– Lynn Jokela
As many companies continue to struggle with fallout from the pandemic, questions abound about how companies will deal with 2021 goal setting and whether companies will make adjustments to outstanding performance awards. A recent NACDonline memo from Roger Brossy and Blair Jones of Semler Brossy suggests now may be a time for boards to reflect more generally about executive pay – basically a time to step back and think about a company’s executive compensation philosophy in the new economic context.
In “normal” times, it’s easy for one year to roll right into the next and things never seem to slow down. If there ever was a time to carve out some time to think about the company’s philosophy around executive compensation, the memo makes a good point that the time is right now. Here are three primary compensation considerations the memo provides for boards to help guide their reflection:
– Decide if pay should continue to be based on market results: include consideration about whether the definition of ‘market’ needs to expand, at least for the highest-potential talent
– Assess whether pay-for-performance needs to be redefined: what is the proper balance of stakeholder concerns and awards for leaders? Ideally, boards could focus on both financial and stock market performance and stakeholder priorities by emphasizing a few stakeholder metrics that are strategic and lead to higher value creation.
– Determine the proper balance for retention: Can we continue to rely on the common wisdom that people leave for greater opportunity and not for pay?
– Lynn Jokela
We’re continuing to see commentary on pay gap disclosures and the most recent being this press release from Arjuna Capital announcing Adobe has become the fourth Fortune 500 company, and the first tech company, that’s agreed to disclose unadjusted pay gap data. Unadjusted pay gap compares the median earnings of women & minorities in the US to the median pay of men & non-minorities and can be an indicator of these groups’ opportunities for advancement. The press release says Arjuna Capital agreed to withdraw a 2021 shareholder proposal calling for Adobe to provide median race and gender pay gap disclosures after Adobe agreed to provide the gender data now. Arjuna has requested that Adobe disclose racial pay gap data before 2022.
Liz blogged last week about how the amendments to Rule 14a-8 may impact pay gap shareholder proposals. Arjuna Capital’s press release says that in the 2020 proxy season, Arjuna submitted a total of 13 shareholder proposals calling for median race and gender pay equity disclosures. During the 2020 proxy season, this Sullivan & Cromwell report (page 13) shows average shareholder support for pay gap proposals fell from 22% in 2019 to 13% in 2020 (none passed). At least for now though, Arjuna Capital seems to be pressing ahead with pay gap proposals, here’s an excerpt from the press release with comments from Natasha Lamb, managing partner of Arjuna Capital:
The question that remains is which of America’s other bellwether companies will be leaders and which will hold this data close to the vest. The push for median race and gender pay equity is going to be a major issue in the 2021 shareholder season. We need more companies to follow Adobe’s lead, prioritize diversity in a meaningful way, and step forward with an honest accounting of pay equity.
– Liz Dunshee
Yesterday, I blogged about the possibility that the SEC’s recent amendments to Rule 14a-8 could eventually deter proponents from submitting “pay gap” proposals. But companies and compensation committees shouldn’t get too comfortable, because shareholders are also using litigation to push for change.
There’s been a wave of shareholder derivative suits launched in the last several months over diversity concerns. While many have focused on board diversity and workforce demographics, some have also taken issue with the absence of connection between diversity goals and executive pay. And now, the latest suit is veering into “pay equity” territory. Earlier this week, a complaint was filed against Pinterest’s board and executives by the Employees’ Retirement System of Rhode Island.
The complaint alleges that the defendants breached their fiduciary duty by “perpetrating or knowingly ignoring the long-standing and systemic culture of discrimination and retaliation.” For the most part, it stems out of allegations made by three former execs in separate lawsuits of unfair compensation arrangements and retaliation for seeking equitable pay leveling – along with resulting employee “walkouts” to demand greater pay transparency and diversity. This D&O Diary blog has more details & analysis. Here’s an excerpt:
When the various #MeToo-related board liability lawsuits were coming in, I was concerned that this type of workplace environment board litigation could take a much more ominous turn if the lawsuits were to move beyond sexual misconduct allegations and expand to include gender pay disparity issues. The reason for my concern was based on a perception that gender pay disparity is a more widespread issue, and that gender pay disparity is an issue that potentially could ensnare many companies. Obviously, part of the basis of this concern is my perception that gender pay disparity is a serious issue. To that extent, if lawsuits like the one filed against the Pinterest board help companies focus on addressing these issues, that is clearly a good thing. But along the way, it could mean that some companies might find themselves facing board litigation arising out of pay equity concerns – as well as litigation brought by those who claim to have received inequitable compensation.
For those of you who might be wondering what the plaintiff might be hoping for from this lawsuit, I think one clue might be provided by the recent Alphabet settlement of the lawsuit involving underlying allegations of sexual misconduct and hostile workplace at Google. That case, readers will recall, settled for the company’s agreement to adopt certain corporate therapeutics, including most notably Alphabet’s agreement to provide funds of $310 million over ten years to address diversity, equity, and inclusion issues at Google. One reason I feel confident in conjecturing that this might be the kind of thing the plaintiff has in mind here is that the plaintiffs’ lawyers who filed the Pinterest complaint were co-counsel in the Alphabet/Google lawsuit.
– Liz Dunshee
According to the investors on our recent webcast, “Pay Equity: What Compensation Committees Need to Know,” pay equity is going to continue to be a hot topic. But this Orrick blog points out that proposals to disclose workforce “pay gap” data eventually may be hampered by the SEC’s recent amendments to Rule 14a-8. Here’s an excerpt:
The amendments to Rule 14a-8 may impact future pay gap shareholder proposals in several ways. First, beginning in 2022, activist shareholders will be unable to reintroduce proposals that fail to attain the requisite support at a previous shareholder meeting. Critically, shareholder proposals have received less than 10% of voters’ support at several companies’ annual shareholder meetings, including Alphabet, Facebook, J.P. Morgan, and Wells Fargo. The amended Rule 14a-8(i)(12) may have less impact at companies where such proposals have failed by a narrower margin.
Relatedly, activist shareholders may shift their calculus given the preclusive impact of multiple failed pay gap proposals in successive years. They may, for example, shift their focus to different industries, or to other companies in the financial and technology industries that have not yet received a pay gap shareholder proposal. Smaller activist shareholder groups may be dissuaded from filing pay gap shareholder proposals altogether given the increased ownership thresholds under Rule 14a-8(b).
Finally, given the rule restricting shareholder proposals to one per “each person,” activist shareholders will soon be prohibited from filing multiple proposals with the same company in a single year. What this means for the future of pay gap shareholder proposals is unclear, although some activist shareholders may find such proposals less attractive than other proposals in light of their extremely low success rate to date.
– Liz Dunshee
I blogged a couple months ago that Starbucks would be tying executive pay to diversity targets. Around the same time, Medtronic released its 2020 Integrated Performance Report and announced progress on several E&S issues – including pay equity – and said that it would be linking compensation & advancement opportunities to diversity, equity & inclusion goals. See this Willis Towers Watson memo for more data on D&I commitments and a prediction that more companies will link diversity achievement to executive pay in the coming year.
As more companies move in this direction, this Hunton Andrews Kurth blog offers a few points to consider so that the program can both motivate executives and avoid awkward proxy disclosure. Here’s an excerpt:
To that end, consider having the D&I metric designed to act only as a downward pay modifier to a financial performance metric (similar to how absolute shareholder return can downward modify the pay outcome of an otherwise successful relative total shareholder return formula). That way:
– The status quo of financially incentivizing the executives towards the success of the D&I initiative is maintained.
– Positive proxy disclosure results if both the financial target and the D&I target are satisfied.
– Positive enforcement disclosure results if the financial target is satisfied but the D&I target is not satisfied (i.e., this outcome is not good from the perspective of the D&I initiative or from the executive’s compensation expectations, but from a proxy disclosure perspective the CD&A would disclose that failure of the D&I initiative resulted in a downward adjustment to the pay formula).
– Semi-positive disclosure results if the financial target is not satisfied but the D&I target is satisfied (i.e., this outcome is not good for long-term shareholders, but is good from a social policy perspective), though the answer is that the performance-based pay formula resulted in a $0.00 payout.
– But more importantly, negative proxy disclosure can be softened if both the financial target and the D&I target are not satisfied because, depending on design, only the missed financial target needs to be disclosed. To this point, if the sole purpose of the D&I metric was to act as a negative modifier to a financial metric (i.e., the D&I metric can only downward adjust a payout and in no circumstances act to upward adjust a payout), then awkward disclosure of the missed D&I target might be avoided.
– Liz Dunshee
Last week, Glass Lewis announced the publication of its 2021 Voting Guidelines. As always, the first few pages of the Guidelines summarize the policy changes. Here are the compensation-related highlights:
– Short-Term Incentives: We have codified additional factors Glass Lewis will consider in assessing a company’s short-term incentive plan. Specifically, we expect clearly disclosed justifications to accompany any significant changes to a company’s short-term incentive plan structure, as well as any instances in which performance goals have been lowered from the previous year. Additionally, we have expanded our description of the application of upward discretion to include instances of retroactively prorated performance periods.
– Long-Term Incentives: We have codified additional factors we will consider in assessing long-term incentive plan structure. Specifically, we have defined inappropriate performance-based award allocation as a criterion which may, in the presence of other major concerns, contribute to a negative recommendation. Additionally, any decision to significantly roll back performance-based award allocation will be reviewed as a regression of best practices, that outside of exceptional circumstances, may lead to a negative recommendation. Additionally, we have defined that clearly disclosed explanations are expected to accompany long-term incentive equity granting practices, as well as any significant structural program changes or any use of upward discretion.
Glass Lewis also clarified its existing policies on several topics, including:
– Excise Tax Gross-Ups & Golden Parachute Votes: We have added language codifying how we evaluate the addition of new excise tax gross-ups to specific change-in-control transactions. In such scenarios, Glass Lewis may consider expanding a negative recommendation beyond the golden parachute proposal in which the gross-up entitlements first appear to also include a subsequent recommendation against the compensation committee members and the say-on-pay proposals of any involved corporate parties.
– Option Exchanges & Repricing: We have added language clarifying our approach in evaluating option exchanges and repricing proposals, which emphasizes the importance of the exclusion of officers and board members from the program, as well as that the program be value-neutral or value-creative, in driving any exceptions to Glass Lewis’ general op-position to such proposals.
– Peer Group Methodology: In the section titled Pay for Performance, we have clarified that, in determining the peer groups used in our A-F pay-for-performance letter grades, Glass Lewis utilizes a proprietary methodology, as previously announced in 2019. In forming this proprietary peer group, Glass Lewis considers both country-based and sector-based peers, along with each company’s network of self-disclosed peers. Each component is considered on a weighted basis and is subject to size-based ranking and screening. The peer groups used are provided to Glass Lewis by CGLytics based on Glass Lewis’ methodology and using CGLytics’ data.
We’re posting memos in our “Proxy Advisors” Practice Area. To hear how to handle decisions that may impact short- and long-term incentives, tune in to our December 15th webcast, “Covid-19 Pay Adjustments: Engagement, Decision-Making & Documentation.”
Also, on TheCorporateCounsel.net, we’re hosting a January 14th webcast that will be a dialogue with Courteney Keatinge, Senior Director of ESG Research at Glass Lewis. Members of TheCorporateCounsel.net can access that webcast for free – if you’re not a member, you can try a no-risk trial.
– Liz Dunshee
Yesterday, the SEC continued its active year by announcing proposed changes to Form S-8 and Rule 701. The amendments suggested by the 156-page proposing release are responsive to comments that the Commission received on its 2018 concept release. Here are the highlights from the SEC’s Fact Sheet (we’ll be posting memos in our “Form S-8″ Practice Area):
With respect to Rule 701, the proposed amendments would:
• Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million, including how the disclosure threshold applies, the type of financial disclosure required, and the frequency with which it must be updated;
• Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;
• Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and
• Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.
With respect to Form S-8, the proposed amendments would:
• Implement improvements and clarifications to simplify registration on the form, including:
o Clarifying the ability to add multiple plans to a single Form S-8;
o Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and
o Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.
• Implement improvements to simplify share counting and fee payments on the form, including:
o Requiring the registration of an aggregate offering amount of securities for defined contribution plans;
o Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and
o Conforming Form S-8 instructions with current IRS plan review practices.
• Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.
With respect to both Rule 701 and Form S-8, the proposals would:
• Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and
• Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.
There’s More! SEC Proposes Temporary Expansion of Compensatory Offerings to Gig Workers
The SEC saved the more interesting – and controversial – part of its “compensatory offering” modernization for an entirely separate proposal – which would, for a temporary five-year period and subject to a number of conditions, permit companies to provide equity compensation to gig workers who provide services (not goods) to the company (or as the SEC calls them, “platform workers”). Commissioners Hester Peirce & Elad Roisman issued a statement in support of the proposal. Commissioners Allison Herren Lee & Caroline Crenshaw dissented – and they were careful to point out that they did support the other proposal.
Here’s the highlights from the SEC’s Fact Sheet:
Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:
• the issuer operates and controls the platform, as demonstrated by its ability to provide access to the platform, to establish the principal terms of service for using the platform and terms and conditions by which the platform worker receives payment for the services provided through the platform, and by its ability to accept and remove platform workers participating in the platform;
• the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement, and is not for services that are in connection with the offer or sale of securities in a capital-raising transaction, or services that directly or indirectly promote or maintain a market for the issuer’s securities;
• no more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;
• the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash; and
• the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.
The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.
The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.
The proposed amendments would require companies that sell securities to gig workers to furnish information to the SEC at 6-month intervals, to help the Commission decide whether the rule changes should expire, be extended or be made permanent.
Both proposals will be subject to a 60-day comment period following their publication in the Federal Register. Time will tell whether the next SEC Chair will carry either of these proposals across the finish line.
– Lynn Jokela
We’ve blogged before about how compensation committees are considering whether to use discretion to adjust executive pay in response to fallout from the pandemic. Many calendar-year companies have been considering possible action, but many have continued gathering information about company performance and ongoing events. Another factor top of mind is whether shareholders will be supportive of any potential actions taken in response to the pandemic. For a preview, a recent Weil Gotshal memo looks at pay actions taken in response to the pandemic and how these actions have affected say-on-pay votes at quarter and mid-year FYE companies.
The memo examines proxy statement disclosures, ISS vote recommendations and vote results of 42 Russell 1000 companies that held their shareholder meetings by October 31. Of those 42 companies, 25 disclosed Covid-19-related changes to their compensation plans. To help understand how companies explain different pay adjustments, the memo includes disclosure excerpts from companies included in the review. Here’s an excerpt about the findings:
The review found that 2019 and 2020 say-on-pay vote results for many companies in the sample were close, with a majority even seeing higher shareholder support. That many companies in the sample were able to achieve shareholder support in 2020 comparable to that of 2019 is a testament to the their use of objective performance metrics, a reasonable alignment of executive pay and company performance, and their inclusion of robust disclosures to “sell the story” behind those decisions – e.g., when discretion was used, giving detailed descriptions of their rationale, with clear and reasonable outcomes. ISS noted that certain actions it would consider problematic during normal times may be viewed as reasonable in the extraordinary circumstances of the pandemic if clear justifications were disclosed and the outcomes were reasonably commensurate with company performance. From the proxy statement disclosures, it seems that several companies in the sample satisfied these criteria, with just over one quarter of the sample receiving lower/slightly lower shareholder support in 2020 compared to 2019, and just one company receiving an “AGAINST” recommendation from ISS with a resulting 54% shareholder support.
– Lynn Jokela
ClearBridge Compensation Group recently came out with its report reviewing annual and long-term incentive plan trend data for large-cap companies. The report reviews incentive plan design trends among 100 S&P 500 companies over the last 10 years and includes data on performance metrics, vesting periods, award mix, etc. Here are some high-level findings:
Annual Incentive Plans:
– Almost all are formulaic, shifting away from discretionary plans for making bonus determinations
– Increased prevalence of companies that use three or more performance measures – 64% in 2020, up from 55% in 2010
– Use of EPS is the most common performance measure while use of revenue and non-financial measures have risen the most – up 15% and 7% from 2010 respectively
Long-Term Incentive Plans:
– Use of time-vested stock options as part of the mix has decreased significantly since 2010 – 64% in 2010 compared to 42% in 2020
– 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, 74% of companies that granted performance-vested long-term incentives used more than one performance measure – up from just 43% of companies in 2010
– Use of stock price/TSR as performance measures are the most prevalent and prevalence has increased significantly – 68% in 2020, up from 35% in 2010
– Of companies granting performance-based incentive comp, in 2020, 24% used a stock price/TSR modifier – one such example being a relative TSR cap (limits the payout of a performance award by establishing a payout cap if certain stock price/TSR goals are not achieved relative to a comparator group)
– In 2020, the majority of companies have included at least one absolute and one relative performance metric – this compares to 2010 when companies were more likely to measure performance solely on an absolute basis
– Liz Dunshee
This 27-page memo from ClearBridge Compensation Group looks at how executive compensation policies have evolved at 100 S&P 500 companies over the last decade. It covers clawback policies, stock ownership guidelines & holding requirements, anti-hedging & anti-pledging policies, peer group approaches, perquisites, and CEO pay ratio. Here are the findings on clawback policies:
▪ Clawbacks have become a near-universal practice; 98% of companies disclose having a clawback policy in 2020
▪ The most common events that trigger a clawback are fraud or willful misconduct (73%) and a financial restatement with an executive at fault (70%)
▪ Most commonly, clawbacks cover performance-based compensation such as cash bonuses (95%) and performance shares/units (97%)
▪ The most common time period for which compensation is covered by a clawback policy is 3 years in 2020 (53%), which reflects a shift from 2010, where the most common period was 1 year