Semler Brossy’s latest say-on-pay recap (from last Thursday, May 13th) reports that the current failure rate is 3.3% for Russell 3000 companies – meaning 22 have failed so far in 2021. That’s down from the prior report – but well above the 1.9% failure rate at this time last year. For the S&P 500, the average vote result is 88.4%. ISS is recommending in favor of far fewer say-on-pay proposals this year.
Based on voting bulletins, it appears that a combination of factors are driving lower voting results:
1. Compensation committees exercising discretion to make payouts, without adequate transparency explaining how & why discretion was used
2. Misalignment between pay & performance
3. Mid-cycle adjustments to performance awards, which resulted in a windfall to executives
4. Inadequate response to prior-year say-on-pay failure
5. Large one-time awards
As You Sow has also been calling attention to increasing pay ratios at some companies. So far, that doesn’t seem to be directly impacting say-on-pay votes.
These votes remain very fact-specific and it’s difficult to draw general conclusions. But there’s at least one broadly applicable outcome of the low results: a lot of companies will face even more scrutiny next year. Comp committee members will be judged on “responsiveness” to investor concerns – while also still needing to keep executives happy enough to retain & incentivize them.
Time to act – register for our “Proxy Disclosure & Executive Pay Conferences” to be held virtually October 13th – 15th. Here are the agendas – 19 panels over 3 days. Our discounted early bird registration rate expires at midnight on May 31st.
Say-on-pay has been wild this year – BlackRock voted “against” more than twice as many pay packages during the first quarter as it did last year, and the failure rate is up. Our Conferences will help you as you navigate evolving pay & disclosure expectations and head into your next round of voting. As always, we have a fantastic speaker lineup – and our agenda is keyed in to the evolving ESG and say-on-pay expectations that you’re grappling with. Our live, interactive virtual format gives you a chance to earn CLE credit and ask real-time questions.
After the Conferences, we not only make the full video archive available for you to refer back to, but also the transcripts for each session—so you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures & engagements. Lastly, if you’re a member of any of our sites – TheCorporateCounsel.net, CompensationStandards.com, Section16.net or DealLawyers.com – you can take advantage of a discounted registration rate.
Early Bird Rates – Act by June 1st: SEC disclosure requirements are changing, and the expectations from investors & stakeholders are higher than ever before. At this three-day virtual conference, you’ll get practical guidance, direct from the experts, on how to use the annual reporting season to your advantage. Show that your board is taking the right steps on ESG and executive pay—and ensure that you’re complying with new SEC rules. Our special early bird rate expires at midnight on Monday, May 31st – register now to take advantage of the discount!
On Friday, ViacomCBS reported on a Form 8-K that the $120 million disputed severance payment to former CEO Leslie Moonves would revert in its entirety to the company. The determination came out of an arbitration proceeding, so it’s informative but doesn’t set a legal precedent that would apply to other companies facing this type of dispute.
Two and a half years ago, the company had announced that there were grounds to terminate Mr. Moonves’ employment for “cause” after #MeToo allegations came to light. Specifically, the company said that he’d engaged in:
[W]illful and material misfeasance, violation of Company policies and breach of his employment contract, as well as his willful failure to cooperate fully with the Company’s investigation.
Here are the employment agreement’s prongs of “cause” that the company appeared to be citing:
– your willful misfeasance having a material adverse effect on the Company
– your willful and material violation of any policy of the Company that is generally applicable to all employees or all officers of the Company (including, but not limited to, policies concerning insider trading or sexual harassment, Supplemental Code of Ethics for Senior Financial Officers, and Employer’s Business Conduct Statement), provided that such violation has a material adverse effect on the Company
– your willful failure to cooperate fully with a bona fide Company internal investigation or an investigation of the Company by regulatory or law enforcement authorities whether or not related to your employment with the Company (an “Investigation”), after being instructed by the Board to cooperate or your willful destruction of or knowing and intentional failure to preserve documents or other material known by you to be relevant to any Investigation;
– your willful and material breach of any of your material obligations hereunder
Although the company ultimately prevailed under this “cause” definition, the severance payment has been tied up in a trust since December 2018 due to a provision in Mr. Moonves’ 2018 separation agreement that said that any dispute related to the board’s determination was subject to binding arbitration. This $120 million was specifically set up as a “holdback” in the separation agreement rather than being paid out immediately.
Programming Note: We’re pausing email delivery of our blogs while we update our system. In the meantime, you can continue to find them on this page and on social media. Thank you to our many loyal subscribers!
As comp committees are often tasked with human capital management oversight, for some this oversight can include matters relating to remote work arrangements and return to office plans. Pearl Meyer recently released results from a “Work from Home Policies and Practices Survey” including data points on, among other things, who’s working from home by employee level (including executives), how companies that shifted to remote work view their success, and future plans for office space.
This excerpt from a press release about the survey, discusses how companies are planning to handle compensation of employees that opt to work remotely from lower-cost geographic areas:
Bill Dixon, managing director at Pearl Meyer notes how some questioned whether companies would change geographic-based salary structures as a result of the shift to remote work. He said even with ‘some worker migration from high cost-of-living states to lower-cost markets, it appears that the number of companies considering changes to an individual’s salary as a result is fairly small.’
One third of survey respondents currently apply “geographic differentials” to their salary structure and of those, 20% are considering modifications to their current approach. When asked outright about reducing an individual’s cash compensation if they move to a lower-cost geographic area and work from home, just 4.3% said they would do so, while 56.5% said they would not, and the balance were uncertain or would decide on a case-by-case basis. Dixon said, ‘at this juncture, when companies are allowing—or encouraging—remote work and it is going well, it appears there is some hesitancy to disrupt the talent pool.’
AllianceBernstein recently released a report summarizing its “2020 ESG Engagement Campaign” and it says one of its two most important ESG themes in 2020 was the inclusion of ESG metrics in executive compensation plans. In 2020, the asset manager engaged with 358 companies, almost half of which were companies based in North America. What does AllianceBernstein want to see?
Our objectives were the same in every engagement: to ask companies if they include ESG metrics in their executive compensation plans, and to encourage them to include at least one material and measurable ESG metric in their 2021 plans.
In 2020, AllianceBernstein asked 293 companies whether they had measurable ESG targets in their executive compensation plans and found 45% of management teams explained that they do. Even more companies said they would consider incorporating ESG targets in their compensation plans.
Some issuers claimed that ESG is inherently incorporated in their compensation plans because ESG issues impact the fundamental financial performance metrics they use to determine pay outcomes. We don’t think ESG factors should be sidelined this way – they should balance financial performance metrics.
The report also outlines AllianceBernstein’s “best practices” for incorporating ESG metrics in executive compensation:
1. We don’t endorse incorporating a long list of ESG-related metrics, each weighted less than 1% in determining executives’ incentive pay. Instead, we promote a more targeted approach with fewer metrics (two to three is ideal), each with a meaningful weight in determining pay outcomes.
2. Companies should identify the ESG issues that are most material to their business and develop quantifiable metrics to measure progress. Qualitative metrics are welcome, too, but they should include specific action items if incorporated in an executive pay plan.
3. We strongly encourage using stand-alone ESG metrics, rather than embedding them in individual objectives or including them as vague modifiers. Another effective format is to accompany a financial metric with an ESG metric, with the ESG metric acting as a gateway/threshold measure for executives to qualify for STI consideration.
Earlier this year, Liz blogged about trends among Fortune 200 companies linking diversity & inclusion metrics to executive pay. When we’ve seen reports of companies linking ESG metrics to pay, they’ve most often been incorporated within annual incentive plans. A recent Meridian memo discusses concerns with that approach and suggests it might be more appropriate to incorporate ESG metrics into long-term incentive plans.
The memo asserts one of the problems with including ESG metrics in annual incentive plans is that, in a short 12-month period, it’s often difficult for companies to make meaningful progress on certain ESG initiatives, such as D&I. Some companies might think it’s easier to link ESG metrics to short-term plans because they plan to assess progress qualitatively. As noted in the memo, meaningful progress on D&I can sometimes require more than a simple 12-month period. To help resolve concerns with trying to measure progress over a short timeframe, this excerpt provides considerations for companies to incorporate ESG metrics into LTIPs:
In a typical three-year LTI cycle, metrics do not change often but goals are reset every year based on past performance; such is the annual nature of our overlapping PSU designs. ESG initiatives are better suited to multi-year objectives that can only be measured by progress over that period. For example, companies could focus on an “S” goal this year, with a three-year plan in mind. Next year, while maintaining the “S” goal a priority, companies could set a new “E” or “G” goal with a three-year plan. This approach would allow organizations to focus on three critical areas over a multi-year period without having different, moving goals for the same metric. Further, there are countless ESG metrics to choose from and most companies want to limit the focus to just one to three items (inclusive of financial and stock price goals that likely will not be replaced). ESG as a broad category could represent a defined percentage of the LTI. This allows for ESG to be a fixture of compensation programs while maintaining flexibility in goal setting and performance measurement.
Liz blogged last week about early say-on-pay vote results and as of late April, the failure rate was 2x higher than at this time last year. Annual meeting season can sometimes be a wild ride and this year appears it might be even more so. Last week, BlackRock released its “Q1 2021 Stewardship Report” and it shows the asset manager’s continued focus on sustainable business practices. BlackRock has stepped up its engagements, the report says they’re up 24% year-over-year.
For compensation matters (which includes say-on-pay and say-on-frequency), voting statistics included in an appendix to the report show for the Americas, in the first quarter alone, BlackRock has voted “against” 15% of proposals, which is more than double the number at this time last year. Back in March, I blogged about BlackRock’s approach to compensation engagements, which the asset manager summarized in a memo. One thing BlackRock wants is transparency about executive compensation structures and the outcomes sought.
For more insight, BlackRock releases “vote bulletins” for some annual meeting matters and two recent bulletins explain the asset manager’s rationale for voting “against” a say-on-pay proposal and another where the asset manager voted “for” a say-on-pay proposal. Although several factors play into BlackRock’s vote decisions, BlackRock mentions company disclosures in each of these excerpts showing that company disclosure can help influence the vote:
Vote “against” say-on-pay:
While the amended compensation plan has been the primary focus of shareholders and the media, the Compensation Committee also used discretion for 2020 bonus payments. Although the corporate financial thresholds in the annual incentive program were met, the committee used its discretion to fund the bonus pool at 80% of target. As discussed in our commentary on our approach to Incentives aligned with value creation, where a Compensation Committee has used its discretion in determining the outcome of any compensation structure, we expect transparency with respect to how and why discretion was used, which we felt was lacking in this instance.
Based on a pay and performance misalignment, as well as a mid-cycle adjustment to the plan based on short term stock declines, BIS voted against the ratification of Named Executive Officers’ compensation and the election of relevant directors on the Compensation Committee.
Vote “for” say-on-pay:
In reaching our decision on compensation, we were informed by both engagements with the company, and the company’s public disclosures.
Moreover, as stated in additional proxy soliciting materials published in mid-April, in deciding its 2020 compensation the board took into account shareholder feedback received over the past year. This included; “eliminating the three 1-year sales goals from the company’s performance share units (PSUs), adding more structure to our annual incentive plan, capping the value of the company’s executive car and driver benefit, and doubling our stock ownership guidelines for senior executives.”
For these reasons, we supported management’s Say on Pay proposal.
Wow. Here’s the latest Semler Brossy memo tracking say-on-pay results for this season, which was published last Thursday. Three takeaways jump out:
– The current failure rate (4.2%) is 2x higher than the failure rate at this time last year (2.1%); however, it is still early in the season and we will monitor whether the failure rate remains at an elevated level following annual meetings for the 12/31 FYE filers
– 13.6% of companies thus far have received an “Against” recommendation from ISS, which is nearly as high as any full-year “Against” rate observed since 2011
– The average vote results of 89.0% for the Russell 3000 and 87.1% for the S&P 500 thus far in 2021 are well below the average vote results at this time last year
At least three more failures rolled in since this memo was published. Here’s a WSJ article about two of them, and one company’s comp committee members also faced a “vote no” campaign for approving mid-stream changes to the CEO’s inducement grant. Diving into company-by-company results underscores what an unusual season this is, because there also have been several high-profile votes at which say-on-pay technically passed, but received less than 70% approval.
Coming in below the 70% level is dangerous because ISS will recommend against comp committee members next year if it doesn’t feel the board adequately responds to shareholders’ pay concerns. Moreover, a low say-on-pay vote can be “blood in the water” for activists.
If you haven’t held your meeting, keep up your engagements. We could be seeing a lot of changes to comp plans next year…
Compensation Advisory Partners recently analyzed COVID-related pay actions of 300 companies in the S&P 1500 with a December 31st FYE. Although it’s a somewhat small sample size, it was pretty surprising to see that 50 percent of the companies made COVID-related changes – mostly, modifications to existing annual incentive payouts or go-forward annual incentive plans. Changes were more common among smaller & mid-sized companies than large caps. Here’s a few other takeaways:
– 50 percent of S&P Composite 1500 companies with fiscal year ends (FYEs) near December 31 modified their outstanding and/or go-forward incentive plans due to COVID-19, up from 42 percent of September FYE companies.
– Of the companies that made incentive changes, 60 percent made annual incentive changes, 9 percent made long-term incentive changes, and 31 percent changed both incentive plans.
– Of companies that disclosed incentive plan changes, they were typically for the most recently completed or outstanding performance period(s) vs. prospective changes.
– Consistent with September FYE companies, modifications were more likely to be to the annual incentive plan among December FYE companies.
– Most September and December FYE companies that adjusted annual incentive payouts for the impact of COVID-19 relied on compensation committee discretion – either positive or negative. CAP’s analysis of the December FYE companies shows that Mid Cap and Small Cap companies were more likely to exercise discretion than their larger S&P 500 peers.
– The most prevalent annual incentive actions were 1) exercising or adding discretion to the plan, 2) adding or changing the performance measures, and 3) revising the payout scale.
– The most prevalent long-term incentive actions were 1) adding or changing the performance measures, 2) modifying the performance period, and 3) changing the long-term incentive vehicle mix.
Page 27 of this WilmerHale IPO Guide walks through market practice for stock incentive plans and employee stock purchase plans at the time of going public. Here are a few interesting stats about ESPPs adopted in connection with 2020 IPOs:
– 70% of 2020 IPOs had an ESPP in place – compared to 47% in 2016
– 94% of those ESPPs included evergreen provisions – compared to 83% in 2016
– 99% of 2020 ESPPs provided a 15% discount – compared to 94% in 2016
– 99% of 2020 ESPPs included a “lookback” feature – allowing the discount to be taken from the market price at the beginning of the offering period – compared to 94% in 2016
– 9% of 2020 ESPPs said the initial ESPP offering period commences upon IPO – compared with 31% in 2016