For those working with stock plans, periodic questions arise about how quickly other companies use up shares reserved under incentive plans or about the number of shares typically included in additional share requests. To help answer some of those questions, FW Cook recently issued its 2020 aggregate share-based compensation report. The report reviews share usage trend data covering the three-year period 2017 – 2019 from 300 companies spread across five industry groups. Data analyzed includes annual grant rates based on annual share usage and fair value transfer (FVT), potential share dilution, prevalence of long-term incentive plan share requests and the allocation of long-term incentive pools to the “top 5” proxy officers. Here are a few high-level highlights:
– FVT rates as a percentage of market cap were generally stable compared to the firm’s 2017 study – the median 3-year average annual rate was 0.92% in the current study
– Potential dilution from outstanding equity awards trended down over the last three years, and continues a downward trend observed over the last 12 years – driven by companies granting more equity in the form of restricted and performance shares, which typically use fewer shares than stock options and remain outstanding for far shorter periods of time
– Over 1/2 of the sample companies requested shareholder approval of an incentive plan share request and the median size of the requests was approximately 4% of common shares outstanding – with requests varying based on company size and the year of request
In terms of what we might see going forward, the report says that if companies encounter ongoing stock price declines for the rest of 2020 and into 2021, we’ll likely see increased FVT rates as companies grant more shares to help offset the market decline
Check out this 66-page Argyle guide to enhanced compensation disclosures in proxy statements. It highlights sample disclosures – organized into these categories:
1. Inclusion of Table of Contents in CD&A
2. Inclusion of a Letter from the Compensation Committee
3. Executive Compensation Overview
4. Presentation of Compensation Principles/Objectives/Philosophy
5. Presentation of Feedback & Responses on Shareholder Engagement
6. Presentation of Compensation Elements
7. Presentation of Metrics Used in Incentive Programs
8. Inclusion of the Evolution of the Company’s Executive Compensation Program
9. Presentation of Compensation Process
10. Presentation of Peer Groups
11. Presentation of Goals & Performance
12. Presentation of CEO & NEO Scorecards
13. Presentation of Other Compensation Policies & Practices
14. Other Compensation Disclosure Enhancements – Q&A, etc.
Compensation Advisory Partners is out with its annual “CAP 120″ survey – which analyzes 120 companies from ten industries, to provide a broad representation of market practice among large U.S. public companies.
CAP reviewed Annual Incentives, Long-Term Incentives, Perquisites, and Stock Ownership Guideline Requirement Provisions of these companies in order to gauge general market practices and trends. Especially helpful this year is the new interactive tool that breaks down the data by industry. Here are some of the overall takeaways:
• 84% of companies use 2 or more metrics in their annual incentive plans (ensuring a broader view of company performance and mitigates risk within the program).
• 43% of companies incorporate strategic and non-financial (including ESG – environmental, social, and governance) annual incentive measures that are unique to a company’s strategy.
• Performance-Based Long-Term Incentives are the largest portion of the LTI mix for the CEO and their use has continued to increase over time (from 46% in 2011 to 63% today, a shift from stock options to performance-based incentive awards).
The annual “Corporate Governance & Executive Compensation Survey” of the 100 largest companies from Shearman & Sterling is always a “hot ticket” item, perhaps because it’s one of the oldest. With perquisites getting more attention lately – due to the impact of the pandemic and recent SEC Enforcement Actions – I was interested in some of the takeaways on that topic. Page 78 gives this info about aircraft use:
– 82 companies allow personal use of corporate aircraft – 46 offer this perk to all NEOs, 21 offer it to only the CEO, 5 offer it to the CEO & CFO, and 10 offer it to the CEO, CFO and other NEO
– 30 require execs to reimburse the company for all or a portion of their personal aircraft usage
– In many instances, personal usage is limited to availability and requires approval by the CEO
– 7 companies disclose that they provide tax gross-ups on some or all perks to execs
This recent report from the CFA Institute takes a look at progress on “short-termism” since 2006 – a concept that originally targeted the pitfalls of practices like sacrificing R&D and hiring to meet quarterly earnings targets but has now evolved to encompass long-term sustainability. On the executive compensation front, the report’s contributors (investors and various corporate governance leaders) concluded that say-on-pay and majority voting for directors have helped drive increased engagement – and “egregious” practices like tax gross-ups are now pretty rare. Progress! Now, though, the hurdle is complexity. Here’s an excerpt:
The consensus of the group focused on the complexity of many pay packages as the most pressing ongoing problem, noting that compensation consultants employed by most companies to design compensation plans are not paid to come up with simple pay plans. Those around the table stressed that it can be simple to align pay to performance, but that such an outcome rarely happens.
According to the group, compensation often focuses on share price but not on shareholder value. The group appreciated pay packages in which executives (and board members) had to buy shares in the market with their own money and hold them for a long period of time. Such a structure is one of the best ways to align management incentives with shareowner interests.
Investors acknowledged that annual targets are needed for metrics linked to pay, because that is a time period that management should feel is somewhat under their control. A large and often majority share of compensation, however, should be tied to a shared incentive with shareowners. Investors want to ensure that compensation is aligned with the long-term execution of strategy. If benchmarks are changing year to year, or compensation goal bars are being lowered, investors see these as red flags.
Succession planning was noted as a key responsibility of a board that has a major influence on a company’s compensation strategy and its long-term strategy. Firms that do a poor job of succession planning often have to go into the market and overpay to induce a manager to leave their current situation. Strong succession planning also signals to investors that companies are managing for the long-term success of a company by taking the time to pick and groom internal candidates that can seamlessly execute on the company’s long-term strategy.
The report goes on to discuss some hesitancy around further complicating incentive plans by adding ESG metrics that don’t have a clear link to value. The takeaway recommendation is that companies work with investors to simplify executive compensation plans so that executive incentives align with shareholder interests – and are easily understood.
Yesterday, as the SEC’s Division of Enforcement wrapped up its fiscal year, it announced another perquisites enforcement action. The latest action involves Hilton Worldwide Holdings and is the second perks-related enforcement action in just the last few months. We list perks cases in our “Perks” Practice Area and you can see they aren’t too frequent – so to see two in just the last few months is surprising.
The SEC’s order provides some of the details and says the company failed to disclose $1.7 million worth of travel-related benefits to its CEO and NEOs.
Items that Hilton incorrectly viewed as business expenses and paid for on behalf of its Named Executive Officers, but did not disclose, include, in the case of the CEO, expenses associated with personal use of corporate aircraft, and in the case of Named Executive Officers, expenses associated with hotel stays, as well as taxes related to such items. As a result, Hilton understated “All Other Compensation” portion of its Named Executive Officers’ compensation by an annual average of approximately $425,000 in the company’s 2016 – 2019 proxy statements.
According to the SEC’s order, Hilton’s system for identifying, tracking and calculating perquisites incorrectly applied a standard whereby a business purpose would be sufficient to determine that certain items were not perquisites or personal benefits that required disclosure.
The SEC’s order acknowledges that Hilton took prompt remedial acts and cooperated with the Commission:
Among other things, the order says after receipt of a written document and information request from the Commission staff, Hilton conducted an internal review of its perquisite disclosures and its system for identifying, tracking and calculating perquisites. On April 24, 2020, Hilton filed a definitive proxy statement, which, among other things, provided revised disclosures regarding perquisites and personal benefits provided to its CEO in 2017 and 2018 and to other Named Executive Officers for the same time period.
Without admitting or denying the SEC’s findings, Hilton consented to the SEC’s cease-and-desist order, which requires Hilton to pay a $600,000 civil penalty.
Perks can be tricky – to help guard against this type of action, we have a 102-page chapter on Perks & Other Personal Benefits as part of Lynn & Borges’ “Executive Compensation Disclosure Treatise” posted on this site. Also, if you missed the perks session at last week’s “2020 Proxy Disclosure” and “17th Annual Executive Compensation” conferences, you can access the video archives or if you didn’t register to attend, you can register now to watch any and all sessions.
We’ve blogged before about incorporating “people” metrics in executive compensation programs. A recent Mercer memo says it’s still not too common, while PwC’s annual director survey says only 39% of directors support including diversity & inclusion metrics in company pay plans. Mercer estimates only 15-20% of S&P 500 companies include diversity, equity and inclusion (DEI) metrics in their executive incentive programs and most don’t include an objective, quantitative metric. As investors are focused on company D&I initiatives and looking for progress, more companies may think about how to advance D&I efforts and incorporating related metrics into incentive programs. To get started, Mercer’s memo suggests companies answer these 6 questions:
(1) Where is your company today on DEI? Where do we want it to be and by when? Determine organizational DEI strategy and objectives and clearly communicate the information – you need to be able to measure DEI by identifying key outcomes. Determine metrics for evaluating success and set specific time frames.
(2) How will we create an environment to support real DEI change? Companies need authentic support from leaders of compensation plans and also from the board and other stakeholders.
(3) Will we use the short-term incentive plan or the long-term incentive plan?
(4) What DEI metrics will we track?
(5) Will our measures be quantitative and objective, or qualitative and subjective?
(6) Who will be held accountable? Some companies may prefer to start with a smaller, more manageable group of senior executives and expanding deeper into the organization later. Other companies may limit the program to the US, while others may extend the program globally. In determining the extent of the program, consider how you might communicate differently to, and across, groups.
Every company is different and what makes sense at one company may not be effective at another – but these questions provide a good starting point to help get everyone on the same page.
Semler Brossy issued a recent report reviewing incentive design changes in response to the Covid-19 pandemic, which so far, have been less frequent than reported CEO salary reductions. Semler Brossy reviewed filings from 36 Russell 1000 companies disclosing changes between June 1 and September 10 and observed that almost 1/2 of the announced changes were to annual incentive plans and about 1/3 were for changes to both annual and long-term incentive plans. Here are the most common changes these companies announced for annual incentive plans:
– 69% of the announced changes added new metrics – commonly added metrics have been cash flow, EBITDA, and strategic/ operational health measures
– 41% reduced target or maximum payout opportunities – both for the in-flight plan and the go-forward plan
– 34% modified the performance period – typically to measure partial year performance
– 28% added committee discretion to determine payouts – the report notes this approach may be more prevalent in practice given the qualitative measurement of certain additional metrics
The report also includes findings from review of announced changes to long-term incentive plans – which were less common than changes to annual incentive plans. For specific actions some companies took, the report provides case studies detailing more extensive actions taken by six companies and Mike Melbinger blogged a while back with a nifty chart showing disclosures from companies that made changes to their short- and long-term incentive plan performance targets or metrics.
Last week, ISS released the results of its annual policy survey, which is part of its process in formulating next year’s proxy voting policies. In short, investors expressed a desire for clear disclosure about the pandemic’s impact on compensation decisions and non-investors expressed a need for flexibility in making adjustments to performance expectations and related changes to executive compensation in addition to expressing a need for clear disclosure of such decisions. Here’s an excerpt with the responses to questions involving executive compensation – John also blogged on TheCorporateCounsel.net about other results from the survey:
– Expectations regarding compensation adjustments: When asked about the respondent’s viewpoint regarding executive compensation in the wake of the pandemic, a significant majority of investor respondents – 70% – indicated that the pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into compensation decisions to adjust pay and performance expectations, and should be clearly disclosed to shareholders. Among non-investors, a majority – 53% -indicated that the pandemic is different from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executive compensation.
– Adjustments to short-term/annual incentive programs: Regarding short-term/annual incentive programs and the respondents’ views on what is a reasonable company response under most circumstances, slightly over one-half of both investors – 51% – and non-investors – 54% – indicated that both (1) making mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities; and (2) suspending the annual incentive program and instead making one-time awards based on committee discretion could be reasonable, depending on circumstances and the justification provided.
Here’s another reason to get your arms around your “equal pay” data – especially if you have a large employee base in California. The legislature there has passed Senate Bill 973, which if signed into law by Governor Newsom would require California employers with 100 or more employees to submit annual pay data reports to the state, similar to what would’ve been required at the federal level if the EEO-1 Component 2 data reporting requirement hadn’t died last year. This Skadden article walks through how SB 973 would work – here’s an excerpt:
Modeled after the now defunct EEO-1 Component 2 data reporting requirement, SB 973 would require that California employers with 100 or more employees submit annual pay data reports to the state’s Department of Fair Employment and Housing. California employers’ annual reports would include the following information: (A) the number of employees by race, ethnicity and sex broken down into nine specified job categories; (B) the number of employees by race, ethnicity and sex whose annual earnings fall within specified pay bands; (C) the total number of hours worked by each employee counted in each pay band during the reporting year; (D) for employers with multiple establishments, a report for each establishment and a consolidated report that includes data on all employees; and (E) any clarifying remarks regarding the information provided, which is optional.
The article notes that SB 973’s express intent is to allow for more targeted enforcement efforts against companies who may be engaged in discriminatory pay practices. That heightens the stakes for companies to not only conduct equal pay audits, but to understand the data that’s gleaned from that process and adequately correct shortcomings (as I’ve blogged, that can be complicated).
The article also notes that although SB 973 adds a compliance rationale for California businesses to address this issue, shareholders and other stakeholders are pushing for pay equity even outside the borders of the Golden State. For help in navigating all these demands, mark your calendars for our November 19th webcast on this topic – “Pay Equity: What Compensation Committees Need to Know.”