This new 49-page analysis (download required) from SquareWell Partners looks at how proxy advisors & large investors are evolving their approach to climate change. Here are the key takeaways on executive pay (also see the table on page 18):
Half of the world’s 30 largest investors have incorporated sustainability considerations, including climate change, into their evaluation of executive pay frameworks. Some examples include:
– As part of its assessment of the robustness of company’s climate risk governance, J.P. Morgan Asset Management’s policy (pg. 2) says it will look at whether executive pay has been linked to environmental metrics.
In celebration of Earth Day, we’ve launched a new site dedicated to ESG developments – PracticalESG.com. Be among the first 422 people to sign up for the free daily blog and get a tree planted in your name.
This WSJ article says median CEO pay reached $13.7 million last year and is on track for a record. While a good number of investors seem to appreciate that retaining good leadership can be expensive, it’s looking like there are also quite a few who are unhappy with those statistics.
I shared predictions last month that these high payouts and investor attention to human capital issues were setting up companies for a difficult say-on-pay season. Here are observations from the latest weekly tracking memo from Semler Brossy (posted in our “Say-on-Pay” Practice Area):
– The current failure rate (4.8%) is nearly 4x higher than the failure rate at this time last year (1.3%); however, it is still early in the season and we will monitor whether the failure rate remains at an elevated level following annual meetings for the 12/31 FYE filers
– The average vote results of 88.9% for the Russell 3000 and 84.4% for the S&P 500 thus far in 2021 is well below the average vote results at this time last year
– Nearly all companies were challenged by the Covid-19 pandemic in 2020, and some responded by adjusting compensation design and magnitude; early proxy season vote results indicate shareholders are likely to hold companies that made changes to a high standard
On that last point, it also was reported just last week that proxy advisors are recommending “against” Say-on-Pay at one big company due to the decision to lower the CEO’s performance goals in the midst of a stock market dip, without adjusting the payout opportunity.
Glass Lewis recently published this 22-page report on gender & racial pay equity – looking at disclosure issues, equal pay laws, litigation risks, and factors that could contribute to a pay gap.
Although the report concludes that pay transparency can benefit companies & workers and help address systemic inequalities, it also acknowledges that there are risks to disclosure – e.g., the data could be oversimplified or misinterpreted. Check out the full report for a nuanced discussion.
Glass Lewis also published this 16-page report on human capital management.
Last week, MicroStrategy – a small-cap company that trades on the Nasdaq Global Select Market – filed this Form 8-K to announce that its four independent directors will now receive compensation in the form of Bitcoin instead of cash. Here’s the stated rationale:
In approving Bitcoin as a form of compensation for Board service, the Board cited its commitment to Bitcoin given its ability to serve as a store of value, supported by a robust and public open-source architecture, untethered to sovereign monetary policy.
It works with the company’s business strategy – here’s an excerpt from the Form 10-K:
MicroStrategy® pursues two corporate strategies in the operation of its business. One strategy is to grow our enterprise analytics software business and the other strategy is to acquire and hold Bitcoin.
MicroStrategy held over a billion dollars of digital assets at the end of the year, which this article says jumped to nearly $5 billion last month when the company made additional Bitcoin purchases. HSBC has even categorized it as a “virtual currency product” (and banned its online customers from trading the company’s shares).
However, the board fees here will actually still be nominally denominated in dollars – which helps the company avoid some of the disclosure & risk issues that would otherwise exist. At the time of payment, the fees will be converted from USD into Bitcoin by the payment processor and then deposited into the digital wallet of the applicable non-employee director. So this is a baby step into Bitcoin compensation, not a leap.
If you’re curious about cryptocurrency as compensation, check out the webcast transcript from our 2019 program on that topic.
Over on the “Proxy Season Blog” for TheCorporateCounsel.net members, I blogged about Legal & General’s 2020 “Active Ownership Report“. The report summarizes the asset manager’s 2020 engagement and voting actions. It’s clear from the report that Legal & General has a strong focus on climate (it was the asset manager’s most frequent engagement topic) but among other topics, the report also touches on human capital and executive pay.
Human capital: Legal & General likely wants the SEC to make the rule more prescriptive. In the report, Legal & General said the new Regulation S-K rule requiring human capital disclosures is a “first step in transforming corporate disclosure to recognize the critical role of human capital in corporate value creation. However, there is still too much room for cherry-picking data and metrics.”
Executive Pay: In 2020 Legal & General increased executive pay engagements by 51%. With that, Legal & General still voted against 54% of say on pay management resolutions at North American companies, which seems like a lot! The report cites the primary driver of these “against” votes being related to either performance conditions not being measured over a three-year period or at least 50% of long-term incentives not being linked to any performance conditions at all.
This excerpt from the report provides further information about the asset manager’s view on retrospective changes to performance targets, which it generally doesn’t support:
A number of companies fell short of our expectations when they retrospectively changed metrics or targets that did not yield the performance needed for awards to vest.
For example, a retail company received shareholder dissent on the adoption of its remuneration report from 67.29% of votes cast. The investor backlash followed the company’s retrospective amendment of its Long-Term Incentive Plan by removing a strongly performing peer from the total shareholder return peer group, citing a change in the peer company business strategy that made it no longer comparable. We disagreed with the company’s decision and voted against the resolution.
Many other companies used the pandemic as justification for poorer-than-expected performance, applying discretion to allow for director bonuses to vest despite pre-set targets not having been met or providing for additional payouts after the fact to compensate for lost remuneration. Another company received investor pushback on a substantial discretionary one-off bonus to its CFO for work that led to securing approvals from the Israeli tax authority on certain advantageous tax treatments. We engaged with both companies prior to their AGM to communicate our concerns clearly, and in the case of latter company the resolution to ratify the additional bonus was withdrawn.
Some may recall that in addition to “traditional” proxy voting guidelines issued annually by ISS, the proxy advisor also issues “specialty” proxy voting guidelines aimed at investors with certain objectives such as investors focused on sustainability or social responsibility. Trillium Asset Management is an example of one investor that follows the ISS Socially Responsible Investment Guidelines, sort of.
Trillium’s 2021 proxy voting guidelines show where it’s aligned with the ISS SRI vote recommendation and then details situations where it varies and say-on-pay is one item where Trillium has a voting guideline that’s more specific than the ISS SRI vote recommendation. Page 16 of Trillium’s voting guidelines has a comparison and it’s worth noting that Trillium’s guidelines say it will vote “against” say-on-pay proposals if any of the following apply:
– CEO pay is excessive compared to its peers
– Equity awards vest in less than five years
– CEO pay is not tied to ESG performance
– The company CEO-worker pay ratio exceeds 50:1. If the company doesn’t report a CEO-worker pay ratio (presumably for companies not subject to SEC disclosure rules), CEO pay exceeds 50 times the median household income.
This is a pretty strict say-on-pay voting guideline and it seems fairly apparent that Trillium is focused on pay equity and long-term holdings. With that, an “against” vote from Trillium looks like it could be in the cards for a lot of large companies. This ClearBridge report discusses trends about long-term incentives for large-cap companies and says three-year vesting periods are the most prevalent for time-vested LTI awards and three-year performance periods are the prevailing practice for performance-vested LTIs. Separately, Farient Advisors’ CEO Pay Ratio Tracker shows median CEO pay ratios by sector, and so far in 2021 none of the S&P 500 company sector medians are below 50.
A recent blog post on the HLS Corporate Governance Forum from Dan Marcec of Equilar provides some early CEO pay trend data. Data cited in the blog is based on proxy statements filed as of March 18 and represents approximately 40% of the Equilar 500. It’s still early but a trend pointing toward a rising CEO pay ratio is worth watching. If the trend showing an increase in CEO pay ratios pans out, the blog reminds companies that they may be faced with a challenging situation in communicating this to stakeholders:
CEO pay ratio appears to be rising – Equilar’s review of early proxy statement filings shows CEO pay declining but median employee pay also declined and the median employee pay declined at a steeper rate, leading the CEO pay ratio to increase.
All of this adds up to a potentially contentious discourse among companies and their key stakeholders — inclusive of employees, investors, advocacy groups and others. The fact that executive compensation is mostly equity and incentive-based, and any change from 2020 will be felt much further beyond when the award was reported, is difficult to communicate clearly to a wide audience.
Unfortunately, a stark realization that employee pay is dropping and the ratio is rising amidst a time of crippling unemployment would shine a light on the fact that regardless of the reason, CEOs are on a different plane than the average employee. Companies will need to be prepared to address this difficult conversation if this trend persists.
We’ve posted the transcript for our recent CompensationStandards.com webcast: “The Top Compensation Consultants Speak.” Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners shared their thoughts on:
– Key Issues & Considerations for Compensation Committees Now
– Human Capital Management Topics Compensation Committees are Discussing Now
– Setting Goals Under Uncertain Circumstances
– Balancing Internal Needs with External Pressures
– Using a ‘Resiliency Scorecard’ During COVID-19 & Beyond
You hear quite a lot in this space about CEO pay levels ratcheting up due to peer benchmarking and every company wanting to pay “above median.” A recent academic paper confirms that variations in CEO pay really have diminished over the last decade, since companies started disclosing peer groups and submitting “say-on-pay” resolutions. The more interesting thing that the paper found was that CEOs appear to be less inclined to take risks that could spur jumps in company performance, supposedly because they don’t see a lot of room for upward pay mobility if they get recruited away to a peer company.
I’m not completely sold, because CEO mobility has also been blamed for skyrocketing pay packages. But the data (from 5000 US companies from 2002 – 2018) did seem to support the findings. Here’s an excerpt:
That is, if the manager is successful, she could receive an offer by the industry peer paying the highest amount and/or has an external benchmark for a wage renegotiation with her board. To retain the executive the incumbent firm may then have to match this alternative pay offer. Figure 9 confirms that external tournament incentives decrease significantly over the sample period.
Overall, our evidence suggests that recent institutional developments have induced a decrease in pay variation, with meaningful consequences for firms’ outcomes.
CalPERS’ recently presented this “Proxy Voting & Corporate Engagements Update” to its Investment Committee. Page 5 contains an eye-popping trend line for the pension fund’s opposition to say-on-pay votes. Back in 2013, CalPERS voted down 9% of executive pay plans. The last two years, that number has been over 50%.
Comp Committee members are now also facing real-time consequences from that opposition. Last year, CalPERS voted “against” 3402 directors last year at 1267 companies – a significant increase from the tally of 2716 that I blogged about last summer. Last year was the first year the pension fund applied its policy to vote against comp committee members in the same year as voting against say-on-pay. CalPERS also says that it wrote to all of those companies to discuss the negative vote. Only 35% responded.