I’ve previously blogged about benchmarking pay practices being detrimental to female executives. But we’re also still tackling gender pay gaps in the workplace, including with respect to equity compensation – and the inequity may potentially be coming from pay negotiation skills and managerial discretion. Barbara Baksa refers to a WSJ analysis in her NASPP blog, which found that in 2018, the average value of company stock held by men was almost 4x that of women, at $104,902 and $26,361, respectively. In addition, the inequity seems to start up front, as women receive 15-30% fewer equity grants (based on a study examining a tech startup and a large pubco).
As companies get more and more calls for pay equity audits in proxy seasons, it’s a good time for compensation committees to get familiar with how exactly companies are managing the equity grant process to root out unfair biases. And as Barbara notes, “employees who are paid less [in cash] can’t contribute as much to the company ESPP or retirement plans as their higher paid colleagues” – and they may also not be able to exercise as many stock options either – so that may affect both your workforce makeup during the hiring stage and pay inequity during the employee lifecycle.
Here’s the latest 137-page guide for compensation committees from Wachtell Lipton, and it even includes a sample compensation committee charter at the back. In the sample charter, they note that it’s not unusual for human capital management to be slotted under either the compensation committee or the Nom/Gov committee – and offer up some sample charter language on HCM oversight. As noted in the guide’s introduction, compensation committees will need to proactively manage compensation & human capital needs this year, and be prepared to act quickly to retain key contributors.
Meridian Compensation Partners released its 2021 Study of Executive Severance Arrangements Not Related to a Change in Control, with data from 100 large U.S. public companies. The study examines the following NEO severance arrangements: (i) payment triggers, (ii) cash severance benefits, (iii) stub year annual bonus, (iv) continuation of health care benefits and (v) treatment of long-term incentive awards – but doesn’t incorporate benefits payable to an NEO upon death/disability/retirement or renegotiated benefits upon actual termination. Here is an excerpt of the key findings:
– 69% of Study Group Companies provided Cash Severance to at least one named executive officer.
– The payment of cash severance is always triggered upon an involuntary termination without “cause” and to a significantly lesser extent upon a voluntary termination for “good reason.”
– 85% of companies determined the amount of cash severance based on a fixed multiple of “pay”.
Definition of Pay – The majority practice is to define pay as the sum of base salary and bonus (with
bonus typically defined as current year target bonus).
Cash Severance Based on a Fixed Multiple of Pay – The dominant severance multiple for CEOs and
other NEOs was 2.0x (62% and 40% of companies, respectively).
– 61% of companies that maintained executive severance arrangements paid stub-year bonuses on a pro rata basis (typically based on target).
– The most prevalent continuation periods were 24 months (38%) and 12 months (23%) for CEOs, and 18 months (27%) and 12 months (34%) for other NEOs.
Meridian’s survey also shows that the treatment of LTI awards varies by types of awards – and whether the NEO is the CEO. A majority forfeit stock options but fully/partially vests restricted stocks/RSUs upon a qualifying termination.
Comments on the SEC’s reopened “clawbacks” proposal were due at the end of November. As usual, though, the SEC has continued to welcome submissions even after that deadline, and letters have continued to roll in as recently as last week. You can view all of the comments submitted – from 2015 to present – on the SEC’s website. Here are a few notable ones:
– NYSE Group (commenting on the delisting standards that exchanges would apply in determining whether an issuer has complied with its recovery policy and advocating for Exchange staff discretion)
Many of the comments reiterate concerns that were previously raised in response to the 2015 proposal. Not surprisingly, investors are general supportive of broader corporate clawback policies, and issuers are advocating for more bright-line tests that are tied to financial statement materiality. The Davis Polk letter also discusses issuer compliance costs and the potential impact on executive compensation arrangements. There are differences of opinion on some points – e.g. whether to include a Form 10-K cover page checkbox – even amongst the issuer community. The Staff certainly has a lot to consider as it moves towards finalizing this rule.
The blog recommends that you take the SAB and these proposed rule amendments into account when considering the timing of 2022 option grants. Here’s an excerpt about what will be required if the proposal is adopted as-is:
The proposal expands the information all companies would need to disclose, not just those companies required to add a footnote to their ASC 718 expense disclosures referenced in the above example. The proposal would require all public companies, under new section 402(x), to include a description in their 10-K annual reports of their option/SAR grant policies and practices, how they determine the timing of grants (predetermined dates during the year or not), and the influence of material nonpublic information in their compensation committees’ grant timing and grant valuations.
This discussion would also be included in the company’s compensation discussion and analysis, so that shareholders can understand company option grant timing practices when considering say-on-pay votes, when approving executive compensation plans and when electing directors. We expect that these will become garden-variety discussions that all companies will be required to include, unless special circumstances exist.
For companies that make grants to named executive officers within 14 days before or after the release of material nonpublic information on quarterly reports or 8-Ks, the SEC would require additional disclosures so that shareholders understand with complete transparency how the process works. The SEC believes that many companies, after the end of a completed fiscal quarter or annual period, hold meetings with their boards of directors a week or two before issuing the earnings release when they are likely aware of material nonpublic information that could affect the stock price of the company. Rather than propose a facts and circumstances test, the SEC proposed a black letter rule that would mandate disclosure within this time frame.
This tabular disclosure would be required for companies that make awards within 14 calendar days before or after the filing of a periodic report on Form 10-Q or Form 10-K, an issuer share repurchase, or the filing or furnishing of a current report on Form 8-K that discloses material nonpublic information (including earnings information).
Instructions are provided as to how these columns must be populated, with rules substantially similar to those in the current proxy disclosure rules. All public companies must abide by the option disclosure rules, including smaller reporting companies.
The WTW team notes that if the proposal is adopted, companies could be required to provide this additional disclosure in 2023 proxies, about 2022 grants. For that reason, even though we don’t yet have the final rules, companies may want to take a second look at their 2022 grant cycle. It may be prudent to reconsider grants that are expected to fall within 14 days before or after earnings or other announcements that could affect share price – or at least consult with legal counsel on whether to be so proactive. Remember that the SEC is also looking for comments on aspects of the rule that may not work well in practice (and since the proposal still hasn’t been published in the Federal Register, which will start the clock on the comment period, you have extra time to get those in).
Here’s an excerpt from WTW’s blog, with parting thoughts:
If the regulations are finalized during 2022, it is likely that the SEC will allow companies and insiders some ramp-up time before they must comply with the new restrictions. It would certainly be worthwhile for companies to consult with their stock plan administrators to determine what actions need be taken to meet the new rules. The question of whether it makes sense to adopt the new requirements before they are finalized becomes a legal question that SEC counsel can help determine.
There’s been a lot of back & forth on whether shareholders actually provided lower support for say-on-pay resolutions last year. That’s probably because the data was mixed. Semler Brossy’s year-end summary explains:
– The Russell 3000 average Say on Pay vote (90.4%) was consistent with the prior two years.
– The Russell 3000 did see an uptick in failures (63).
– At least 32% of failures happened because of Covid-19 pay actions.
– In the S&P 500, average vote results decreased to 88.3%. This was 130 basis points below the prior year result and 210 basis points below the Russell 3000 average vote.
It’s easy to go around & around with stats, but the bottom line is that companies should not get complacent about say-on-pay. I’ve previously blogged that low support is “blood in the water” for activists. Semler Brossy’s report says that over the past 5 years, average direct support at companies that received a say-on-pay vote below 50% in the prior year is 5% lower than at companies that received above 70% support.
Despite last week’s wild stock market fluctuations and all of the other factors pointing to a dampened year for IPOs, there are still plenty of companies that are looking to go public in 2022 (and plenty of SPACs that want to help them). Once a company’s governance structure is in place, this 7-page Pay Governance memo gives a good overview of what compensation committees of pre-public companies should do as they prepare for the big debut. Here’s the executive summary:
• Compensation program planning is a critical part of the comprehensive and time-consuming process necessary to transition from private to public ownership.
• There are several facets of the compensation program to consider through the transition, such as:
— Establishing/Updating a Compensation Philosophy
— Reviewing/Aligning Executive Pay Levels to Business Objectives and Competitive Practice
— Developing a Long-term Incentive (LTI) / Equity Program Strategy
— Reviewing/Establishing Severance and Change in Control Policies
• Advance planning, incremental decisions, and careful analysis of external and internal factors in each of the above areas can help.
As Liz noted last month, the SEC has been looking at whether to reopen the comment period on its 2015 pay-for-performance rule proposal. Yesterday, the SEC announced that it’s moving ahead with that – and John gives us the details over on TheCorporateCounsel.net blog today:
Yesterday, the SEC announced that it was reopening the comment period for the Dodd Frank-mandated pay-for-performance disclosure rules that the agency proposed way back in 2015. Here’s the 29-page reopening release & the 2-page fact sheet. This excerpt from the fact sheet summarizes the reasons for the SEC’s decision to reopen comments as well as some changes to the initial proposal that are being contemplated:
The Commission received numerous comment letters on the 2015 proposing release. In light of the regulatory and market developments since 2015, the Commission is providing the public the opportunity to submit additional comments on the 2015 proposal, and to address the additional requirements the Commission is considering in the reopening release issued today. These additional requirements include, among other things:
– Whether registrants should be required to disclose additional performance measures beyond total shareholder return;
– Whether, if required, pre-tax net income and net income would be useful additional financial measures;
– Whether registrants should be required to disclose the measure that in the registrant’s assessment represents the most important performance measure used by the registrant to link compensation actually paid during the fiscal year to company performance (which is called the “Company-Selected Measure”); and
– Whether registrants should also be required to disclose a tabular list of a registrant’s five most important performance measures used to determine compensation actually paid.
Commissioner Peirce issued a brief dissenting statement in which she contended that “the additional requirements raised in this release go well beyond the statutory mandate of Section 953(a), are not responsive to the comment file, and do not seem warranted in light of current executive compensation practices related to company performance.” Commissioner Lee weighed in with a supporting statement and Commissioner Crenshaw provided one as well.
The reopened comment period will expire 30 days after publication of the release in the Federal Register. However, the SEC hasn’t exactly been rocketing into print with its recent rule proposals – the 10b5-1 & buybacks proposals still haven’t been published – so it’s possible that the reopened comment period actually may be quite a bit longer than that.
CEO pay continues to be scrutinized by long-term investors, employees, activist investors, & the media. This Pay Governance memo gives us a sneak peek at where they think CEO pay is headed, after analyzing pay data – consisting of base salaries, actual bonuses (not target), and reported grant date fair value of long-term incentive awards – of S&P 500 companies with CEOs of 3+ years tenure. Here is an excerpt of their CEO pay projections:
– We expect 2021 overall CEO actual TDC [total direct compensation] to increase in the low- to mid-single digits due to stronger financial results than projected at the beginning of the year when bonus goals were set; there will be some variation with strong performing industries likely seeing increases in compensation.
– The Aggregate S&P 500 Index year-over-year revenue and operating income for 2021 are currently forecasted to increase by 16% and 37%, respectively (S&P Capital IQ).
– We expect median CEO target pay increases in early 2022 to be in the mid-single digits and possibly higher given very strong financial and TSR performance (S&P 500 was +29% in 2021); this increase will be primarily made by increases in LTI compensation.
– In certain high-growth industries (e.g., technology and biotechnology) and high-performing companies, CEO increases could be greater than 10% (primarily with larger LTI awards) because of a highly competitive labor market, while executives in slow-growth industries or heavily impacted companies might see no increases.
Liz previously blogged about the growing number of companies incorporating ESG metrics – and how ESG in executive compensation is likely here to stay. But ESG can mean a lot of things, and it’s difficult to know sometimes which “ESG” topic is being utilized in executive compensation. While metrics can (and should) vary by industry, one topic that seems to be employed across almost all sectors is DEI, according to an analysis last summer.
To get more granular, Teneo did a deep dive on how companies are specifically incorporating diversity, equity & inclusion metrics into executive compensation. Teneo looked at the largest 100 companies in the Fortune 500, as well as those that “publicized DEI compensation ties or that were otherwise publicly committed to improving DEI performance,” with all but one company in the US. Here are some of the highlights:
– Strong DEI incentive metrics align with the company’s long-term strategy. The most common metric is diverse representation among leadership.
– A Teneo study of S&P 500 companies found that over half of 2021 Sustainability Reports included at least one demographic target, with 42% of companies including both gender and racial/ethnicity goals. By setting goals, companies are treating DEI like any other business priority, ensuring accountability and tracking progress.
– Communicating exactly how much pay is at risk based on DEI performance creates accountability. The most common weighting for DEI metrics in the STI and LTI is 10%. Quantifying the impact on pay is considered more transparent from a shareholder perspective, and the pay affected is viewed as more strongly performance based.
– The most common weighting was 10% of the incentive payout for those that quantified the impact. However, the range of disclosed weightings varied from less than 5% of the bonus to determining 100% of the PSUs earned. There is no universally ideal weighting system, but investors and proxy advisors have questioned whether weighting DEI and other ESG-related metrics below a certain level is effective at holding executives accountable for performance.
– While most companies embedded diversity considerations in their annual incentive, 17% of companies in the study incorporated DEI metrics in long-term incentive (LTI) design, an emerging best practice.