The International Corporate Governance Network recently issued this 10-page memo on integrating ESG into executive compensation plans. Consistent with what we’ve been hearing from investors, ICGN notes that the COVID-19 pandemic has the potential to re-invigorate the debate about high levels of executive pay and income inequality.
ICGN proposes key characteristics of short- and long-term pay programs that can advance sustainability initiatives, regardless of location-specific market practices or regulations. It recommends using the SASB materiality map and guidelines from the European Commission as a starting point – and suggests that LTIPs be extended to cover 5-year periods.
What may be especially helpful to companies as they prepare for proxy season disclosures and engagements is this list of sample questions that investors can ask:
1. What are the top three environmental, social or governance considerations of your company?
2. (How) have you engaged with key stakeholders to determine these? Who are the key stakeholders? Where is the process documented? How often is this consultation repeated?
3. How many of these ESG considerations are part of the strategic outlook of the company for the next 5 years? For the next 10 years?
4. Can you define opportunities for balancing long-term value creation, short-term strategic agility, and the building of stakeholder ecosystems all at the same time?
5. How does the company’s mission and its board-level narrative on sustainability issues get translated into robust governance of these issues, a clear strategy, risk (and opportunity) management as well as metrics and KPIs?
6. What are the company-wide KPIs related to these issues?
7. Do you have along-term incentive plan in place? What are the relevant ESG-related performance metrics and gateways for these? What is the evaluation and vesting period for it?
8. How you approach setting well-fitting multiyear performance targets in long-term incentives plans, in a changing – and sometimes unpredictable – world?
9. Do executives have a share-ownership requirement? What multiple of their annual fixed salary is this? What’s the time-frame after their appointment that they need to reach this level? What is the holding period requirement after cessation of their executive role?
10. How do you entice ownership of environmental, social and governance issues in company governance and among directors, executives and employees?
11. What makes your disclosure on these issues credible and reliable?
12. How are these issues integrated in the compensation packages of executives and others?
13. What are your three-and five-year targets regarding integrating sustainability in the remuneration and what is the roadmap to get there?
14. What help would you welcome from the investment community on this?
15. Do you benchmark your current remuneration practices against peers (also in the context of the pandemic)? How do you know which peers to look at for best practice?
Tune in tomorrow for our webcast – “Your CD&A: A Deep Dive on Pandemic Disclosures” – to hear Mike Kesner of Pay Governance, Hugo Dubovoy of W.W. Grainger and Cam Hoang of Dorsey discuss how to use your CD&A to tell your story and maintain high say-on-pay support, trends and investor expectations for COVID-related pay decisions, addressing “red flags” through storytelling, linking your CD&A to your broader ESG and human capital initiatives and ensuring consistency between your CD&A and minutes.
This recent memo from Compensation Advisory Partners also discusses what actions companies are taking – 42% of companies are making changes, mostly to annual incentive plans.
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We’ve blogged before about studies showing executive pay actions in response to the pandemic. Recently, CG Lytics, the data service provider to Glass Lewis for the proxy advisor’s say-on-pay recommendations, issued a report summarizing Covid-related pay actions by Russell 3000 companies. For companies in hard-hit sectors that are interested in conserving cash, the report offered this bold, albeit potentially unrealistic, suggestion:
If CEOs in hard-hit businesses would like to help their companies save cash and support employees, bigger sacrifices, such as returning part of their compensation packages or taking bonus cuts and reductions in other short-term cash incentives, may be impactful.
The report presents high-level data about pay cuts and adjustments to incentive plans by sector. The data is generally consistent with prior reports and shows most actions have been by companies in the consumer discretionary and industrials sectors. For companies that made base salary cuts in response to challenges from the pandemic, CG Lytics characterizes these actions as “window dressing” as it notes that base salary is commonly only a small fraction of compensation packages.
In a recent Directors & Boards article, Blair Jones and Greg Arnold of Semler Brossy discuss incentive goal setting amid the pandemic. Uncertainty about the pandemic’s duration and its effect on company performance has made 2021 goal setting all the more challenging. To help compensation committees set 2021 incentive plan goals, the article provides several considerations for companies whether they’re in hard-hit or well-performing sectors. For companies that had a banner year in 2020, the article suggests the following as possible considerations to help reduce risk of a disconnect between incentive payouts and shareholder expectations:
– Change the leverage curve: while targets may be lower than 2020 performance, if these are missed, the payouts decline quickly and for maximum payout levels, those should be much harder to reach
– Use a multi-year lens: consider what is fair progress from 2019, or for 2020 and 2021 combined
– Set different performance curves based on macro environment: boards could establish one set of performance goals if the broader economy declines by 5% and a lower range of goals if it goes down by 10%, and the payout opportunity could be adjusted as well
Throughout the year, and particularly this time of year when many companies dole out bonuses, many keep a watchful eye on CEO pay. A recent Pay Governance memo takes a look at S&P 500 CEO compensation increase trends. The memo analyzes S&P 500 CEO pay trends by focusing on CEO median total direct compensation (base salary, actual bonus paid and grant date value of long-term incentives) and finds that historical CEO pay increases have been supported by historical TSR, with annualized pay increases trailing TSR performance by 9 percentage points. Here’s an excerpt with some projections about what might be in store:
– We expect that 2020 overall CEO actual TDC will decrease, potentially by 3-4%, due to the pandemic and weaker financial results that impacted bonus payout decisions, although this will vary based on industry performance
– We expect median CEO target pay increases in early 2021 to be in the low single digits due to some companies providing “supplemental LTI grants” for lost value for performance equity that was lost during COVID-19 – again, we’ll likely see variation with executives in industries with favorable economic conditions and higher growth seeing more significant pay increases, while those in hard-hit industries seeing flat or continued pay declines
– Individual CEO pay increases will continue to be closely tied to overall company performance and peer group compensation increases; it is notable that S&P 500 TSR was +18% in 2020, primarily driven by large-cap technology companies
– Although the study found a positive correlation between CEO annual pay increases and TSR performance, it says they’re confident the correlation isn’t as significant as that between realizable pay and TSR increases
Disney is one company that’s been hard-hit by the pandemic. During the last year, it’s been in the news as, among other things, it imposed executive pay cuts and made plans to furlough employees. A couple of weeks ago, the company filed its 2021 proxy statement and disclosed the compensation committee made “a determination to pay no executive bonuses despite achievement of certain performance metrics.” As we start seeing more 2021 proxy statements, for companies in hard-hit industries, we’ll see whether Disney’s decision on executive bonuses turns into a trend.
Last week, the SEC issued this order against a former CEO & CFO, which relied on Sarbanes-Oxley Section 304 to require the former execs to reimburse their company for incentive compensation. The SEC determined that they had made false & misleading statements that caused revenue to be improperly recognized, resulting in a restatement.
As this Cooley blog explains (and as we’ve detailed on TheCorporateCounsel.net), restatements are more rare these days than they used to be. Maybe that’s part of the reason that clawbacks under SOX 304 are also rare. The SEC made a point in its order that misconduct by the CEO & CFO themselves isn’t required to trigger that provision, and this order shows that the Commission is still willing to pursue recovery when the circumstances are right.
We’ve posted the transcript for our recent webcast: “The Latest – Your Upcoming Proxy Disclosures.” Topics covered in this wide-ranging program by Compensia’s Mark Borges, Hogan Lovells’ Alan Dye, MoFo’s Dave Lynn and Gibson Dunn’s Ron Mueller included:
1. Key Lessons from the 2020 Proxy Season – virtual shareholder meetings, pay ratio, say-on-pay, E&S proposals, no-action trends
2. Expectations for 2021 Proxy Season – human capital, say-on-pay, pandemic disclosures, pay ratio, ESG disclosures, equity plan proposals, perquisites
3. Director Matters – diversity & board composition, director pay
4. Section 162(m) – final regulations, disclosure expectations
Last week, Arjuna Capital announced that it had withdrawn a racial & gender pay equity reporting resolution at BNY Mellon – following the bank’s agreement to disclose its unadjusted median pay gaps (i.e., pay gaps aren’t adjusted based on role or position, which is thought to show whether underrepresented groups have equal opportunities to access higher paying roles).
I’ve blogged about other companies taking this course of action in response to Arjuna’s proposals. More recently, in addition to BNY Mellon, Adobe agreed in December to start providing unadjusted gender pay gap disclosure immediately and racial pay gap data by the end of this year – the first tech company to do so. Arjuna submitted 13 proposals on this topic last year and shows no signs of letting up. Here’s more detail from the press release:
Since 2016, Arjuna has compelled gender pay gap disclosures at 22 companies, and race pay gap disclosures at 17 companies, including leading U.S. tech, finance, and retail firms Apple, Amazon, Intel, Microsoft, Google, Facebook, JPMorgan, Bank of America, Nike, and Adobe.
Pay inequity persists across race and gender. Black workers’ hourly median earnings, adjusted for inflation, have fallen 3.6 percent since 2000, representing 75.6 percent of white workers’ wages. The median income for women working full-time in the United States is 80 percent that of men.
Citigroup estimates that closing U.S. minority and gender wage gaps 20 years ago could have generated 12 trillion dollars in additional national income and contributed 0.15 percent to United States GDP per year. PwC estimates closing the gender pay gap could boost Organization for Economic Cooperation and Development countries’ economies by $2 trillion annually.
Arjuna also isn’t the only investor interested in this information. For a recap of what comp committees should be doing to prepare for these types of proposals & disclosures, check out the transcript from our recent webcast with Mintz’s Anne Bruno, BlackRock’s Tanya Levy-Odom, Equity Methods’ Josh Schaeffer, and Pax World Funds’ Heather Smith.
Despite pressure on boards to broaden clawback policies and seek payback in the event an executive causes “reputational harm,” companies have to fight an uphill battle when they try to recover compensation that’s already been paid. Now, there appears to be a growing recognition that “a bird in the hand is worth two in the bush.”
Yesterday, the WSJ reported that several healthcare & pharma companies are adopting pay deferral policies and planning to enhance proxy disclosures about how pay can be revoked if executive misconduct comes to light. The policies arose out of negotiations with an investor consortium that had previously submitted – and withdrawn – proposals on this topic. Here’s an excerpt:
Participants in the working group say they expect more companies to implement or disclose mandatory pay-deferral provisions. Some of the investors hope other industries will pick up the practice as well.
The group’s principles intentionally leave board compensation committees with flexibility.
They envision companies setting annual bonus payout levels as normal, then retaining some or all of the pay, potentially for a year or more. If the recipient is found to have hurt the company’s reputation or finances, the board could choose to reduce the deferred pay. Equity compensation is most often deferred by paying it in restricted shares or similar instruments that vest over time.
The article says that Bristol-Myers Squibb will be requiring execs to hold three-quarters of their equity grants for at least a year after the awards vest, and that Walgreens Boots Alliance and CVS have added misconduct as a factor that lets them revoke deferred pay. A portion of pay to CVS executives will be held back even after they leave the company. It’s definitely shaping up to be an interesting proxy season in terms of pay disclosures.
Liz blogged last fall about the Business Roundtable’s statement encouraging voluntary public disclosure of key diversity metrics. In the statement, the BRT also called for closing pay gaps. In terms of what companies are doing to close pay gaps and how they’re doing, a Pearl Meyer study provides some insight.
Although most companies participating in the study indicated that D&I, gender pay equity and closing the gender pay gap were either “important priorities” or “among a company’s highest priorities,” the study found a disconnect with results from programs and actions that can begin to close gender and minority pay gaps. In fact, the study found only a small percentage of companies are choosing levers that can actually lead to closing of this gap. There are opportunities for improvement though as the study suggests different levers to measure outcomes, here’s an excerpt with some of the findings:
– Less than half measure D&I outcomes (44%) with the most widely used measure being number of diverse hires (74%), which is a lagging indicator. Measuring outcomes in the talent pipeline, including number and percentage of diverse applicants and promotions of diverse staff, can be better leading indicators of D&I outcomes.
– One area presenting a big opportunity to impact D&I are internal training and development programs and formal processes to increase female and minorities in management and/or executive positions – there’s a lot of potential upside here as just 13% have a process in place to increase female and minority representation in management and/or executive positions. One lever that isn’t reported as often as might be expected is a requirement of diverse candidates in the preliminary and final slates of candidates, just 17-20% of respondents used this lever
– Measuring D&I progress can be more powerful when combined with prioritizing and holding leaders accountable for progress – a small percentage of firms tie D&I outcomes to incentive pay (8.5%), with most being organizations with revenues/assets of $3 billion or greater and for those that do tie incentives to D&I outcomes, the CEO, executive team and CHRO are all held accountable through a variety of short- and long-term incentive plans
Sharing information with the comp committee or the board is one way companies can move things forward and it’s another area with room for improvement. The study found almost 70% of organizations share D&I information with the board. But in terms of the information shared, there’s wide gulf between those that share general information about overall gender and minority representation (85%) and those that share pay equity (34%) and pay gap (17%) information.