Here’s BDO’s latest study examining director and select board compensation practices of 600 middle-market public companies. Data was collected from proxy statements filed between April 2020 and March 2021 – right in the thick of the pandemic. The study found that, based on Form 8-Ks filed between March – June 2020, 14% companies reduced board pay levels by 50% for an average of six months, but these were temporary reductions. BDO notes that at the end of the year, “retainers and fees were slightly above the prior year, which reflects the recognition that boards face an ever-changing array of complex challenges” – including navigating shareholder activism, tackling changing regulations and monitoring supply chain disruptions & other risks. Here are some of the other highlights:
– Director total compensation increased by 2.3% in fiscal year 2020 over fiscal year 2019
– Committee retainers and fees decreased 2.7%, continuing the trend to provide cash-based compensation through board fees rather than for individual committee work.
– Full-value stock awards continue to outpace stock options. Stock awards increased 2.5% over the prior year, whereas stock options decreased by 11.6%. Total equity compensation rose 2.2%
– For middle-market companies, industry membership is a critical consideration when benchmarking director compensation. Directors in the healthcare and life sciences and technology industries are the highest paid. On the other end of the continuum, financial services banking directors are paid one-quarter of the compensation received by those in the highest paying industries.
This Latham memo reminds us that companies need to furnish – by this upcoming Monday, January 31st – annual information statements to people who exercised ISOs or purchased ESPP shares during 2021. Companies also need to file an information return with the IRS in February or March, as applicable.
The memo explains what must be included in the returns and information statements, how to deliver the information statements to employees & former employees, exceptions to filings, possible penalties for noncompliance and more – and also provides links to the IRS forms.
We’ve posted the transcript for the recent webcast: “Compensation Committee Responsiveness – How to Regain High Say-on-Pay Support.” Aileen Boniface of Clermont Partners, Steve Day of Calfee, Halter & Griswold, Brad Goldberg of Cooley and Tara Tays of Pay Governance discussed what has been triggering low say-on-pay votes and how to recover. Among many useful nuggets from this program was this suggestion made by Brad:
Each company needs to figure out exactly why shareholders voted against the proposal. The best way to do that is to read the proxy advisor reports and start to engage with your key shareholders. Typically, people are going to start with the significant shareholders in the top 15 or 25, which is the best place to start. Once you identify what the issues were and who you’re going to reach out to, you need to form the team, and there’s questions there of who’s involved. Key outside participants often will be the comp consultant and companies will often look to a proxy solicitor to help with the effort as well. Another key thing to consider is who from management — and more importantly, who from the compensation committee — can attend these meetings. Are you confident that the directors in your compensation committee are going to have sufficient knowledge of the program and be able to present in a meaningful way?
Tara also noted:
When there are significant changes that need to be made to executive compensation programs to increase shareholder support with respect to say-on-pay, it’s important to ensure the appropriate due diligence is taken around what makes sense for the company and what’s going to allow the company to continue to motivate executives, especially in this time. There shouldn’t be any rash decisions made. It is going to take a couple of meetings to get to the right solution to make sure that they position the programs in the right direction going forward.
Don’t rush into it. Take the time that’s needed. Make sure that the appropriate research is done in terms of what peers are doing, in terms of what the company can do with respect to forecasting a certain performance metric that’s being changed, with respect to their incentive plan designs. Then, make sure that there’s a balanced approach taken in terms of what shareholders want to see, what institutions want to see, and what’s needed for the company in order to drive results in the future.
This proxy season, S&P 500 boards will be facing greater consequences for keeping workforce demographic info private. As Emily noted last week on our “Proxy Season Blog” on TheCorporateCounsel.net, State Street Global Advisors published new guidance on diversity disclosures & practices – as well as on human capital management disclosures & practices. When it comes to workforce diversity, SSGA expects all portfolio companies to publicly disclose:
– Goals: Describe the firm’s timebound and specific diversity goals (related to gender, race, and ethnicity, at minimum), what policies and programs are in place to meet these goals, and how they are measured, managed, and progressing.
– Workforce Metrics: Employee diversity by gender, race, and ethnicity (at minimum), in markets where it is legal to collect and disclose this information. We expect to see this information broken down by industry-relevant employment categories or levels of seniority, for all full-time employees. In the US, companies are expected to at least use the disclosure framework set forth by the United States Equal Employment Opportunity Commission’s EEO-1 Survey. Non-US companies are encouraged to disclose this information in alignment with SASB’s guidance and nationally appropriate frameworks, or guided by their own perspective as to the best way to describe the composition of their workforce.
If a company in the S&P 500 doesn’t disclose its EEO-1 report, the diversity guidance says that SSGA will vote against the chair of the Compensation Committee. Acceptable disclosures include the original EEO-1 report response or the exact content of the report translated into custom graphics. SSGA also encourages companies to consider providing other demographic info – e.g., LGBTQ+ and disabilities. The asset manager also underscored the increasing focus on workforce diversity by saying:
While our existing diversity voting policies are mainly focused on increasing diverse representations on boards, given our belief in the centrality of effective board governance and oversight, we intend to shift our focus to the workforce and executive levels in the coming years. Companies should prepare by ensuring they are recruiting, promoting, and retaining diverse talent at all levels of the organization.
Similar to the letter issued yesterday by BlackRock’s Larry Fink, SSGA also expects companies to disclose how the board oversees human capital-related risks & opportunities, HCM strategy – including pay strategies, specific info about how employee engagement is conducted (and acted upon), and inclusion efforts. If the stewardship team encounters HCM “laggards” who aren’t making progress through engagements, it will consider voting against relevant directors and/or supporting relevant shareholder proposals.
On the point of shareholder proposals, SSGA’s framework for analyzing requests on the topics of DEI reporting, racial & gender pay gaps, and racial equity/civil rights audits also looks at whether a company’s disclosure & oversight framework aligns with what’s in these guidance documents. SSGA will generally vote against proposals where companies are meeting SSGA’s expectations – as evidenced by public disclosure about oversight, strategies, goals, statistics, etc. It will abstain if the company has made a specific commitment on the topic, and it will support proposals at companies that haven’t disclosed a plan to address the applicable issues. Check out the guidance for more details and recommendations on how boards & executives can support DEI.
Tune in at 2pm Eastern tomorrow for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss all the latest issues to consider as you prepare your upcoming proxy disclosures – including say-on-pay trends, shareholder proposals, ESG metrics, clawbacks, director compensation disclosure, pay ratio considerations and more.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
Over the past couple of years, we’ve been tracking the trend of compensation committees expanding their scope of focus to cover the broad spectrum of human capital management issues, even beyond workforce compensation-related issues. Some compensation committees have even regrouped as “people committees.” If your compensation committee has also taken on shouldering human capital management responsibilities, this KPMG memo lists 6 issues that should make it into the compensation committee agenda this year. Here’s a short excerpt:
1. Review Incentives: Ensure that executive & employee compensation plans are aligned with current strategy (which may have changed over the past 2 years) and focused on key drivers of performance
2. Review Benefits: Balance all components of total rewards, including benefits that support worker health & well-being and allow desired work-life balance
3. Consider HCM Metrics: Recognize the role of the compensation committee in the board’s oversight of ESG – be ready to discuss how these issues were considered in plan design, and take stock of which HCM metrics are important to the company and therefore monitored by the comp committee to hold management accountable (in many cases, these metrics will each warrant their own agenda item for the comp committee)
4. Briefing on Shareholder Voting Trends: Understand investors’ and other stakeholders’ expectations for compensation and HCM and be prepared to enhance proxy disclosures, particularly around ESG metrics
5. Corporate Governance: Reconsider compensation committee composition, charter and operations in light of changing responsibilities
6. Revisit Director Pay & Clawbacks: Revisit the structure & level of director pay, and prepare for SEC rulemaking on clawback policies
Over the past few years, we’ve seen a growing interest in gender & racial pay equity audits, from companies incorporating ESG into their executive pay to proxy advisors to investors. For companies jumping into the fray to conduct a pay equity audit, here’s a new checklist on the nuts and bolts of pay equity data collection and interpretation by Mark Borges and J.T. Ho – check it out!
Liz blogged a couple of months ago about how investors are starting to assess pay ratios as part of the say-on-pay analysis. According to a recent study by a group of B-School profs (Alam, Ghosh, Ryan Jr. and Wang), the best way for companies to come out favorably on these types of voting policies is probably to make real changes to CEO and/or employee pay, versus taking steps that could be viewed as “gaming the calculation” of the median employee. The study analyzes these three questions:
(i) Do discretionary choices in the methods used to estimate the pay ratio allow firms to influence the reported pay ratio without making real changes to CEO or employee pay?
(ii) Do investors react differently to pay ratio disclosures based on the choice of method employed?
(iii) Do firms strategically use these discretionary choices when facing social pressure toward income equality?
The professors conclude that companies disclose lower pay ratios when using “more complex methods to identify the median employee” – and companies “headquartered in a state with stronger aversion toward income inequality” are more likely to choose these more complex methods, presumably in response to societal pressure. At the same time, the study shows that shareholders react negatively to those complex methods. That’s consistent with another study that Liz blogged about a couple years ago.
Compensation committees will need to stay aware of these perceptions and pressures. It will be a juggling act to set competitive executive compensation while also balancing pressure to minimize inequality. While the outcome of those decisions will vary by company, human capital oversight and potential increases to workforce compensation are shaping up to be hot topics for almost everyone again this year.
To kick off 2022, here’s a summary of Longnecker’s blog covering upcoming compensation strategies & emerging trends – for executives and the broader workforce:
– ESG: “As public pressure and changing cultural norms continue to evolve, ESG looks to stay as a new benchmark criteria for today’s business leaders. Specifically, institutional investors are holding company operations accountable for their effects on the environment and their surrounding communities. Surveys show that already, 45% of FTSE 100 companies incorporate ESG metrics in their executive pay programs.” ESG is a global phenomenon, and it’s also here to stay in the U.S. Get ready to see ESG metrics incorporated into companies’ incentive programs.
– Compensation Clawbacks: Liz recently blogged about McDonald’s successful clawback – and though there hasn’t been much new activity after the SEC comment period for the clawback proposals closed, companies should review their clawback policies and how the proposed rules might work with existing and upcoming incentive plans.
– Proxy Disclosures: Longnecker notes that “in addition to Human Capital Management, CEO Pay Ratio and other disclosures, Perquisite disclosures continue to be an enforcement priority for the SEC.” You can also check out our handy checklists on perks disclosure and other executive compensation disclosures as you start drafting.
– Flexibility & Remote Work: Longnecker suggests that “remote work options and flexibility are emerging trends that will continue to gain momentum in 2022 as employees place high value on these benefits.” Flexibility may also promote employees’ mental health, which is another factor in human capital management.
– Variable Compensation to Reward Top Performers: Longnecker projects “an upward trend in variable pay strategies, especially at the employee level going into 2022” and flags that variable pay programs and spot awards are “proven methods to improve retention at both the employee and executive levels.”
– Mitigating Pressure on Compensation Budgets & Rising Wages: Longnecker notes that employers can mitigate the dual issues of struggling to fill open positions and raise base salaries by “retain[ing] current employees, offer[ing] learning and development programs to fill positions from within, tak[ing] a holistic approach to total rewards and look[ing] beyond compensation.”
As everyone plots out the agendas for upcoming board & committee meetings – and considers governance disclosure that will go in the proxy statement – a member recently posted this question to our “Q&A Forum” (#1390):
Does the compensation committee need to/should it approve personal security and/or other perks on an annual basis?
John Jenkins responded:
Yes, I think comp committee oversight of the nature of the perks that are provided to executives is essential and that committee approval of them on an annual basis is appropriate. After all, the perks a company provides are an element of executive comp. Stock exchange rules require the comp committee to approve CEO compensation and to recommend the compensation of compensation for other executive officers. Many charters go beyond that, and delegate responsibility for executive comp to the comp committee.
Perks are an investor hot button and an area that’s gotten a lot of attention from the SEC’s Division of Enforcement, and oversight from the comp committee is expected. Here’s what the CII had to say at the time the SEC adopted the revised comp disclosure rules:
“Company perquisites blur the line between personal and business expenses. The Council believes that executives, not companies, should be responsible for paying personal expenses—particularly those that average employees routinely shoulder, such as family and personal travel, financial planning, club memberships and other dues. The compensation committee should ensure that any perquisites are warranted and have a legitimate business purpose, and it should consider capping all perquisites at a de minimus level. Total perquisites should be described, disclosed and valued.”
I think that the general perquisites provided to the company’s executives need to be reviewed and approved by the compensation committee just like any other compensation plans or practices that apply to its executive officers.