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.
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?