Public companies like peer benchmarking – benchmarking gives lots of great datapoints for compensation committees to use while setting executive pay. But benchmarking also leads to some interesting outcomes – Liz previously blogged on how variations in CEO pay have diminished, often for the CEO’s benefit as companies and boards try to beat the “median” pay. S&P Global argues that this benchmarking practice actually disadvantages female executives. Here are some interesting points from the S&P Global research report, which analyzed over 80,000 executives who held positions at Russell 3000 companies from 2006-2020:
– Compared to men, women in executive roles are more likely to receive compensation in a compressed range around the median of their peer group and are less likely to receive compensation outside this range. The practice of Gender-Based Compensation Management (GBCM) artificially addresses the gender pay gap by increasing the median woman’s compensation without providing women equal access to the full range of compensation. This work shows GBCM has exacerbated the ‘glass ceiling’ and, by extension, the gender disparity in compensation.
– Firms that have been defendants in federal court cases involving compensation disputes, discrimination, fraud, or other governance-related affairs exhibit more pronounced GBCM. This finding suggests GBCM is associated with poor governance.
– The percentage of women holding positions across the C-suite, board of directors, and executive positions grew from 15.4% to 19.2% from 2018 to 2020. While this progress is statistically meaningful, at this rate women have at least 1-2 more decades before they reach parity in their representation across senior roles. In positions where women’s progress has been slower, such as CEO, parity will likely take even longer.
As companies look to collecting employee data for pay equity analyses, they might want to be mindful of focusing less on the measured median pay metric and more on the ultimate goal of pay equity.
I blogged last week on TheCorporateCounsel.net that we have made two wonderful additions to our Editorial team – Emily Sacks-Wilner and Julie Gonzales. They both bring a wealth of experience. Emily will be making her blogging debut on this site tomorrow! Keep an eye on your inbox for her practical insights.
Late last week, Activision CEO Bobby Kotick sent all employees this email that was also posted as news on the company’s website. After detailing steps the company is taking to improve its working environment, Kotick says he’s asked the board to reduce his total compensation to the lowest level permitted by California law ($62,500) – until the board has determined that the company has achieved the gender-related goals and other commitments described in the message. Those include:
– Adopting a zero-tolerance harassment policy
– Increasing the percentage of women and non-binary people in the workforce by 50% within 5 or less years (to approximately one-third of employees) and investing $250 million over 10 years to accelerate opportunities for under-represented communities
– Waiving required arbitration of employee sexual harassment, unlawful discrimination, or related retaliation claims
– Continued pay equity reviews – to follow the high-level results of the most recent analysis, communicated in mid-October
– Providing quarterly progress updates from business units, franchise teams & functional leaders – along with a dedicated focus on gender hiring, diversity hiring and workplace progress in the annual report to shareholders and the company’s annual ESG report
No Form 8-K has been filed yet. That could be because the report is not yet due. Or, perhaps the company has not yet formalized any material amendments to Kotick’s pay arrangements. The email emphasizes that the reduction is not just to Kotick’s salary – it applies to all bonuses and equity grants as well.
This is a bold step and could be a roadmap for other CEOs who really want to “put their money where their mouth is” when it comes to ESG progress – but there were also unique & compelling circumstances here that may have made people more open to big action. Activision Blizzard has been tangled up with sexual harassment & discrimination claims since this summer – which led to an employee walkout in July, a securities class action lawsuit in August, an $18 million EEOC settlement announced in September (the second-largest the agency has ever negotiated), and ongoing California litigation (the company had attempted to pause that litigation, but a few days prior to this employee announcement, a Los Angeles court denied that request).
As Lynn blogged, the company also faced a very tight say-on-pay vote in June. Its CEO earned nearly $155 million in total compensation last year – largely due to pay-for-performance stock awards.
The email doesn’t get into the nitty gritty of how these gender diversity & related goals will be measured or what will happen if or when they’re achieved, but I would imagine there was outreach around that and the details will emerge through future SEC disclosures. At any rate, it’s a significant ESG & human capital commitment that may also resolve, for now, the pay package that some shareholders found problematic.
This Winston & Strawn blog recaps the multitude of issues you need to be thinking of as you plan for upcoming compensation committee meetings, fall engagements, and proxy disclosures. Among them:
– Low say-on-pay results may require clarified disclosure about compensation decisions and shareholder feedback
– COVID-19 adjustments may still be in play for 2021 pay and 2022 disclosure – and ISS favors disclosure that clarifies the temporary nature of these adjustments
– Disclosure about “prospective” pay changes may be more important this year, if you need to foreshadow additional pandemic-related pay changes and/or 2022 changes made in response to shareholder feedback
– Has your workforce changed significantly? You may need a new median employee for your CEO pay ratio.
– Perks are an SEC enforcement priority – keep an eye on your internal controls and your disclosure controls
– Stay informed of how your peer group companies are addressing executive pay issues and whether your competitors are recruiting your talent
– Be aware that there’s a legislative trend toward limiting the use of restrictive covenants (e.g., non-competes) in employment agreements, at the state and federal level
– Make sure the comp committee’s name and charter appropriately reflects its role
– Be ready for the SEC’s updated clawback proposal
There are a lot of reasons to proceed with caution when adding ESG metrics to your incentive plan. This Compensation Cafe blog from Altura’s Ann Bares suggests that the downside risks of “unintended consequences” are much greater for things like safety metrics than they are for productivity-based incentives. Here’s an excerpt that gives food for thought:
Unintended consequences, of course, are the bane of all incentive design efforts, but I think the risk of these can be fundamentally unacceptable when it comes to employee safety. The obvious concern with many commonly used safety metrics is that you’ll drive people to ignore or under-report hazards and incidents, but there are concerns that go beyond this obvious one.
Is trying to change safety-related behaviors no different than trying to change productivity-related behaviors? To me, the risks associated with over-reporting productivity and under-reporting safety incidents are simply not of equal severity and magnitude. And so I think I disagree with Borlo and Klapow on the point above.
Should rewards be used to incent greater attention to safety? Is it a good idea to include safety metrics in a broad-based employee incentive plan? I guess my response would be possibly … and only very carefully. At least, this is the approach I’ve taken with the plans I’ve helped develop.
FW Cook recently posted preliminary findings from a study of ESG metrics in incentive plans, based on disclosures through September 15th. The prevalence of quantitative ESG metrics jumped by 21% in 2020 compared to the prior year – and based on corporate announcements this year, we’ll likely see an even bigger jump when 2021 disclosures become available. Here are a few takeaways:
– 160 companies (64%) use ESG in one or more incentive plans, up from 132 (56%) last year. This is a 21% year-over-year increase in prevalence
– 148 companies (59%) use ESG metrics in their annual incentive plan only, up from 53% last year
– Only 9 companies (4%) use ESG metrics in both the annual and long-term incentive plan, up from 3% last year
– Only 3 companies (1%) use ESG metrics in their long-term incentive plan only, versus no companies last year
– Of the 160 companies using an ESG-based metric, 54 (34%) measure performance using a formulaic metric or modifier approach. This differs considerably from prior year experience in which only 22% of companies employed a non-discretionary approach
– Among the 160 companies most recently disclosing ESG-based metrics, Human Capital & Culture metrics were the most common (70%), followed by DEI and Environment & Sustainability (67% and 36%, respectively).
Dan Ryterband, FW Cook’s Chair & CEO, says that no plan design trend has evolved faster than ESG – and he expects that the focus is permanent. He cautions that there is no “one-size-fits-all” approach and that the metrics need to truly support business objectives. Board advisors, the disclosure team, directors and managers need to be able to justify new metrics and respond to questions about how the chosen framework will support the company’s strategy & goals.
This Equilar blog says that – despite some companies freezing director pay during the pandemic – retainers have continued to steadily increase by about 1.9% the past two years. What’s striking is how many companies set their retainer to be right around the median (although that approach makes a lot of sense in light of litigation & voting policies). Here are a few data points:
– In 2020, the median director retainer at Equilar 500 companies was $270,000, which increased 1.9% in each of the past two years, up from $260,000 in 2018 and $265,000 in 2019.
– Communication services and healthcare had the highest median retainer at $300,000, with technology not far behind at $298,000. The lowest median retainer of $245,000 was awarded to directors in the consumer cyclical industry, also consistent with trends for executive pay.
– Meanwhile, basic materials companies awarded the largest increase in the median retainer to board members from 2018 to 2020, an increase of 12.5% from $240,000 to $270,000. The energy sector was the only industry to see a drop in retainers in any year, falling from $280,000 in 2019 to $275,000 in 2020. The healthcare and real estate sectors remained flat in 2020, while all other industries saw gains.
– In 2020, 26 companies awarded their directors less than $200,000 for a retainer, and only nine had a median retainer above $400,000. Throughout the study period, just seven different companies have offered their directors more than $500,000, and only three companies offered directors’ compensation above this threshold in 2020.
I’ve been curious about the direction of Glass Lewis since it was reported earlier this year that they were being acquired by a private equity firm. Yesterday, the proxy advisor announced the launch of an Equity Plan Advisory service – through a newly formed affiliate, Glass Lewis Corporate. Here’s an excerpt from the press release:
Public companies can work with a Glass Lewis Corporate advisor to model their equity compensation plan against the Glass Lewis model. Advisors will review plans with customers, testing different new-share requests and equity plan amendments against Glass Lewis’ methodology, examining multiple what-if scenarios. Glass Lewis maintains a strict separation between Glass Lewis Corporate advisors and Glass Lewis research analysts in order to ensure the continued independence of our proxy advice.
With its Report Feedback Statement and “self-serve” engagement calendar, Glass Lewis seems to be working to accommodate companies and address some of the concerns that have been raised over the years about issuers’ ability to verify information in proxy reports. Yet, this new business model may draw some criticism. Some companies harbor cynicism against ISS – the other major proxy advisor – for having a business arm that offers issuer consulting services like this. That’s the case even though – or maybe especially because – working with ISS Corporate Solutions in no way guarantees that you’ll get a favorable recommendation from ISS on your ballot item. Now, you can also engage Glass Lewis Corporate to try to make sure your plan will pass the models.
This Sullivan & Cromwell memo gives a good reminder about monitoring director & officer stock acquisitions to ensure they don’t trigger a filing under the Hart-Scott-Rodino Act, given the extra focus on antitrust enforcement right now. If a filing is required, the individual needs to do that ahead of the acquisition and wait 30 days before completing the transaction – or face a $44k/day penalty. Here’s an excerpt from the memo:
Under the HSR Act, an officer or director planning a stock acquisition that would result in the individual holding an aggregate amount of voting securities valued in excess of specified dollar thresholds (the lowest of which is currently $92 million) is often required to file an HSR notification form with the FTC and DOJ and observe a 30-day waiting period before consummating the acquisition. There are exceptions to this requirement, including situations in which the individual’s other investment assets are valued under a specific threshold set forth in the HSR Act (currently $18.4 million).
Acquisitions by officers and directors triggering an HSR filing obligation can occur in a number of ways, including (1) the grant of restricted stock, (2) the delivery of shares underlying restricted stock units or performance stock units, (3) the exercise of options, warrants or stock-settled stock appreciation rights, and (4) the acquisition of shares on the open market. When an officer or director acquires a share that has voting rights (such as in the open market), the relevant date for HSR notification purposes is the date the officer or director gains beneficial ownership of the share (which is the right to vote or the right to dispose of the share).
When an officer or director receives a right to acquire a share in the future and that does not carry the present right to vote (such as a restricted stock unit), then the relevant date for HSR notification purposes is usually the date on which the shares are delivered under the right (and therefore the acquirer gains beneficial ownership of the share).
Although the high ownership threshold means it’s rare to trigger an HSR filing, the concept of an enforcement action for missing a filing isn’t just theoretical. Last month, Mike Melbinger blogged about the FTC & DOJ going after an executive and obtaining a $638k penalty for an unreported 2018 stock award.
The writing was on the wall when the SEC scheduled and then cancelled this week’s open meeting. Yesterday, without a meeting, the Commission announced that it was re-opening the comment period on the 2015 “clawbacks” proposal – which would – at a very high level – direct the stock exchanges to require listed companies to implement policies to recover incentive-based pay in the event of an accounting restatement. The fact sheet that accompanied yesterday’s announcement notes:
The Commission received numerous comment letters on the 2015 proposal. In light of the regulatory and market developments since 2015, the Commission is providing the public the opportunity to submit additional comments on the 2015 proposal, and to address the additional questions raised in the reopening release issued today.
The 19-page “reopening release” points out that the SEC will consider comments that have been received to-date on the proposed rule. The agency is also seeking feedback on 10 specific additional topics, based on its consideration of the prior proposal and new things that have happened in the past half-decade (e.g., many companies have now adopted clawback policies that may or may not align with the proposed rule). SEC Chair Gary Gensler released this short statement in support of the decision to re-open the comment period.
The comment period will be open for 30 days from the date the re-opening release is published in the Federal Register. We will be talking about this breaking news at our “Executive Compensation Conference” today!