As I blogged last week on TheCorporateCounsel.net, just in time for our “Proxy Disclosure & Executive Compensation Conferences” – where our agenda includes a panel covering “clawbacks” issues – the SEC issued this Sunshine Notice about an open meeting tomorrow. The purpose of the meeting is to consider whether to re-open the comment period for the clawback proposal that the Commission issued back in 2015, which would – at a very high level – direct the stock exchanges to require listed companies to implement policies to recover incentive-based pay in the event of an accounting restatement.
This doesn’t come as a huge surprise, because consideration of a re-proposal has been an item on the SEC’s “Reg Flex Agenda” for the past two years. Consistent with the priorities that he identified in that Agenda, SEC Chair Gary Gensler also has been remarking at recent conferences, such as the CII Fall Conference, that he wants to knock out remaining Dodd-Frank rulemaking in short order.
The clawback proposal was criticized at the time because it would be triggered only be formal restatements, which have been on the decline. And in the years since, some people think it’s become even more antiquated. But although a clawback sounds simple on its face, it is very complex in practice. That’s why most of the big “clawbacks” that we’ve seen in the past few years are actually forfeitures of future incentives that have not yet been paid. So, it will be interesting to see whether the comment period is reopened and – if so – what comments roll in.
If & when clawback rules are finalized, that would satisfy the requirement in Section 954 of the Dodd-Frank Act. A couple weeks ago, the SEC proposed “say-on-pay” voting disclosure requirements that would take care of the rulemaking mandates under Section 951 of that Act. As I blogged about a year ago, the list of outstanding Dodd-Frank rulemaking requirements rightfully continues to shrink.
As a “sneak peek” for our members who are attending our “Proxy Disclosure & Executive Pay Conferences” that are starting next Wednesday, October 13th, we have posted the “Course Materials” – 167 pages of practical nuggets. Our expert speakers go the extra mile to deliver originally crafted insights! In addition, our conference platform will be going live soon – with fun 1-minute speaker videos, a “101” resource page, info from our amazing sponsors (thank you in particular to Diligent & Morrison & Foerster!), and calendar links for each session that you want to attend.
Here’s some other info:
– How to Attend: There’s still time to register for our pair of upcoming conferences, and once you do, you’ll receive an email with login details for the conference platform. Follow the agenda tab to 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 are the agendas for all three days! If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to Watch Archives & Read Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives by using their existing login credentials beginning about a week after the event, and unedited transcripts will be available 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: 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.
This 7-page memo from Compensation Advisory Partners looks at how 2020 CFO pay compared to CEO pay, based on 135 companies with median revenue of $12 billion. As you might expect, annual incentive payouts were lower at some companies based on 2020 performance – and proxy-disclosed LTI awards don’t yet reflect changes due to the pandemic. CFO total compensation is about one-third of CEO total pay and the target mix hasn’t changed in a decade (if it ain’t broke…). Here’s more detail:
– Salaries: In 2020, the salary increase prevalence declined by about 10% from historical practice. We believe the COVID-19 pandemic was the main factor for the decrease. However, salary increases were still quite prevalent for CEOs and CFOs, at 44% and 55% of the sample, respectively. Median 2020 salary increases were 2.7% for CFOs (or 4.3% for those receiving an increase) and 0% for CEOs (or 4.1% for those receiving an increase).
– Actual Pay: The actual total cash compensation for 2020 was generally flat among our sample with only CFOs seeing a minor salary increase in salary levels. On a total compensation basis (including long-term incentive awards), the median rate of increase continued to trend lower for CEOs and was generally flat for CFOs (3.3% for CEOs and 4.1% for CFOs).
– Target Pay Mix: The pay program structure for CEOs and CFOs has remained largely unchanged since 2011. CEOs continue to receive less in the form of salary and more in variable pay opportunities, especially LTI, than CFOs.
– Target Bonuses: Target bonus opportunities as a percentage of salary remained unchanged for the CEOs in the sample. For CFOs, the 25th percentile increased to 90% of salary from 80% last year. We expect target bonuses will continue to remain largely unchanged.
– LTI Design: The use of two different vehicles to deliver LTI remains the most prevalent approach, used by almost 60% of companies. Approximately 30% of companies in the sample use all three equity vehicles (stock options, time-based stock awards, and performance plan awards).
The portion of LTI awards granted in Performance plans decreased slightly in 2020 at the expense of higher time-based awards. The stock option portion remained unchanged. Even though most of the awards in the analysis were granted before the onset of the COVID-19 pandemic (due to disclosure rules), the minor increase in time-based awards was expected.
Willis Towers Watson recently announced results of their 2021 study on CEO pay in the S&P 1500. Here are the key findings, by the numbers:
– 4.7% – Increase in target total direct pay for S&P 1500 CEOs. Target pay for S&P 500 large-cap CEOs increased 5.4%. Pay for S&P 600 small-cap CEOs grew just 3.7% over the prior year, while S&P 400 CEOs saw a 4.4% increase. These figures reflect a slower rate of growth compared with the 6% increase last year, and the lowest results since the 2015-2016 cycle. This was partially due to the pandemic resulting in lower earned incentives at some companies.
– 3.9% – Increase in earned pay for S&P 1500 CEOs, down from the 5.5% increase observed in 2019. Mid-cap CEOs saw the biggest shift in earned pay, moving from just a 0.2% bump in the 2018 – 2019 cycle to a 7.6% increase in 2020.
– 47.5% – Percentage of S&P 1500 CEOs who did not receive a base salary increase in 2020. This contributed to no change in base salary at the median. Performance-based awards continue to be the primary element of CEO compensation programs.
– 102x – 2020 median ratio of CEO pay to median employee for S&P 1500 companies in this study. The pay gap at S&P 500 companies has widened the most over the past three years, reaching 174:1 in 2020. Conversely, the 2020 pay ratio for small-cap CEOs has returned to its 2018 level of 57:1 after an increase to 63:1 in 2019. Median pay ratios vary considerably by industry sector.
On Friday, ISS announced the results of its 2021 benchmark policy survey. 159 investors responded – as well as 246 companies, advisors and affiliates. Here are some of the executive pay-related highlights (see my blog on TheCorporateCounsel.net for details on other findings):
1. Non-Financial ESG Performance Metrics in Executive Compensation: When asked whether the use of non-financial ESG metrics is an appropriate way to incentivize executives, over half of investor respondents replied yes, but that they should be specific and measurable, and targets communicated transparently. Only a small number of investors replied no, and that companies should only use traditional financial metrics in compensation plans. About a third of investors replied yes, and that even metrics that are not financially measurable can be an effective way to incentivize important outcomes if chosen well. That answer choice was the most popular among non-investor respondents.
Most respondents thought that non-financial ESG metrics could be appropriate as part of either short- or long-term incentives. Among investors that chose one or the other, almost all chose long-term incentives as the more appropriate place for non-financial ESG metrics.
2. Long(er) Term Perspective on CEO Pay Quantum: 85% of investors and 67% of non-investors agreed that the inclusion of a longer-term perspective of CEO pay quantum is relevant and would be helpful. For example, ISS might add a three-year assessment of CEO pay quantum to its pay-for-performance screen.
3. Mid-Cycle LTIP Changes: Investors were fairly evenly split on the question about whether mid-cycle changes to long-term incentive programs should still be seen as a problematic response to the pandemic. Over half of investor respondents replied that they should continue to be viewed as problematic. Forty percent said that they may be reasonable for companies that have experienced long-term negative impacts from the pandemic.
Don’t miss our “Navigating ISS & Glass Lewis” panel coming up next Thursday, October 14th, at our virtual “Proxy Disclosure & Executive Compensation Conferences” – which runs October 13th – 15th. We’ll be discussing policy expectations, engagement do’s & don’ts, and more. You can still register – and anyone who has a paid subscription to any one of our sites gets a discount! Check out the agenda – 18 panels over 3 days.
Yesterday, the SEC announced that it had proposed amendments to the rules governing disclosure of proxy voting by mutual funds and institutional investment managers. Among other things, the proposed rule would require all institutional investment managers who are required to file a Form 13F to disclose all of their say-on-pay votes annually on Form N-PX. Specifically, managers would have to disclose:
1. A description of say-on-pay matters that’s consistent with the description on the issuer’s form of proxy;
2. The voting item’s standardized classification (the proposal suggests standard identifiers for typical voting matters – e.g., Section 14A say-on-pay votes for executive compensation, Section 14A say-on-pay votes for frequency, Section 14A say-on-pay votes for extraordinary transaction executive compensation);
3. The number of shares voted and number of shares loaned and not recalled; and
4. How the shares were voted by the manager.
SEC Chair Gary Gensler hinted that this proposal would be coming at the CII meeting last week. If adopted, the rule would give issuers and investors more transparency into managers’ proxy voting decisions – and would finally complete the SEC’s Section 951 Dodd-Frank rulemaking mandates. The comment period will be open for 60 days after publication of the proposal in the Federal Register, which usually takes somewhere around 30 days. For coverage of the other fund voting disclosure part of the rule, see my Proxy Season Blog.
You can still register for our popular conferences – the “Proxy Disclosure & 18th Annual Executive Compensation Conferences” – to be held virtually Wednesday, October 13th – Friday, October 15th. We’ll be covering the changing expectations from investors and other stakeholders – with practical guidance on how to use the annual reporting season to your advantage. And new on the agenda, Dave Lynn will be interviewing the Director of the Division of Corporation Finance, Renee Jones!
For more details, check out the full agenda – 18 panels over 3 days. Our speakers are fantastic and this is truly a “can’t miss” event for anyone involved with proxy disclosures, corporate governance, and executive pay.
Conference attendees will not only get access to our unique & valuable course materials (coming soon) – we’ll also be making video archives and transcripts available after the conference, so that you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures and engagements. Plus, our live, interactive format gives you a chance to earn CLE credit and ask real-time questions.
Register today! As an added benefit to members, this year we are offering a discounted conference rate to those who have a paid subscription to any one of our sites.
I’ve blogged that it’s somewhat rare right now for companies to link executive pay to environmental metrics (we also cover it in this checklist). Now, the non-profit shareholder advocacy organization As You Sow has taken a close look at the proxy statements of 48 companies that are “large carbon emitters.” They posted their initial findings yesterday.
Although few companies clearly described an express link between greenhouse gas reductions and executive pay for 2020, As You Sow found four companies that described specific goals and a specific impact on pay. Here’s an excerpt:
AES – links 5% of annual incentive pay for “decarbonization” consistent with GHG reduction goals and identifies target; 5% for “strategic capital initiatives” citing a target ”$1B through clean energy or 3rd party Fluence EV [an energy storage joint venture] of $750M. “
Ameren – awards 10% of Performance Share Units in LTIP based on “pre-established goals related to the total MW tied to renewable generation and energy storage additions. This measure includes MW associated with new wind, solar, biomass, landfill gas and energy storage added to Ameren’s generation portfolio over the three-year period.”
Marathon Petroleum – assigns “greenhouse gas intensity” as a factor for 5% of annual incentive compensation (which is 17% of target CEO pay) = 0.85% of total pay.
Southern Company – ties 10% of CEO LTIP pay to achieving specific megawatt reductions each year, either by adding zero-carbon megawatts and by eliminating coal or gas steam megawatts, with specific targets set for each year. The 100% payout target is set based on the trajectory needed to meet Southern’s 2020 goal of a 50% GHG reduction by 2040. There is a 150% payout stretch goal, which is set about 60% higher than the target three-year net MW change goal, meaning that there is more challenging to reach the maximum payout for the 2020-2022 performance period. The threshold for 2020-2022 is set to the garget for the 2019-2021 goal, so there is no payout if the target for the 2019-2021 performance period is not reached.
In addition, As You Sow also found that several companies said that they’ve adopted new policies for future years. I blogged a few months ago that environmental metrics could pick up in the US as European trends spread across the Pond.
As You Sow also says that companies are adding metrics in response to shareholder pressure, including proposals that it has submitted. According to its recent proxy season review, the proponent currently seems to be more focused on climate-related proposals right now than on proposals related specifically to CEO pay. It wouldn’t be too surprising if in the coming year, they pursue more proposals that urge adding climate metrics in pay programs.
Semler Brossy recently published its third report in a series looking at ESG incentives. This one dives into trends in plan design. Here are the highlights:
• ESG metrics are most commonly incorporated as part of a scorecard (36%) or qualitative individual performance assessment (28%)
• ESG metrics are far more common in annual plans (57%) than long-term plans (less than 5%)
• As shareholders continue to push for longer-term sustainability goals, we expect increased prevalence of ESG metrics in long-term incentives
This memo from Compensation Advisory Partners looks at non-employee director compensation among the largest public companies. Here are the key takeaways for this year:
– Median Total Board Compensation remained flat versus prior year, and 75th percentile Total Board Compensation has remained flat for the past two years
– During the last year, there were the fewest increases to board cash and/or equity retainers of any year during the last decade, in reaction to the COVID-19 pandemic and related implications
– Shareholder-approved director pay limits that apply to both cash and equity-based compensation (i.e., that apply to total pay) became majority practice in 2020
The memo says that companies are now evaluating director pay levels in light of the pause on increases during 2020. Companies are still aware of COVID-related optics, but CAP predicts that boards will likely return to the normal cadence of director pay reviews & increases in 2022.