workforce as a whole. For a recent rendition of this concept, this Harvard Business Review article says there’s an opportunity to move to a model of having a “people committee.” The article notes that some companies, including JPMorgan Chase, Walmart, and Dupont, have expanded the mandate of the traditional compensation committee and moved toward a hybrid structure with something along the lines of a “compensation & management development committee.” But, the authors contend that for companies to cultivate a competitive advantage, a “people committee” can help them deliver a sustained advantage.
Your people committee is on the hook to ensure management delivers today’s employee strategy and tomorrow’s leadership bench. Think of it as an umbrella committee that helps you create an advantage by setting priorities, tracking progress, and driving accountability in the talent domain.
As a critical talent attraction and retention tool, compensation should remain a core responsibility of the new committee, ensuring SEC compliance and aligning leadership performance and potential with rewards and long-term incentives. But the people committee would reach beyond compensation in a number of areas to add differentiated value in three areas (the article provides additional commentary on each of these areas):
At least two well-known tech companies recently changed their equity plans so that awards fully vest in one year, according to this article. The accelerated approach is better for employees who may not want to be locked in for several years, but also allows companies to save expenses due to smaller awards and more control in light of changing valuations. This blog from Dan Walter gives more color on this and other “post-pandemic” developments:
Equity Compensation vesting schedules are changing to correct a well-known problem. I have discussed before that equity compensation vesting schedules have basically not changed in more than 25 years. Basically, 3 or 4 years for RSUs and stock options. We are not seeing companies use 6 and 7-year schedules to align with long-term goals. We are also seeing equity plans with 1 and 2-year schedules to reflect the “bonus” intent for those companies.
This Foley & Lardner blog explains how three typical deal structures – stock purchase, asset purchase, and carve-out – affect executive comp & employee benefits strategies. For each type of transaction, the chart shows:
1. Will the benefit plans & compensation arrangements come with the transaction?
2. Will employees and employment agreements come with the transaction?
3. What happens to the 401(k) plan?
4. What happens to non-qualified retirement plans?
5. What happens to equity awards?
6. Does the structure impact how/whether Code Section 280G (“golden parachute rules”) applies?
7. What happens to group health plans?
8. What about flexible spending accounts (FSAs)?
9. What about accrued vacation or bonus liabilities?
We continue to post resources in our “Sustainability Metrics” Practice Area that can help you navigate the best way to link ESG goals to executive pay. Caution and careful planning are key – especially since some people criticize ESG metrics as being a cover for under-performance on stock price.
The latest instructive memo comes from Aon – and among other things, it includes a framework to analyze whether your company is ready to add non-financial metrics to your executive pay plans. Here’s an excerpt:
Compensation committees currently determining when and how to design ESG-based incentives will need to focus more on impact and readiness of potential metrics and rely less on competitive practice compared to other areas of the executive compensation structure.
As the use of ESG metrics in compensation plans evolves, we expect this aspect of incentive design to take two to three years before there are truly competitive norms and a strong understanding of investor and investor advisor standards. For now, the decision on when to implement should be based on degree of readiness, the nature of the ESG metrics, and the size and time frame needed to cover the performance gap.
Aon looks at adding ESG metrics in terms of a spectrum of “readiness.” Companies that are further along on the “readiness spectrum” will be able to add multiple quantitative incentives, with greater weights, to the long-term plan – whereas companies that are closer to the “exploration” stage should focus on short-term plans and adding one metric at a time, likely qualitative in nature – or even just focus on disclosure of ESG progress for another year. Here are the indicators that show a company is pretty advanced in its readiness:
– Several key metrics have been identified and disclosed for more than a year. Quantitative understanding of success or failure known
– Metrics have a range of performance associated with them and clear timeframes
– Additional metrics have been explored and either added or eliminated from consideration
– Relative importance/priorities established
– Internal teams working on metric definitions and goals have initial findings and an on-going agenda
– Key milestones and timeframes to achieve goals are mapped for all multi-year goals
– Systems for assessing progress and reporting to leadership and the board have been tested
– Back or future testing completed
– Risk assessments completed and communicated to the board
We’ll be having a panel discussion about ESG in Executive Pay at our “Proxy Disclosure & Executive Compensation Conferences” – which will be held in an interactive virtual format October 13th – 15th. Here are the agendas. You’ll want to be part of this “can’t miss” event so that you can get the latest info as you head into the next proxy season. Register today!
With more companies searching and competing for diverse and talented directors, private companies are revisiting director pay plans to ensure they’re competitive. A recent NACD blog from Susan Schroeder of Compensation Advisory Partners (CAP) takes a look private company director comp programs and outlines considerations for designing and implementing a new program.
One of the items the blog covers relates to which pay components to adopt. The memo discusses use of long-term incentives in director pay programs and says we may see increased use of these incentives in larger private companies as they compete for board talent. When it comes to director cash compensation, many public companies prefer a “retainer-only” pay model, which is certainly easier for planning purposes. This excerpt discusses a few considerations for “retainer-only” and “meeting-fees only” cash component pay models:
A CAP-MLR Media private company survey that found 50% of private companies still use per-meeting fees to compensation directors. The retainer-only pay model makes sense for companies that wish to pay for overall board roles rather than time spent at individual meetings. Indicators that favor this pay model include material director time required outside of meetings, ambiguity about the definition of a formal meeting, a more predictable board workload, and a desire for administrative simplicity. The memo includes a range of board retainers that increase for companies with higher revenues.
A “meeting-fees only” pay model makes sense if most of the board work is tied to the meetings themselves. Per-meeting fees can be set to take into account typical meeting length, preparation, and follow-up time. Indicators for this pay model include an unpredictable number of meetings, comfort with the administrative efforts required to track and compensate meeting attendance, and the majority of work accomplished during the board and committee meetings. The blog says $2,500 is the median meeting-only fee, with $1,000 the median for telephonic/virtual meetings.
There are also companies that fall somewhere in the middle with a combination of a retainer and meeting fees. Some companies with the potential for a flurry of meetings can stipulate that the basic retainer covers a certain number of meetings. If meetings are required above the number covered by the retainer, then meeting fees will be paid to directors for the extra workload.
Over the last year, we’ve blogged changes to executive pay programs in response to Covid-19. For a peek at where things are headed in 2021, Meridian recently issued its “2021 Trends and Developments Survey” about executive pay programs. The survey is based on responses from over 300 companies and includes findings relating to payments and awards in 2020 and plan designs for 2021. Here’s an excerpt about 2021 short-term and long-term incentive design:
Short-Term Incentives – 2021 Design
– Widening the goal range was the most common adjustment to 2021 short-term plan design (37%)
– One-half of participants set 2021 threshold goals for primary earnings-related measures higher than 2020 actual results, similar to prior year
– Most companies (57%) use multiple financial metrics in their annual plan; profit measures remain the most prevalent
– Increasing from 17% in 2020, just under 25% of companies included ESG metrics in 2021
Long-Term Incentives – 2021 Design
– Most companies (64%) are preserving current long-term performance metrics and vehicles used
– Consistent with prior year, 65% of companies use multiple metrics in long-term plans
– The use of performance awards has slightly decreased from the prior year (88% vs 95%)
– TSR remained the most prevalent long-term performance measure (consistent with 2020)
– Only 2% of companies included an ESG metric in their 2021 long-term plan design
Liz blogged not too long ago about market practice for stock incentive plans and employee stock purchase plans for companies going public. A recent blog from Sharon Podstupka of Pearl Meyer provides a reminder that when going public, communication planning about equity compensation is one aspect of the transaction that shouldn’t be overlooked. The last thing companies want on the day of the IPO is fallout from employees upset or concerned about how they’re being compensated and whether it’s impacted by the IPO.
The blog includes a sample roadmap for compensation communication planning, here’s an excerpt but see the blog for a handy chart:
Post S-1, Pre-IPO: Meet with leaders and manager to explain what they’ll receive, when and how they’ll receive it and what their teams and direct reports will receive and their role in communication
IPO Day: Key messages from CEO via email or other media covering the significance of the day and how equity will factor into rewarding for success
Post-IPO: Communication from leaders and managers to direct reports with information about equity awards, how the award works, award agreement and personalized worksheet with award details
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Liz has blogged about some of the early trends with this year’s say-on-pay votes. Although a proposal hasn’t technically failed when it receives support from shareholders above 50%, it’s important to remember that proxy advisors set a higher bar. ISS considers shareholder support at 70% or below inadequate and will recommend “against” comp committee members next year if it doesn’t believe the board has adequately responded to shareholders’ pay concerns – for Glass Lewis it’s shareholder support at 80% or below.
For thoughts on what comp committees can do to demonstrate responsiveness to a passing, but low say-on-pay vote result, Pete Lupo of Pearl Meyer outlines a few steps for consideration:
– Pull together a team, including the compensation committee chair, head of HR and head of investor relations to begin planning the company’s response
– Communicate to the full board so they understand the need for investor outreach and to get their buy-in
– Develop an investor outreach slide deck and seek feedback
– Meet with institutional holders representing at least 50% of combined votes, press for detailed responses during these meetings so it can be helpful
– Meet with ISS and Glass Lewis
– Keep design features you believe are critical, don’t necessary cave and make all requested changes – the committee and management know more about linking metrics to long-term strategy than shareholders and proxy advisory firms but be prepared to explain why the committee didn’t make certain changes
– Take advantage of easy changes such as updating hedging/pledging policies or stock ownership policies – give yourself time to analyze and evaluate any significant plan design changes
– Polish your CD&A, make every attempt to write with clarity, provide an executive summary that includes ample charts and graphs and include a section discussing shareholder feedback received and changes you made based on the feedback
It was only a couple of months ago that Meridian’s Marc Ullman spoke on our “Top Compensation Consultants Speak” webcast. We were saddened to see the firm’s statement that he passed away on May 6th. Marc had a long-time career as an executive compensation consultant and had been with Meridian since 2013. In late 2020, he was elected to become only their third Managing Partner since the firm was established in 2010. Marc is remembered as a wonderful person both professionally and personally, with optimistic dreams for the future. His legacy continues through his wife and two children.
The last 5 years of say-on-pay data show that approval levels have gradually been dropping, according to this Equilar blog. Here’s the intro:
Marking its 10th anniversary this year, Say on Pay has been trumpeted as a critical voice for shareholders to rein in rising, outsized levels of executive compensation. Yet since the provision was enacted in 2011, median CEO pay has increased nearly every year while the percentage of companies that receive overwhelming approval on this measure has been consistently high. There’s been a question as to whether this non-binding vote actually works toward its intended purpose, and perhaps that it even has additional unintended consequences.
Looking at the Equilar 500 over the past five years, high Say on Pay approval ratings — over 90% — are widely common. However, starting in 2016, five years into the provision’s lifespan, the “rubber stamp” started to weaken, and “yes” votes in the 90%-94% approval range started to become much more common than those above 95%. While nearly half (48.4%) of all companies in the Equilar 500 received approval in the highest range in 2016, just 29.1% did in 2020. Meanwhile, the percentage of companies receiving approval in the 90%-94% range increased more than 15 percentage points in that time frame.
While most of the shift has been to the 90%-94% range, approximately three in 10 companies received lower than 90% approval, up from about 25% in 2016.
That seems to align with this King & Spalding blog (and the underlying Proxy Insight data), which says that as of about a month ago, ISS had recommended in favor of just 73% of say-on-pay resolutions, compared to 89% last year. Even two years ago, data was starting to show that nearly half of companies had received low say-on-pay support at some point since the advisory vote was enacted. I don’t know that companies or investors ever felt like say-on-pay was a “rubber stamp,” but the stats seem to show there’s more scrutiny as of late, as pay-for-performance and other expectations have evolved.
“Glass half-full” types can take heart that many of those companies were able to bounce back afterwards, and that low votes could have been caused by one-off circumstances. But lawyers & comp consultants are paid to spot risks, and a number of people are worried that what we’re seeing so far in 2021 could be a sign of things to come. Another big company reported a say-on-pay failure yesterday…