Executive Compensation

Subscribe to Executive Compensation RSS Feed

ISS Releases Final Changes to Its Voting Policies for 2020 Proxy Season – Newly Public Companies, Independent Chair and Share Buyback Proposals, Board Gender Diversity, EVA and More

Today, Institutional Shareholder Services Inc. (ISS) released its 2020 global proxy voting policy updates, which will generally be applicable for shareholder meetings on or after February 1, 2020. Consistent with the preview offered in its proposed 2020 voting policy changes (covered on our blog here), the updates to ISS’ U.S. proxy voting policies apply primarily to the proxy advisory firm’s treatment of (1) certain governance structures at newly public companies, including multi-class shares; and (2) annual meeting proposals calling for independent board chairs and share buybacks.

The updates released today confirm that ISS will include Economic Value Added (or EVA) metrics in its pay-for-performance model’s secondary Financial Performance Assessment (or FPA) screen.
Continue Reading

Glass Lewis 2020 Guidelines Include Director Negative Recommendations Depending on SEC Staff’s Response Under Recently Updated Staff Shareholder Proposal No-Action Letter Policy

Glass Lewis (GL) has recently released its 2020 U.S. proxy season voting guidelines, which contain a few notable developments to consider in preparation for the upcoming proxy season.  These updates include changes related to the exclusion of shareholder proposals and company responsiveness to say-on-pay opposition, among other amendments, all of which are described in the sections that follow.

Exclusion of Shareholder Proposals

In September 2019, the SEC staff announced that it may sometimes respond orally, rather than in writing, to company requests to exclude a shareholder proposal from a proxy statement, and may also decline to state a view altogether (discussed in a Davis Polk Client Alert).
Continue Reading

Spencer Stuart Shows How Boards Are Transforming

The 2019 U.S. Spencer Stuart Board Index (Index) reflects the board practices and trends of S&P 500 companies. According to the Index, boards are responding to investors’ increasing calls for greater diversity of “gender, age, race/ethnicity and professional backgrounds.” Spencer Stuart found that “boards are accelerating the addition of women and minority directors,” which in turn is driving notable changes in board composition. Spencer Stuart predicts that the biggest drivers of board refreshment will be replacing retiring directors and adding new skills to the board.

The Index covers public companies in the S&P 500 as of May 15, 2019 and the proxy statements released between May 30, 2018 and May 15, 2019.
Continue Reading

ISS Opens Window Today for Peer Group Submissions

Today begins the window where certain public companies in the U.S. and Canada have the option of submitting changes to their respective peer groups to Institutional Shareholder Services Inc. (“ISS”). The submission window closes next Friday at 8:00 PM EDT, July 19, 2019.

ISS’ invitation is directed to companies with annual meetings scheduled between September 16, 2019 and January 31, 2020 that have changed or anticipate changing their respective peer group from their last proxy disclosures. ISS advises that “[s]ubmissions should reflect peer companies used (or to be used) by the submitting company for pay-setting for the fiscal year ending prior to the company’s next upcoming annual meeting.”

Each proxy season, ISS constructs a peer group for each company prior to the company’s new proxy statement.
Continue Reading

Investor Letter Campaign Calls for More Equity Pay Transparency

An announcement issued today states that an institutional investor group representing over $1.6 trillion in assets under management has launched a letter campaign calling for companies to provide more disclosure on workplace equity policies and practices relating to gender, race, ethnicity, sexual orientation, and other federally protected classes. The signatories believe that this type of information is material to investors and seek “more accurate assessments of the scope and depth of a company’s programs, its performance relative to peers, and improvement trends over time.”

The letter, referred to as the Investor Statement, references studies on the benefits of a diverse workplace, including findings by Equileap, an organization that specializes in providing data and insights on gender equality.
Continue Reading

Is an Eventual Negative Say-on-Pay Recommendation Almost Inevitable?

Results of a study published in April 2019 by the executive compensation consulting firm Pearl Meyer suggest that Russell 3000 companies which have not yet received an “Against” Say-on-Pay (SOP) recommendation will likely receive one down the road. The firm states that “it’s reasonable to expect that at some point in the future, more than 80% of companies will have fallen victim to a negative vote recommendation at least once.”

Relevance. Management’s SOP proposals give shareholders a precatory or nonbinding vote on compensation packages for the company’s top executives. While the underlying regulation permits some leeway on the frequency of holding these votes, many companies opt to do so annually.
Continue Reading

Potential Legislation on HCM Reporting and Stock Buybacks

Earlier in the week, a subcommittee of the House Financial Services Committee held a hearing on four draft bills that, if enacted, would impact corporate reporting, and more. Proponents of these bills contend that the disclosure will “provide more information to help investors make decisions based on long-term economic growth.”

What Were the Topics?

1. Mandatory HCM Reporting. Representative Cynthia Axne (D. Iowa) introduced a draft bill to amend the Securities Exchange Act of 1934 (Exchange Act) to require issuers to disclose information about human capital management (HCM) in annual reports on topics such as demographics, compensation, composition, skills, culture, health, safety, and productivity.
Continue Reading

Will the SEC Adopt Additional Human Capital Management Disclosure Requirements?

IAC Meeting.  Last week, the Investor Advisory Committee (IAC or Committee) to the Securities and Exchange Commission (SEC) voted to ask the SEC to further investigate and evaluate whether public companies should be required to disclose information related to human capital management (HCM), in other words, how companies manage workplace relationships including training, talent development and retention.

Over the last few decades, as the US economy has increasingly become based on technology and services, certain investors have expressed more interest in HCM disclosure. 
Continue Reading

IRS Issues Guidance Clarifying Tax Reform Changes to Section 162(m)

On August 21, 2018, the IRS issued Notice 2018-68, which provides initial guidance on two aspects of the amendments to Section 162(m) of the Internal Revenue Code made by the Tax Cuts and Jobs Act:

  • how to identify the expanded group of employees who are covered by new Section 162(m); and
  • how a plan or agreement can qualify as grandfathered from new Section 162(m).

This memorandum summarizes this guidance, as well as the additional aspects of new Section 162(m) about which the IRS is seeking comment. Read the full memo here.
Continue Reading

Relationship Between CEO Pay Ratio and Say on Pay

A recent Semler Brossy report examining the relationship between 2018 CEO Pay Ratio and Say on Pay Results concluded that CEO Pay Ratio has an inverse relationship with Say on Pay but is not a primary driver of Say on Pay Results.  With most companies now having filed their 2018 CEO Pay Ratios and reported Say on Pay vote results, the report covered 1,611 Russell 3000 and 364 S&P 500 companies.

It found that there was a weak, inverse relationship between CEO Pay Ratio and Say on Pay for Russell 3000 companies.  Average Say on Pay support for Russell 3000 companies with a CEO Pay Ratio above the index’s median was 89.3% compared to 91.8% for those below the median. 
Continue Reading

SEC Publishes Final Rule and Concept Release on Equity Compensation Offerings

On July 18, 2018, the SEC voted unanimously both to issue a final rule and to solicit public comment through a concept release relating to the federal securities rules that govern the issuance of employer stock pursuant to compensation arrangements. Davis Polk discusses the SEC’s final rule and concept release here.

The final rule and the concept release were published to the Federal Register on July 24, 2018. The final rule is effective as of July 23, 2018, meaning that companies can rely on it immediately as of that date. The SEC is accepting comments relating to the concept release until September 24, 2018.
Continue Reading

Delaware Court Finds Continued Compensation to Incapacitated Chairman Could Render Directors Liable for Claims of Waste and Bad Faith

In an unusual finding, the Delaware Court of Chancery held that demand was partly excused and claims for corporate waste, bad faith and unjust enrichment could proceed against CBS Corporation for compensation paid to its former Executive Chairman, Sumner Redstone, who later became Chairman Emeritus.  The plaintiff alleged that Mr. Redstone became incapacitated yet continued to receive compensation for work he did not perform.

The court noted that claims of corporate waste and bad faith require a plaintiff to show that the board’s decision was “so egregious or irrational” that it could not be based on a valid assessment of a company’s best interest, and amount to an “extreme factual scenario.”  In making its determination, the court reviewed the salary payments made to Mr.
Continue Reading

New Tax Act Has Meaningful Implications for Broad-Based Employee Benefit Plans

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA), which generally went into effect for tax years beginning on or after January 1, 2018.  The TCJA provisions affecting executive compensation (for example, the elimination of the performance-based compensation exception to Section 162(m) of the Internal Revenue Code) have received signification attention, but the TCJA also has meaningful implications for broad-based employee benefit plans and programs.

A memorandum that provides an overview of the key TCJA provisions impacting employee benefits is available here.
Continue Reading

Administering Compensation Programs in the Wake of the Tax Cuts and Jobs Act – New Section 162(m)

The Tax Cuts and Jobs Act (TCJA) significantly changes Section 162(m) of the Internal Revenue Code, effective for tax years beginning after December 31, 2017. While supplemental regulatory guidance is likely, the impact on companies’ compensation programs and planning processes is immediate.

For an in-depth discussion of the significant changes, ways companies can address them and areas where the new rules present uncertainty, see our memorandum.
Continue Reading

Another Twist in the Challenges to Director Compensation

In a series of cases challenging the magnitude of equity award compensation that boards have provided for their non-employee directors, the Delaware Chancery Court suggested that if the awards were made within a “meaningful limit” approved by shareholders the court would review these challenges under the standard business judgement rule rather than requiring an entire fairness review.

Many companies took heed, seeking shareholder approval for amendments adding a director award limit to their stock incentive plans. However, the Delaware Supreme Court recently put into question whether a meaningful limit would actually help to avoid an entire fairness review.

While it is hard to believe that a reasonable limit approved by shareholders would be of no value in rebutting a challenge to an otherwise defensible equity grant, boards should focus on the entirety of their approach to determining non-employee director compensation.
Continue Reading

Where the Final Tax Reform Bill Landed on Executive Compensation

On December 15, the Conference Committee reconciling the House and Senate tax reform bills released its full bill text to be voted on by both chambers of Congress and, if approved, presented to the President. The compensation provisions in the final bill are substantially the same as those in the Senate bill. The most important of these provisions are as follows:

Deduction Limit on Executive Compensation Paid by Public Companies.

The final bill makes the following changes to Section 162(m):

  • The exceptions for performance-based compensation (including stock options) and commissions are repealed.
  • The list of covered employees is expanded to include the CFO.

Continue Reading

Year-End Compensation Planning in Light of the House Tax Reform Proposal and Proposed Changes to the Taxation of Stock Options

Over the past week, Republican lawmakers in the House of Representatives have proposed sweeping tax reform legislation, including a series of amendments to the initially proposed bill. As companies enter their year-end compensation planning to develop compensation programs for 2018, they may wish to keep in mind certain aspects of the proposed legislation that may dramatically change how companies choose to compensate employees, executives and directors. A memorandum outlining these issues is available here.

Additionally, a blog post summarizing changes proposed by Representative Brady’s amendment to the bill relating to the taxation of stock options and restricted stock units granted by private companies is available here.
Continue Reading

House Tax Bill Upends Key Executive Compensation Rules and Makes Changes to Employee Benefits

On Thursday of last week, Republicans in the House of Representatives released a proposed tax reform bill that includes several provisions that would significantly impact compensation of directors, executives and employees. The bill also includes provisions relating to 401(k) plans and other employees benefits.

Blog posts summarizing these provisions are available at https://www.taxreformandtransition.com/2017/11/house-tax-bill-upends-key-executive-compensation-rules/ and https://www.taxreformandtransition.com/2017/11/house-tax-bill-changes-to-employee-benefits/.

These posts summarize the initial version of the tax reform bill proposed in the House. The bill is undergoing changes through the mark-up process in the House, and the Senate is expected to release its own bill soon, which may include very different provisions relating to compensation and benefits.
Continue Reading

SEC Issues Interpretative Guidance on Pay Ratio Rules, Reinforcing Flexibility and Providing Relief

As companies are coming to grips with the reality that the pay ratio rules will not be delayed, the SEC yesterday issued interpretative guidance that went a long way toward reassuring companies that they have sufficient flexibility and can exercise their best judgment in determining the median employee and the resulting pay ratio, thereby reducing compliance costs.

This came in the form of a brief Commission guidance and separate Staff interpretations.  In addition, although no mention was made in the press release touting these SEC actions, the Staff also updated and in one case withdrew its prior pay ratio guidance in the Division of Corporation Finance compliance and disclosure interpretations (CDIs) from last year (see Section 128C).
Continue Reading

The Drivers that Continue to Dog Say-on-Pay

Although the failure rate for 2017 say-on pay results achieved an all-time low of just 1.3%, the number belies the fact that more than 2,000 say-on pay proposals have either received negative recommendations from ISS or less than 70% support, or both, since say-on-pay resolutions started in 2011.

Approximately 12% to 14% of companies run into problems every year.  As companies have become more proactive with shareholder engagement, the number of companies that received “against” recommendations from ISS and still achieved more than 70% support has increased in the last three years, while the number of companies with those negative recommendations that received less than 70% favorable votes have fallen. 
Continue Reading

EEOC Reports Seeking Employer Pay Data Stayed

New EEOC regulations seeking pay data will not go into effect in March 2018 as planned.  According to the EEOC, the Office of Management and Budget (OMB) informed the Commission that it is initiating a review and instituting an immediate stay of the effectiveness of the pay data collection aspects of the revised form that was adopted in September 2016, in accordance with its authority under the Paperwork Reduction Act (PRA).

While the acting chair of the EEOC had opposed the revised form at the time it was approved, the EEOC reportedly lacked sufficient votes to reverse course.  Some groups had asked congressional lawmakers to pass laws to prohibit the EEOC from enforcing the rule. 
Continue Reading

MSCI Pay Report Finds Misalignment Between Reported Pay and Shareholder Returns

A new MSCI report reviewed 429 large-cap U.S. companies from 2006 to 2015 and found that, on a 10-year cumulative basis, total shareholder returns of those companies whose compensation was below their sector median outperformed those companies where pay exceeded the sector median by 39%. The conclusion was reported in the WSJ. SEC disclosure rules focused on annual pay were criticized for obscuring these trends.

The report aggregates its data to arrive at its conclusions. The underlying data for individual company results are not provided. The largest company in the study was Apple ($591 billion market capitalization) and the smallest company was PPL Corp.
Continue Reading

Supplemental Proxy Filings on Say-on-Pay Do Not Affect Overall Vote Results

A recent Semler Brossy report that examined supplementary proxy materials on say-on-pay proposals since 2011 found no material impact on the vote outcome for companies that made those filings in response to a negative ISS recommendation.  The average results for companies that received an “against” recommendation and made a supplemental filing are equal to or below the results at companies that received negative recommendations and did not file additional materials.

While the number of these filings have decreased from a high of 113 in 2012 to just 38 three years later, companies continue to file them.  So far this year there has even been an increase. 
Continue Reading

Delaware Case Addresses Board Process for Hiring and Terminating Executive

The Delaware Court of Chancery recently issued a 75-page opinion granting additional books and records related to the hiring and termination of Yahoo’s chief operating officer (COO), which triggered nearly $60 million in severance payments after only 14 months on the job. The Court determined that a credible basis exists to infer that there is possible mismanagement that would warrant further investigation.

According to the opinion, in initial discussions with the compensation committee about the potential hire, the CEO “cryptically” withheld the individual’s name, position and qualifications while asking the compensation committee to approve a compensation package that the compensation consultant had explained was more than what the peer data supported.
Continue Reading

LexBlog