As a result of recent stock market volatility combined with a tight labor market, some companies are dusting off option repricing playbooks. For good reason, a lot of us are rusty on how this works (while others of us might have some PTSD from the last time that repricings were widely used). White & Case compiled this 18-page guide on the topic, which covers:
1. Structuring Repricings
2. Shareholder Approval Requirements
3. Tender Offer Rules
4. Other Considerations (Tax, Accounting, Section 16, etc.)
5. Foreign Private Issuers
6. Alternative Strategies
There are a lot of traps for the unwary here – so make sure to check out the memo and the other resources in the “Underwater Options” section of our “Stock Options” Practice Area. Also, be on the lookout for our next issue of The Corporate Executive – Dave is planning to analyze the impact of market volatility on executive pay from a bunch of different angles. If you aren’t already receiving that newsletter, call (800) 737-1271 or email sales@ccrcorp.com.
A member recently asked this question in our Q&A Forum (#1411):
We are looking for any type of guidance/handbook/alert that gives any insight into Change in Control Plan participants BELOW the executive leadership team (e.g., how common this is, how to determine participants). Are you aware of anything? Thanks!
John responded:
I think it’s not unusual to provide change in control compensation to people beyond the NEO group, but I don’t think it’s common to provide change in control agreements along the same lines as those provided to NEOs. We have a lot of materials on change in control arrangements in our “Severance” Practice Area, and you may want to take a look there.
Here are some specific resources from that Practice Area that you may find helpful:
John highlighted some great resources in our Practice Areas, and we also have Lynn & Borges’s “Executive Compensation Disclosure Treatise” posted online for members of CompensationStandards.com. On top of that, we’ve got lots of checklists on topics like clawbacks & director expense policies. If you’re not finding what you’re looking for, give us a shout at our Q&A Forum or email us anytime at info@ccrcorp.com.
During the early months of 2020, there was a ton of coverage about CEO & employee pay cuts – with some CEOs giving up their 2020 salaries to help dampen the pandemic’s effects on worker salaries & layoffs. But a recent academic paper found that while many CEO base salaries did go down in 2020, powerful CEOs weren’t really worse off because of the increase in their total compensation that year. The average annual decrease in base salary for 330 CEOs that accepted salary cuts in 2020 was 18.6% – but the total compensation wasn’t significantly lower on average, nor was the total compensation different from those of CEOs who didn’t take salary cuts.
The paper draws on the managerial power theory of executive compensation, where “powerful CEOs exert influence over boards to extract rent through higher but unwarranted pay. Stakeholder outrage acts as a constraint on CEO pay because a CEO can suffer reputational damage if their compensation package is perceived to be egregiously out of line with stakeholder or wider societal expectations.” The managerial power theory predicts that powerful CEOs would respond to higher stakeholder outrage by restructuring their compensation to be more opaque.
During 2020, there was lots of stakeholder outrage to go around, with widespread furloughs & worker safety concerns consuming a lot of media attention. The paper argues that, “increased outrage costs [from the pay disparity during the pandemic] bit harder on powerful CEOs and triggered an adjustment to the structure, but not the size, of their compensation.” They found that the “Other compensation” category increased by 131% from 2019 to 2020 for CEOs who took a salary cut, with all else equal. The paper also noted that CEOs of companies with weaker corporate governance, low board independence and busy boards also seemed to restructure their pay structure & avoided a significant loss in income.
At the end of the day, governance is at the crux of these issues, and there’s a lot more scrutiny by a wider group of stakeholders, ranging from institutional investors to a company’s employee and customer base. With your board and compensation committee increasingly in the hot seat, you’ll want to register for our upcoming “Proxy Disclosure & Executive Compensation Conferences” – coming up virtually October 12-14. Among other critical topics, our agenda includes a session on “The Evolving Compensation Committee” – with Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, Pay Governance’s Tara Tays and American Water Works’ Jeffrey Taylor.
With median pay packages for CEOs breaking records this year, here’s an updated Semler Brossy report (with data as of May 5) showing that the current S&P 500 average say-on-pay vote result (at 87.3%) is below the index’s average at this point last year (at 89.6%). There’s also a widening spread between the average say-on-pay vote results in the Russell 3000 and S&P 500 indices – at 320 basis points this year vs. 210 basis points at year-end in 2021.
However, from a 30,000 ft. level, companies seem to be cruising, as the say-on-pay failure rates for both the Russell 3000 and S&P 500 are significantly lower than the failure rates this time last year. Semler Brossy found that the “Russell 3000 is 210 basis points lower at 1.9% and the S&P 500 is 260 basis points lower at 3.6%.” Here are a few other stats from the latest Semler Brossy memo:
– 8.6% of Russell 3000 and 12.7% of S&P 500 companies have received an ISS “Against” recommendation thus far in 2022. The Russell 3000 “Against” rate is 270 basis points lower than the rate observed last year, and the S&P 500 “Against” rate is 160 basis points higher.
– Over the past five years, average Director election vote support at companies that received a Say on Pay vote below 50% in the prior year is seven percentage points lower than at companies that received above 70% support.
– Average vote support for equity proposals thus far in the proxy season (91.0%) is 130 basis points higher than the average vote support observed at this time last year (89.7%).
– Companies receiving less than 90% Say on Pay vote support have had higher average equity plan proposal support in 2022 than in previous years.
A recent Pearl Meyer Quick Poll survey, “Trends in Granting Equity,” looks at whether and how companies are changing up their usual equity practices in light of retention concerns, stock market volatility, inflation and other external pressures. The survey reflects responses from 187 companies, and here are some interesting findings:
– About 28% of respondents went deeper into their organizations with equity grants while almost 21% went deeper into the salaried employee group.
– Almost 45% increased their 2022 burn rate, with almost 10% increasing this rate 20% or more. Although most organizations did not go deeper with their equity grants, many have higher burn rates due to depressed stock prices and increasing competition for talent. It will be interesting to see what impact 2022 equity burn rate decisions will have on the ISS 2023 burn rate tables.
– Of the approximately 34% that increased senior leadership team equity values, the increases were spread out somewhat evenly from up to 5% to 20% or more.
– About 10% increased the use of restricted [stock units] by 15% or more, which is a meaningful change. Interestingly, of the companies that indicated making a change, 52% increased by >=25%.
– A little more than a third of companies raised the value of equity grants for new hires, an outcome we expected to see. Similar to the increase in grant values to existing members of senior leadership, many organizations did increase the value provided to new hires in order to compete for talent.
– A little less than two thirds (64.7%) of companies do not use rTSR [relative total shareholder return metric] in their incentive plans. We expected the results to show 50% or less.
As Pearl Meyer flagged, the equity burn rate decisions this year may potentially impact ISS burn rate tables next year. To make sure your board is thinking through all of the risks, benefits & consequences of your compensation decisions, register for our upcoming “Proxy Disclosure & Executive Compensation Conferences” – coming up virtually October 12-14. Among other critical topics, our agenda includes:
– “Navigating ISS & Glass Lewis” – featuring Davis Polk’s Ning Chiu, Glass Lewis’ Courteney Keatinge and ISS’s Rachel Hendrick.
– “The SEC All-Stars – Executive Pay Nuggets” – with Skadden’s Brian Breheny, Compensia’s Mark Borges & MoFo’s Dave Lynn.
In addition, join us for the “1st Annual Practical ESG Conference.” For both of these events (which can be bundled together for a discount), our seasoned and diverse speakers will be sharing practical guidance in a fast-moving format. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271. Sign up today for the best rate, because our “Early Bird” pricing ends June 10th!
EEO-1 data has become a hot topic among shareholders, who want public disclosure of workforce demographics. This Thompson Hine blog reminds everyone that the deadline for submitting the annual EEO-1 survey to the Equal Employment Opportunity Commission is coming up quickly – this Tuesday, May 17th. Here’s an excerpt:
The EEO-1 Survey is an annual reporting requirement that applies to all private employers with at least 100 employees, as well as any prime government contractors or first-tier government subcontractors with at least 50 employees and a contract, subcontract or purchase order of at least $50,000. If covered, employers must file annual EEO-1 Survey reports that provide summary workforce gender and race/ethnicity information for each of their U.S. locations. Using a single payroll period between October 1st and December 31st of the prior calendar year, employers must capture and report this demographic information for all their U.S. employees (including remote workers) who were employed at any point during that payroll period. Once completed, the EEO-1 Survey reports must be electronically filed and certified through the EEOC’s Online Filing System.
Given the upcoming deadline, covered employers should take immediate steps to compile and prepare the data necessary for completing their EEO-1 Survey reports. Employers should also create and/or re-activate their accounts with the EEOC’s Online Filing System, as well as report any corporate changes (i.e., mergers, spin-offs, acquisitions) or changes in certifying officials since last year’s reporting cycle. Once filed, employers should download and retain copies of their certified EEO-1 Survey reports in the event of an EEOC investigation or government audit.
Last week, the Department of Labor announced that it had entered into a settlement with LinkedIn to resolve allegations of systemic gender-based pay discrimination. LinkedIn denied the allegations. Here’s more detail from the DOL’s press release:
A routine Office of Federal Contract Compliance Programs’ compliance evaluation found that – from March 1, 2015, through March 1, 2017 – LinkedIn failed to comply with Executive Order 11246. Specifically, OFCCP alleged that the employer did not provide equal pay to the affected female workers in positions in its Engineering and Marketing job family groups in San Francisco, and its Engineering and Product job family groups in Sunnyvale.
Under the terms of the agreement, LinkedIn will do the following:
– Pay $1.8 million in back wages and interest to the affected workers.
– Conduct a staff training program to ensure compliance with LinkedIn’s non-discrimination obligations.
– Evaluate – for the next 3 years – whether the company’s compensation is gender-neutral and make salary adjustments if not. LinkedIn will also revise its compensation policies and practices and agreed to monitoring and reporting to ensure compliance with federal contract obligations.
The 3-year commitment to evaluate salaries and report on compliance is a meaningful undertaking that most companies would prefer to avoid, even if the dollar value of this settlement doesn’t create much of a ripple in relation to LinkedIn’s $10+ billion revenue. The conciliation agreement says that the agency found “statistically and practically significant pay disparities in annual base salary based on gender after controlling for legitimate explanatory factors.” While the Executive Order at issue in these allegations is keyed toward federal contractors, that’s a broad group of companies – and this settlement may put gender pay equity back in the spotlight with stakeholders at other companies, too.
It’s important to be proactive here – before someone else forces your hand. We’ve been covering this issue for years and have a great collection of resources in our “Gender & Racial Pay Equity” Practice Area that can help you advise your comp committee and reduce risk. Make sure to check out the transcript from our webcast, “Pay Equity: What Compensation Committees Need to Know” – for practical info about conducting audits, remediation strategies, disclosure issues, board oversight, and shareholder expectations.
Emily blogged last month that CEO pay is back on the rise. A new ISS Corporate Solutions whitepaper (available for download) says that the rebound is widening the gap between CEOs and CFOs, who are often the second highest paid NEO. Interestingly, while the gap is increasing on a dollar-by-dollar basis, the ratio of CEO to CFO pay has remained constant over the past decade. One has to wonder whether this is the only thing in the world that has been the same since 2012.
– The gap between CEO and CFO pay widened substantially between fiscal 2020 and 2021 in each of the four indices examined
– CFOs were the second highest paid Named Executive Officer after CEOs at 37% of the companies in the Russell 3000 in 2020
– The analysis of median CEO pay as a multiple of median CFO pay by industry shows a marked level of volatility
– CEO pay tends to be a higher multiple of CFO pay at larger companies. For example, the CEO pay multiple in the S&P 500 is around 3.0 over the whole 10-year period examined; it is relatively close to that for much of the period in the S&P 400. By contrast, it is around 2.6 in the S&P 600 and around 2.2 in the Russell 3000 excluding the S&P 1500. In contrast to the dollar differences in pay, which have increased over the period, CEO pay as a multiple of CFO pay has remained fairly constant.
Check out this updated “Compensation Committee Handbook” from Skadden Arps – written in a non-technical style that is easily understood. This year’s edition is 126 pages long. Here’s an excerpt that explains some of the updates:
The duties imposed on compensation committees of publicly traded companies have evolved and grown over time. This eighth edition of the Compensation Committee Handbook from the lawyers of the Executive Compensation and benefits group at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates is intended to help compensation committee members understand and comply with the duties imposed upon them. We have also undertaken to describe in some detail the concepts underlying a variety of areas within the bailiwick of compensation committees (for instance, the types of equity awards that are commonly granted and their respective tax treatment) and to provide our perspective on some of the many decisions that compensation committees must make (for instance, the pros and cons of hiring a compensation consultant and the factors that go into that hiring decision).
We discuss the developments over the past year to executive and director compensation practices and related trends, particularly with respect to the SEC’s proposed clawback rule in connection with the Dodd-Frank Act (discussed principally in Chapter 2), executive compensation in the continuing era of COVID-19, and increased attention on environmental, social and governance (ESG) considerations (each discussed principally in Chapter 10).
This comprehensive guide is posted along with checklists, sample charters and memos about evolving comp committee responsibilities in our “Compensation Committees” Practice Area.
In addition, at our “19th Annual Executive Compensation Conference” – coming up virtually on October 14th – we have a session devoted to “The Evolving Compensation Committee” that will deliver practical guidance to make sure your directors aren’t opening themselves up to vulnerability. This Conference is paired with our “Proxy Disclosure Conference” on October 12th-13th. These Conferences are bundled together in order to provide you with meaningful and practical info about proxy season issues that affect executive pay decisions & disclosures, in a fast-moving and entertaining format. Here are the agendas – 17 sessions over three days. Sign up now to take advantage of the “Early Bird” rate, which expires June 10th! You can register online or by emailing sales@ccrcorp.com, or by calling 1-800-737-1271.
As companies emphasize the importance of human capital management in their periodic filings, shareholder proponents are seeing if that lines up with a company’s pay practices. Shareholder proponents submitted a proposal relating to the feasibility of increasing tipped workers’ wages at Dine Brands Global and Denny’s. The shareholder resolution for Dine Brands reads:
RESOLVED: that shareholders of Dine Brands Global (“Dine”) request that the board of directors analyze and publicly report on the feasibility of increasing tipped workers’ starting wage to a full minimum wage, per state and federal levels, with tips on top to address worker retention issues and economic inequities.
The supporting statement highlights Dine’s ESG strategy as including “the goal of empowering team members by “investing in employees” and “attracting and retaining diverse talent”” – and underscores a concern that the “misalignment between Dine’s stated goals in its annual reporting and the payment of a subminimum wage creates significant reputational and financial risk.”
While these tipped worker wage proposals are specific to certain industries, the supporting statement speaks to a bigger issue – companies need to shape the narrative on how their human capital management approaches fit in with the rest of their ESG messaging. “Human capital management” can be broken down into a plethora of discrete topics ranging from DEI, to worker safety, to workforce compensation – and you’ll want to make sure your approach to one HCM issue won’t clash with your ESG efforts elsewhere. Visit our “Human Capital Management” Practice Area to make sure you’re kept up to date on companies’ latest HCM priorities – and how their HCM and ESG disclosures are evolving with it.