President Biden unveiled his 2023 budget proposal in late March – and John blogged over on TheCorporateCounsel.net about the proposed buyback restrictions & its potential impact on corporate buyback practices. A Meridian memo highlights two other proposed legislative topics under the proposal for companies to be cognizant of:
– Millionaire/Billionaire Individual Income Tax – 20% minimum individual income tax would be imposed on income of households with a net worth of more than $100 million (determined as assets minus liabilities). In addition, the 20% tax would be imposed on unrealized gains (including ordinary gains) of such households. Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once. The proposal would be effective for taxable years beginning after December 31, 2022.
– Increase in Top Marginal Individual and Corporate Income Tax Rates – Top marginal income tax rates for individuals and corporations would be 39.6% (up from 37%) and 28% (up from 21%), respectively. The top marginal individual income tax rate would apply to taxable income over $450,000 for married individuals filing a joint return, and $400,000 for unmarried individuals. After 2023, the thresholds would be indexed for inflation. The proposals would be effective for taxable years beginning after December 31, 2022.
A member recently posed this question in our Q&A Forum (#1408):
If an NEO at a SRC is contributing to a 401(k) plan, or a foreign equivalent, from their salary, would that be accounted for under the Salary column in the Summary Comp Table, or would it have to be separately accounted for in another column?
John responded:
If it’s just a contribution from the NEO, there’s no separate reporting, because the amounts contributed to the 401(k) plan were already reported in the salary column. If the company is making matching contributions, those are reported in the “All Other Compensation” column.
With new SEC rules, record support levels for shareholder proposals, and relentless regulatory & investor scrutiny, your proxy disclosures – and the actions that support them – are more important than ever. The Proxy Disclosure & Executive Compensation Conferences will inform you of what you need to know to protect your company and board. Get practical guidance about rule changes, staff interpretations, emerging disclosure risks, investor and proxy advisor positions, executive pay expectations, the board’s role, and more. Check out the agendas – 17 sessions over three days.
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A group of 60 PE firms, banks, pension funds and others have signed on to Ownership Works – a non-profit with the goal of creating $20 billion in wealth for lower income & diverse employees over the next decade. This WSJ article says that the organization is the brainchild of Pete Stavros of KKR – and counts Apollo, KKR, Warburg Pincus, CalPERS and the Washington State Investment Board among its members.
NYSE-listed Harley Davidson is listed as a case study. The company announced last year as part of its earnings & strategic plan that it would grant stock to all 4500 employees worldwide, which is also called out in the company’s recent proxy statement. Where are the shares coming from? In Harley’s case, they’re coming from the equity incentive plan, and are part of the reason the company is seeking an increase to the authorized number of shares this year. Ownership Works has a FAQ for that too, which suggests they aren’t pushing for a particular format of plan:
Many companies already share ownership with senior leaders in the form of a management equity plan. Achieving broad-based ownership may require allocating additional equity to an all-employee equity plan and/or a shift in the amount allocated to more senior executives. When well implemented, shared ownership programs should, over time, pay for themselves by maximizing shared wealth creation.
With the PE firms in this coalition committing to institute employee ownership at a minimum of 3 portfolio companies and the pension fund participants pledging to “encourage asset managers to consider it when appropriate,” there may be more “asks” coming for enhanced employee ownership. That’s on top of the interplay between stock ownership & pay equity attracting more attention. If you don’t already have a broad-based employee stock plan, it’s worth perusing the Ownership Works resources and keeping your compensation committee up to speed about the alternatives.
The last two years were rocky in the executive compensation world as compensation committees tried to design the right incentives during a pandemic. And in 2021, ISS put out its updated FAQ for pandemic-related pay adjustments, and suggested that pay programs should go “back to normal.” With the pandemic (slowly) fading out, Pay Governance looked at how it has changed the compensation world. Below is an excerpt of the 2021 compensation practices that they expect will have persisted from 2020:
– Wider performance curves. Many companies widened their performance curves to minimize the chance of a zero or maximum payout given the uncertainty in setting performance targets. This uncertainty persisted at the beginning of 2021, and a widening of the performance curve allowed companies to retain the basic structure of existing plans but with far less pay/performance leverage.
– Semi-annual short-term incentive performance periods. Companies in industries facing the greatest level of uncertainty continued or adopted a “1st half/2nd half short-term incentive plan whereby 6-month goals are set at the beginning and the middle of the performance year to allow for a “resetting” of targets at mid-year based on more current financial outlook.
– Inclusion of qualitative metrics. After unprecedented levels of discretionary adjustments applied in 2020, some companies added or increased the weighting of qualitative metrics to allow the Compensation Committee to exercise discretion within predefined guardrails (e.g., +/- 20%).
– Above target annual incentive plan payouts. Given the limited visibility at the beginning of 2021 amid the continued impact of COVID-19 (e.g., supply chain pressures, “The Great Resignation,” etc.) and 2020 annual incentive plan payouts, the majority of which were below target or zero, many companies may have established relatively conservative financial targets for their 2021 annual incentive plans. Early indications are that above target (or maximum) annual incentive payouts are being reported by companies that were more resilient than forecasted and capitalized on better-than-expected market opportunities in 2021.
With CEO pay bouncing back in 2021, what’s director compensation looking like? We’ve previously blogged about director pay at S&P500 companies and how equity compensation seems to comprise the biggest bulk of total compensation.
Pearl Meyer recently held a webcast with NACD and surveyed the 148 director attendees. 67% of respondents don’t expect to reduce the board equity grant value because of declining stock prices. In addition, for new board members, 49% provide pro-rated equity grants based on the new director’s start date and the annual granting date. Pearl Meyer ends with an interesting idea – if executives get inducement equity grants in a competitive market, why not directors?
To complement Semler Brossy’s memo on early say-on-pay results yesterday, here’s a memo from Equilar on the Harvard Law School Forum on Corporate Governance regarding early trends in executive compensation. Below are some highlights on how executive compensation is shaking out:
– CEO pay is back on the rise – there’s a change in median total direct compensation from $12 million in 2020 to $14.3 million in 2021.
– With CEO pay on the rise, you’ve also got the pay ratio number rising. The CEO pay ratio so far is 245:1 (vs. 192:1 in 2020). Liz previously blogged about how the pay ratio is directly affecting the say-on-pay votes at Kroger – we’ll have to see if failure rates also start climbing compared to what we’re seeing early on.
– Gender pay gap persists even at the highest levels. Median pay for women CEOs in the Equilar 500 was $11.8 million in 2021, vs. $14.5 million for men. I’ve previously blogged about how female executives may ironically be paid less because of benchmarking, and it looks like 2021 continues that trend.
With proxy season in full swing, here are some observations from the latest Semler Brossy memo tracking say-on-pay results for this season, published as of March 31:
– The current failure rate for the Russell 3000 is at 2.2% (with 3 companies failing), much lower than the failure rate at this time last year (4.9%). The three are Arrowhead Pharmaceuticals, D.R. Horton & Griffon Corporation – and notably, D.R. Horton’s CEO is on As You Sow’s Most Overpaid CEOs list.
– Breaking it down by sector, it looks like the consumer, industrials, IT & healthcare industries are where you see support dipping below 70%.
– 8.9% of Russell 3000 companies have received an “Against” recommendation from ISS thus far, which is 240 basis points lower than 2021 year-end.
It’s still early days and there’s lots more to come on this topic, since only 32 S&P500 companies have held a say-on-pay vote thus far. We’ll keep posting these stats in our “Say-on-Pay” Practice Area to keep you informed.
Pay ratio is coming full circle. Remember when the rule went into effect and everyone was really worried that their company would be canceled (or whatever the word was for that in 2017)? And then most companies just provided the basics of what Item 402(u) requires and nobody paid much attention. Seemed like kind of a nothingburger. For a minute.
Here’s part of a letter that Carl Icahn sent to Kroger on Tuesday:
Even in a hard-nosed capitalistic system like ours, it is obscene that a CEO makes 900 times what workers earn. It is truly difficult to point to anything comparable, even when considering the grave injustices in the early days of the Industrial Revolution. At Kroger, amazingly, it will take an average worker 20 years to make what the CEO earns in one week. In my 40 years of being an activist, I have never seen anything like this.
Yes, you read that right. Billionaire Carl Icahn is taking issue with the pay gap between a company’s CEO and its median employee. And he wants to put 2 directors on Kroger’s board to help solve the problem! (He owns 100 shares of Kroger stock, by the way.)
While I have previously blogged that pay ratio is becoming a factor in say-on-pay…which can lead to lower director support and potentially catch the attention of activists, this is much more direct! Carl Icahn isn’t waiting around for low say-on-pay votes to tip him off to vulnerable directors. He’s just finding the high pay ratio. That’s the vulnerability.
While this might seem like a very odd-duck scenario, keep in mind that the SEC’s universal proxy rules go into effect later this year and will make it much easier for concerned shareholders to try to nominate dissidents to your board. If the pandemic didn’t already spur compensation committees to take a close look at wage inequality when setting CEO pay, maybe proxy contests will. Better to give your directors a heads up now versus when activists are at the gate.
Stay tuned for an announcement soon about our October “Proxy Disclosure & Executive Compensation” Conferences…and more. We’ll be discussing what boards and their advisors should be doing to protect themselves from this type of situation – and you won’t want to miss it. Hat tip to one of our speakers, Georgeson’s Hannah Orowitz, for alerting me to this proxy contest.