Earlier this summer, I blogged about a Semler Brossy Report that found 62% of Fortune 200 companies incorporate ESG measures in executive compensation programs – here’s a NYT article discussing what some companies have done. More recently, Semler Brossy issued a follow-up report on ESG and incentive programs and Liz blogged about how it shows many of those ESG metrics relate to shorter term, operational metrics. The report also gives some interesting info on D&I metrics.
“People” metrics have frequently been included in incentive program design, but in contrast to explicitly measured ESG metrics on topics like customer satisfaction and climate change, the report says that over half of companies with a diversity & inclusion metric include it on a discretionary basis. Here’s more:
Of companies with ESG measures, 38% use a D&I metric (or 23% of all companies in the sample). However, well over half of companies with D&I include it on a discretionary basis. Despite seeming prevalence, only 10% of all companies in the overall sample include a D&I metric with a formal weighting in executive incentives.
This trend speaks to many Boards’ traditional hesitation to set and disclose formal targets around D&I initiatives, likely due both to general discomfort around setting “quotas” and optics as well as risks associated with disclosing performance that may be subject to external criticism. In addition, many companies recognize that “hard” metrics of representation in an employee population do not capture the cultural aspect of a truly inclusive organization – measuring “Diversity” results without assessing “Inclusion” is an incomplete answer. A more balanced assessment may require discretion and judgement.
As much as there’s hesitation to disclose formal D&I targets, there may be increased demand for companies to do so. Debate about the proper way to incentivize progress on diversity & inclusion efforts will likely continue and as the report notes, existing examples of how companies have integrated social metrics into incentive plans will prove helpful for other companies as they step forward. The same will also likely be true for other sustainability metrics.
We’ll be addressing ESG & use of other non-financial metrics in incentive plans, along with related issues, at our “Proxy Disclosure & Executive Pay Conferences” – coming up virtually September 21st – 23rd. Register today to get the latest essential & practical guidance, direct from the experts. Here are the agendas – 15 panels over 3 days, plus interactive roundtables to discuss pressing topics.
Amid Covid-19 and the related economic turmoil, many companies experienced significant stock price declines – many have since seen decent recoveries. Earlier this year though, as companies granted equity awards, they undoubtedly used more shares from their stock plans than initially projected. A recent Equilar blog reviewed additional share requests of Russell 3000 companies from 2018 to 2020. Upon first glance, it didn’t appear that 2020 share requests were more frequent than prior years. But, when Equilar drilled into the data further, it did see accelerated share requests in April 2020.
Equilar found that, in addition to more frequent share requests, the volume of shares requested also increased. Similar to the number of share requests, the increase in volume of shares requested becomes more obvious when drilling into 2020 data further. In terms of the number of shares requested as a percentage of shares outstanding, Equilar found a median of 4% at the end of March, which then rose to 4.3% by mid-April and 5.1% by mid-May.
The blog says that proxy advisors have recommended against companies making share requests that the proxy advisors view as too large. At the same time, Equilar includes data showing a downward trend in vote support as share requests become larger. Rather than scrambling come proxy season, as we don’t know when or whether stock prices may dip again, if companies haven’t already done so, it might be worthwhile to schedule more frequent assessments of shares remaining available for grant.
A recent Pearl Meyer memo discusses long-term incentive plans and private companies. For many reasons, trying to put a LTIP in place at a private company that offers the same potential benefit as plans provided by public companies can be difficult. For private companies that want to consider implementing a LTIP, the memo lists 7 key LTIP design questions for consideration. The questions are broad and can help illuminate potential paths as well as ‘non-starters’, from a structural perspective:
– What is the company’s vision, exit strategy or transition plan? A potential exit or transition strategy will affect decisions relating to equity vehicles, performance metrics, vesting parameters and liquidity options.
– What is more important to emphasize: performance or retention? The answer can provide clarity about whether appreciation-oriented vehicles or full-value vehicles would be more appropriate.
– Should we share ‘real’ equity with our employees? If potential earnings dilution and administrative headaches are obstacles, the memo discusses some benefits to offering equity-like vehicles, along with some disadvantages.
– Should we provide in-service liquidity? Depending on a company’s strategy, doing so may cause executives to take their eyes off the prize.
– Who should participate in the LTIP? This is probably the most company-specific question and companies need to consider whether all levels of the organization will really value potential future equity above a higher salary today.
– Can we set and track performance metrics and goals? Some companies outsource this process by conducting a periodic third-party valuation, while others establish an internal valuation model, such as a multiple of EBITDA.
– Who has the authority to approve the plan and administer it? With established governance structures less common in private companies, the memo suggests selecting a member of HR and finance to work with the CEO as part of a ‘management committee.’
We’ve blogged before about legislative considerations tying corporate tax rates to pay ratios. A recent Baker McKenzie blog says San Francisco is considering such a move. The blog summarizes action taken earlier this summer by the San Francisco Board of Supervisors when it approved what is called the “Overpaid Executive Gross Receipts Tax” for inclusion on November ballots.
The initiative would impose a tax on companies doing business in San Francisco if their highest-paid employee makes more than 100 times the median compensation of the company’s San Francisco-based employees. Businesses with no more than $1 million in annual gross receipts and non-profits would be exempt from the tax, but other businesses with a presence in San Francisco would potentially be subject to the tax.
As discussed in the blog, the ballot initiative is silent on how compensation will be determined, making it difficult for companies to understand the potential impact of the tax. The blog suggests the potential purpose of the tax is less about making policy and more about seeking an additional source of tax revenue.
Although 62% of the Fortune 200 incorporates ESG metrics into incentive plans, a significant portion of those relate to shorter-term “operational” metrics, versus metrics that shareholders have deemed relevant to long-term sustainability and stakeholder objectives. That’s according to this Semler Brossy memo – which categorizes “operational” metrics to include:
The memo notes that “customer satisfaction” is the most common ESG metric, used by about 55 companies in the Fortune 200. Although they may not be exactly what “stakeholder capitalism” proponents are looking for, the rationale for using “operational” metrics seems pretty strong – they’re easier to tie to the top or bottom line.
We’ve blogged a lot about pay adjustments that may be necessary due to unforeseen challenges that the pandemic has presented (here’s the latest – and this 11-page CGLytics memo analyzes adjustments that’ve been announced by 554 companies in the Russell 3000).
But for some companies, the pandemic has meant that business is booming. This Pay Governance memo summarizes pay actions that you might want to take if you’re at either end of the spectrum – noting that even companies that are doing relatively well right now still need to be sensitive to the overall environment that we’re all facing.
Here’s what it says to consider if your company’s performance has been better than expected this year, and you’re tracking to above-target payouts for annual incentives:
Discuss formulaic payouts, based on:
• Reviewing the impact of the pandemic on revenues/profits versus future/sustainable levels
• Considering the team’s response to the pandemic to safely meet increased customer demands while managing supply chain and other operational challenges
• Evaluating if negative discretion is appropriate considering broader context (e.g., pay less than maximum to avoid perceptions of windfalls and demonstrate empathy)
And for long-term incentives that were granted at prices well below the current value, or that are tracking for above-target payouts due to unique 2020 performance, it suggests:
• Reviewing formulaic payouts to ensure payouts are appropriate considering the broader economic and social context
• Evaluating if the estimated payouts from outstanding awards provide sufficient recognition for the performance delivered, which also may be considered in developing next year’s long-term incentive grants
In addition, the memo suggests reviewing NEO pay – including potential realizable pay and a mock-up of next year’s Summary Compensation Table – and the history of incentive payouts compared to TSR over 3, 5 and 10-year periods. While you’re at it, now’s also the time to start assessing whether 2020 events should affect plan design for 2021.
As I recently blogged, ISS is already saying that COVID-related compensation decisions will dominate next year’s proxy season. That means proxy advisors and shareholders will be looking even more closely at your CD&A to understand the rationale for pay decisions – and how they fit into your broader “ESG” story, especially with respect to your “human capital” practices and decisions.
As this Willis Towers Watson memo points out, shareholders “may be less inclined to support companies taking what they perceive to be disproportionate actions to protect executives at the expense of or in contrast with others.” The memo notes that these social and governance factors could attract extra scrutiny this year:
– Furloughs
– Reductions in force
– Reliance on government aid programs
– Broad employee pay-cuts
– Outbreaks at sites or among employee populations
– Customer safety
– Reduced or suspended dividends
– Increased dilution
Willis Towers Watson urges companies to address any “red flags” – such as one-time retention awards, overriding formulaic outcomes through the use of discretion, executive windfall gains, etc. – head-on, through a storytelling approach. And when it comes to ESG, the consulting firm suggests that discussing its role in executive compensation may offer these benefits:
– Preempt investor questions and demonstrate awareness of a topical issue
– Highlight existing practices or documents that may not have been widely known about to date
I blogged a few weeks ago about a framework for executive pay adjustments. This Mercer memo lays out additional considerations specific to “non-performing” performance shares – including available alternatives for this situation, plan provisions, accounting treatment, and disclosure and tax implications. Here’s what it says about accounting treatment:
The accounting treatment of discretionary performance share cancellations, modifications, and replacements differs for awards with nonmarket (e.g., EPS or sales targets) vs. market performance conditions (e.g., TSR). Automatic adjustments that are set out in the plan (“the committee shall adjust for …”) generally have no impact on compensation expense.
Nonmarket conditions. Companies recognize no cost for performance shares that are improbable of vesting or cancelled. Instead, companies must recognize any incremental cost associated with a modified or replacement award. The incremental cost is calculated by comparing the fair value of the award immediately pre- and post-modification. If an award is improbable of vesting or cancelled, the pre-modification fair value is zero and the post-modification value equals the new number of shares expected to vest (typically target) multiplied by the per-share fair value on the modification date. The final cost is trued up for the number of shares that actually vest.
Market conditions. The cost of a performance share with a market condition must be recognized regardless of the outcome or whether the award is cancelled, as long as the employee completes the award’s original service requirement. In addition, companies have to recognize any incremental cost associated with a modified or replacement award. The incremental cost is calculated by comparing the fair value of the award (using a Monte-Carlo simulation incorporating the probability of achievement) immediately pre- and post-modification.
And when it comes to your plan documents, here are a few questions to consider:
– Are there any restrictions on discretionary modifications or replacements?
– Is participant consent required?
– Will cancelling awards or converting stock-settled awards replenish the share reserve?
– Will additional grants exceed the available share reserve or any plan individual limits?
I blogged the other day about a SEC settlement that included repayment of close to $2 million in incentive compensation, and last week, Liz blogged on TheCorporateCounsel.net about another clawback matter, this one involving Steve Easterbrook, the former CEO of McDonald’s. If you’ve been following news reports, you’re likely aware McDonald’s is suing Easterbrook to claw back severance that was paid to him when Easterbrook was dismissed “without cause.” A recent NYT DealBook article suggests that companies and legal advisors may want to revisit pay and severance policies for a closer look at “cause” definitions. Here’s a Fenwick & West blog discussing some of the potential ramifications companies might find themselves up against when pursuing a clawback.
Many companies adopted clawback policies in the time since the SEC proposed rules directing national securities exchanges to establish listing standards relating to clawback policies. A recent Pay Governance memo reminds companies to monitor upcoming SEC action as it’s likely the SEC will propose final rules on clawbacks in the next several months. If so, companies will want to ensure their policies comply with the final rules – some policies may require amendment.
We’ll be discussing the latest on clawbacks and forfeiture provisions, including the trend to broaden those provisions at our “Proxy Disclosure & Executive Pay Conferences” – coming up virtually September 21st – 23rd. Register today to get the latest essential & practical guidance, direct from the experts. Here are the agendas – 15 panels over 3 days, plus interactive roundtables to discuss pressing topics.
We’ve blogged before about reports showing trends in tying ESG metrics to executive compensation and a recent Clermont Partners blog looks at shareholder proposal trends for insight into investor interest in tying ESG to executive compensation. And, it sounds like companies may want to start planning for how to enhance disclosure in next year’s proxy statement about E&S compensation metrics and how executives are compensated against E&S goals.
In analyzing shareholder proposal trends, the blog says investor’s want to see executive compensation tied to ESG metrics. The blog reports that the number of, and support for, ESG executive compensation shareholder proposals have increased and then it walks through some of the factors ESG ratings firms evaluate for executive compensation. Depending on which ratings firms company investors follow, the blog provides a helpful overview of ESG ratings in context of executive compensation. To get started, the blog suggests companies first define key performance indicators used to track and measure company-specific ESG goals and then clearly disclose these KPIs in ongoing investor communications.
In terms of potential E&S executive compensation proposals – within the “E” dimension, the blog says investors have cited poor performance on SASB-defined material ESG issues, requesting boards integrate ESG metrics into executive incentive programs. Within the “S” dimension, investor requests have largely centered around reporting on a company’s global median pay gap across gender, race or ethnicity or requesting compensation committees evaluate pay grades and/or salary ranges of all classifications of employees when setting CEO compensation targets.