This Stinson blog gives a timely reminder to be careful in your proxy disclosures when seeking shareholder approval of your equity incentive plan. In Pascal v. Czerwinski, the shareholder plaintiffs claimed that the company’s proxy statement failed to disclose that the company’s directors could grant awards to themselves under the plan as compensation for past efforts to take the company public.
The defendants argued the 2019 Proxy did disclose both intentions: the proxy provided that the EIP was meant to “attract, retain and reward the best available persons for positions of substantial responsibility and to recognize significant contributions made by such individuals to the Company’s success.”
The Court found that the 2019 Proxy did not explicitly mention the possibility of retrospective payment for the go-public conversion. However, the 2019 Proxy did set out that the company might issue awards in part for past accomplishments. And, given that “awards for past accomplishments” encompasses “retrospective payment for the conversion,” the Court did not find it reasonably conceivable that stockholders would have found the difference between the two to be material.
It’s a good reminder at this time of year to think carefully about disclosures when asking for approval of equity compensation plans.
The WSJ reported last week that General Electric’s board decided not to claw back pay to former CEO Jeff Immelt and other executives. They had been considering that course of action in response to 11 shareholder demands to investigate breaches of fiduciary duty and securities law violations. The company’s market cap has declined by about $200 billion since 2017 and it recently agreed to pay $200 million to settle an SEC charge that it misled investors about the circumstances leading up to that drop.
Although it’s still pretty rare for companies to claw back executive pay, there does seem to be a growing expectation that that will happen when a CEO’s decisions or actions are closely related to a scandal and/or drop in value. So, some people were surprised that GE didn’t take that step – and perhaps the company’s actions and communications will serve as a roadmap to other companies that face these demands in the future. Based on statements provided by the company and its lawyers, the WSJ reported these steps:
– The board investigated the shareholder allegations by reviewing thousands of documents and conducting dozens of interviews – and concluded it didn’t have a sound legal claim to bring against any current or former officer, director or employee of the company, or against KPMG
– The company enhanced its disclosures and internal controls
– The former CEO didn’t receive any severance when he left GE
– Most of the members of GE’s board have changed since the activities at issue occurred
– No changes to GE’s financial statements were required in connection with the SEC settlement
– The company took action to fire its auditor of more than a century as a result of the accounting issues that led to the stock drop
On the flip side, if the company’s current directors end up encountering resistance to their re-elections because of this, it could be another reason for other companies to strengthen clawback policies and provisions. Boards can benefit from having a strong legal basis for recovery if they find themselves facing shareholder demands to do that. Along those same lines, this Agenda Week post highlights the expansion of “for cause” termination provisions in CEO employment agreements – based on preliminary data from a forthcoming research paper about the #MeToo impact on those contracts.
We’ve posted the transcript for our recent webcast – “Covid-19 Pay Adjustments: Engagement, Decision-Making & Documentation” – in which Charlene Kelly of Conagra Brands, Jim Kzirian of Meridian, Mike Melbinger of Winston & Strawn and CompensationStandards.com and Reid Pearson of Alliance Advisors discussed how companies are handling and explaining pay decisions resulting from economic fallout and operational disruptions related to the Covid-19 pandemic.
I’ve blogged a couple of times about companies announcing that they’re planning to link diversity metrics to executive pay. This Semler Brossy memo captures the trends that we’re seeing emerge on this topic among Fortune 200 companies. It includes a chart that tracks the metrics by company, industry, weight and performance outcome – with a link to the disclosure. Here are its key takeaways:
• 20 companies have incorporated Diversity and Inclusion metrics in their incentive compensation programs
• Of these companies, the metrics tend to be assessed qualitatively and are more operational in nature
– 19 of the 20 companies studied have incorporated these metrics within their annual incentive plan, and one incorporated it within their long-term incentive program
– Amongst the companies studied, typical Diversity and Inclusion weightings make up approximately 5%-30% of metrics within annual incentive plans
• We expect the prevalence of Diversity and Inclusion metrics to rise in 2021 as multiple stakeholders call for greater oversight/progress on HCM topics and the nature of the metrics to evolve to be more strategic
About a year ago, I blogged about shareholders that were scrutinizing how clawback policies apply to situations of “reputational harm.” At the time, the NYC Comptroller led a group of proponents and submitted a shareholder proposal to McDonald’s in an effort to expand a clawback policy. Now, according to a recent news report, a group of investors, one being the NYC Comptroller, are pressing for board turnover – including the compensation committee chairman.
The investors are calling for resignations of McDonald’s board chair and the company’s compensation committee chair because they’re unhappy with severance paid to the company’s former CEO. The company is in the process of trying to claw back the severance, but the shareholders – who reportedly own less than 1% of the company’s outstanding shares – want accelerated board turnover.
The shareholders want action now in advance of the company’s annual meeting. Liz blogged last summer about increased scrutiny of pay decisions, especially this year. We’ll see how this plays out but for now, the saga highlights shareholder increased scrutiny of clawback policies and other pay actions, including board responses to shareholder requests for action.
I blogged earlier this week about a Willis Towers Watson survey that showed over the next several years we’ll likely see an increase in how companies use ESG metrics with executive incentive plans. Yesterday, Reuters reported that Apple is one company making a change – starting in 2021 the company will incorporate an ESG modifier in its annual cash incentive program. Here’s an excerpt from Apple’s 2021 proxy statement:
Beginning in 2021, an environmental, social, and governance modifier based on Apple Values and other key community initiatives will be incorporated into our annual cash incentive program. This change is intended to further motivate Apple’s executive team to meet exceptionally high standards of values-driven leadership in addition to delivering strong financial results. The financial performance measures and the threshold, target, and maximum payout opportunities under our annual cash incentive program for our named executive officers will not change. However, the Compensation Committee will use the modifier to determine whether to increase or decrease the bonus payouts by up to 10% based on the Compensation Committee’s evaluation of our named executive officers’ performance with respect to Apple Values and other key community initiatives during 2021.
As Reuters notes, the company cites the new ESG modifier in its opposition statement to a shareholder proposal relating to executive compensation. The proxy statement doesn’t give details about how the company will measure ESG progress so we’ll likely wait until next year to understand more about the impact the new modifier has on executive compensation but it sends a message that the company intends to measure and incent ESG progress.
Before the end of the year, I blogged about incentive compensation trends for large-cap companies. ClearBridge Compensation Group recently issued a companion report examining incentive compensation trends for mid-cap companies over the last 10 years. Here are some of the findings:
Annual Incentive Plans
– Like large-cap companies, almost all are formulaic, shifting away from discretionary plans for making bonus determinations
– Most companies use two or three performance measures
– Most common performance measure is an earnings-based measure, with EBIT/operating income being the most prevalent
Long-Term Incentive Plans
– In 2020, 86% of companies have granted at least one performance-vested vehicle, up significantly from 2010 when it was 46%
– Use of time-vested stock options has decreased even more significantly for mid-cap companies –65% in 2010 compared to 25% in 2020
– Like large-cap companies, most time-vested restricted stock/units and time-vested stock options/SARs vest ratably over the vesting period, a minority of companies use cliff vesting
– In 2020, 69% of companies used multiple performance measures compared to 52% in 2010
– Earnings-based measures are the most prevalent (58%), followed by stock-based measures such as TSR (54%) most typically measured on a relative basis
– A majority of companies (52%) used only absolute performance measures, down slightly from 2010 (62%). Relative performance measures, most typically stock-price based measures, are usually measured against a customized comparator group
Liz blogged last summer about how most ESG metrics that are incorporated into incentive plans relate to shorter-term operational metrics rather than long-term sustainability objectives. She noted the rationale for most doing so is because it’s easier to tie these operational metrics to the top or bottom line. But, Willis Towers Watson recently reported that looking forward, things may start to change. Here’s an excerpt from a Willis press release:
Willis conducted a survey of company directors. Four in five respondents (78%) are planning to change how they use ESG with their executive incentive plans over the next three years. More than four in 10 (41%) plan to introduce ESG measures into their long-term incentive plans over the next three years, while 37% plan to introduce ESG measures into their annual incentive plans. Additionally, about a third plan to raise the prominence of environmental and social/employee measures in their incentive plans.
ESG metrics that fall within the sustainability bucket often include those relating to environmental, climate and broader social matters. Even with change on the horizon, it doesn’t sound like companies and comp committees will have an easy time with it. Willis reports that when tying ESG to incentive plans, companies encounter the biggest challenges with target setting, performance measure identification and performance measure definition.
Before you dive in to crafting your next supplemental proxy disclosures about “realizable pay,” check out this recent study from ISS Corporate Solutions – suggesting that the extra disclosure doesn’t improve say-on-pay outcomes. As Mark Borges has blogged, these types of disclosures seem to be on the decline – and maybe they’re most useful when there’s a major transaction that would benefit from extra color. Here’s an excerpt from the ICS blog:
Based on our study, there appears to be no clear signal that realizable pay assessments in the proxy statements are materially impacting ISS SOP vote recommendations at S&P 500 companies, as companies that included realizable pay assessments in their proxy statement received positive vote recommendations from ISS on SOP at almost exactly the same rate as those companies that did not include a realizable pay assessment.
However, while the data above provide some initial insight into the impact of disclosing a realizable pay analysis on the ISS SOP vote recommendation, it’s important to recognize that ISS supports SOP proposals at different rates based on the initial pay-for-performance (P4P) concern levels identified in their quantitative frameworks.
For companies with elevated P4P concern levels, does the inclusion of a realizable pay assessment in the CD&A lead to a better chance of securing a positive vote recommendation from ISS on SOP?
Similar to the first outcome observed, these results suggest there is no definitive link between the inclusion of a realizable pay analysis in the proxy statement and subsequent support by ISS on the SOP proposal, i.e., companies with an elevated P4P concern level received “FOR” vote recommendations on their SOP proposal at the same rate whether they included a realizable pay assessment in their proxy statement or not.
My colleague Mike Melbinger has been blogging about the final 162(m) regulations that the IRS & Treasury Department released a couple weeks ago. They clarify “grandfathering” and other issues that resulted from the elimination of the “performance-based” exception for compensation deductions.
