Executive Compensation

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ISS Releases Preliminary FAQs on U.S. Compensation Policies and the COVID-19 Pandemic

On October 15, 2020, ISS released a series of preliminary FAQs on its approach to analyzing pay decisions relating to the COVID-19 pandemic. These FAQs provide general guidance on how ISS Research may approach COVID-related pay decisions in the context of ISS’ pay-for-performance qualitative evaluation. ISS makes clear that the responses to the FAQs should not be construed as a guarantee as to how ISS will consider any particular situation.

This post describes each topic covered by ISS’ preliminary FAQs and summarizes ISS’ related guidance. ISS typically releases its final FAQs in December of each year after it releases its updated benchmark voting policies, typically in November of each year.
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Glass Lewis Shares Recommendation Rates for 2020 Proposals

On October 8, 2020, Glass Lewis (GL) released reports providing its overview of the 2020 proxy season. These reports cover selected shareholder vote results and trends, market and regulatory developments, and whether GL was supportive of proposals on various topics submitted to shareholder votes during the 2020 proxy season. On a selected basis, the reports also provide GL’s rationale for its 2020 voting recommendations on company-specific proposals. Companies may find these new reports, particularly the information specific to GL’s practices and recommendations made, worth considering as they prepare for the upcoming 2021 proxy season.

Two reports cover shareholder meetings at U.S.
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ISS Peer Group Submission Window Is Currently Open

Each proxy season, Institutional Shareholder Services Inc. (“ISS”) constructs a peer group for each company prior to the company’s next proxy disclosure. ISS’ methodology for constructing the peer group is based in part on the company’s self-selected peer group. ISS recently invited submissions from certain U.S. and Canadian companies with annual meetings scheduled between September 16, 2020 and January 31, 2021. The submission deadline is next Friday at 8:00 PM EDT, July 17, 2020.

As one input in its peer group selection methodology, ISS will generally look to the peer group disclosed in the company’s last proxy and utilized by the company in determining CEO pay.
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SEC Urged to Mandate Disclosures on COVID-19 Risks and Responses

On June 15, 2020, Americans for Financial Reform (AFR), a nonprofit coalition founded in the wake of the 2008 financial crisis, called on the Securities and Exchange Commission (SEC) to require public companies to disclose how they are protecting employees from coronavirus (COVID-19), citing that consistent, comprehensive information is critical to investors and public health.

Although the SEC Division of Corporate Finance issued Staff Guidance in March 2020 providing companies with its views on COVID-19 disclosures, followed by a joint statement on COVID-19 disclosures in April 2020 by SEC Chairman Clayton and Corp Fin Director Hinman which statement recommended that companies “provide as much information as is practicable” about how they are responding to the pandemic, AFR claims that these efforts were only one step in the right direction.
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COVID-19: Reductions in Executive Pay

Recent market volatility due to the coronavirus (COVID-19) pandemic has disrupted many companies’ day-to-day operations resulting in economic hardship that has caused companies to consider or implement various measures to reduce personnel costs, including pay cuts, furloughs and/or layoffs. When implementing such personnel cost-cutting measures, a number of companies have reduced executive pay, including reductions in base salary and bonus opportunities, and some have also reduced director retainers.

This memo summarizes the actions that a number of companies have already taken and provides guidance for companies considering reductions in executive or director pay.

Read the full memo here.

The COVID-19 pandemic and the ensuing market uncertainty, as well as recently enacted legislation, have upended the compensation and benefit programs of many companies.
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COVID-19: Impact on Nonqualified Deferred Compensation Plans

Recent economic instability caused by the coronavirus (COVID-19) pandemic has caused many companies and their employees to suffer economic hardships that do not have a clear end in sight. As a result of ongoing fluctuations in the markets, uncertainty about job security and increased medical and other expenses, people are experiencing a real need for increased liquidity in the short term. Companies that maintain nonqualified deferred compensation plans may be approached by employees seeking to take distributions of deferred compensation from their plan accounts or to cancel or suspend currently outstanding deferral elections under the plan.

The challenge for both companies and their employees is that nonqualified deferred compensation is subject to Section 409A of the Internal Revenue Code, which was designed to prevent the early payment of deferred compensation amounts and often fails to provide needed flexibility in a crisis like we are experiencing today.
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COVID-19: Addressing Underwater Stock Options and Stock Appreciation Rights

The recent market volatility caused by the coronavirus (COVID-19) pandemic has caused precipitous drops in the stock prices of many companies, reducing the value of outstanding equity awards and potentially jeopardizing the effectiveness of these awards to reward and retain employees.  In particular, some companies may find that the exercise prices of their outstanding options and stock appreciations rights now substantially exceed the company’s current stock price. This memorandum sets forth key considerations for companies in this position and offers possible approaches that may enable companies to continue to retain and incentivize employees amid the ongoing market volatility, while taking into account the reaction from their shareholders and the proxy advisory firms.
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ISS Releases Policy Application Guidance For COVID-19’s Impact

On Wednesday, April 8, 2020, Institutional Shareholder Services Inc. (ISS) issued guidance on voting policies of various corporate governance-related issues that are likely to be implicated by the coronavirus (COVID-19) pandemic during the 2020 proxy season. The guidance does not introduce any new formal policies. Rather, the guidance provides ISS’s perspective on selected market developments and application of several of its existing policies relevant to the U.S. markets. Importantly, the guidance sheds some light on which company-specific and market-specific facts and circumstances are more likely to influence the proxy advisor’s determinations during and following the pandemic.

EXECUTIVE SUMMARY

The guidance makes three points relevant to the U.S.
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COVID-19: Considerations for 2020 Incentive Compensation Programs

The coronavirus (COVID-19) pandemic and the ensuing market uncertainty, as well as recently enacted legislation, have upended the compensation and benefit programs of many companies. These two memos are the first in a series of memos that will discuss considerations for companies to keep in mind in connection with their short- and long-term incentive compensation programs.

The first memo highlights key issues for companies that have yet to finalize their 2020 incentive compensation programs.  In the second memo, we identify issues for companies that have already granted their incentive compensation for 2020, including whether or not to revise performance criteria and/or goals now and other alternatives that companies may wish to consider.
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Glass Lewis Outlook on COVID-19’s Impact on the Present and Future of Governance for Boards and Companies

Glass Lewis (GL) shared last Thursday more of its perspective and outlook of the effect that the coronavirus (COVID-19) pandemic may have on corporate governance for the 2020 proxy season. GL explains that it is issuing further updates because “it is important to provide the market with certainty and transparency on [GL’s] established approach” given that it believes that all governance issues and most proposal types will be impacted by the pandemic. Anticipating that the pandemic will continue for up to 18 months, GL states that the proxy advisor is monitoring the markets; the sentiments of institutional investors and shareholder proponents; disclosures by public companies; and the approaches and actions of public companies.
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Glass Lewis Is Currently Accepting Peer Group Submissions

Glass Lewis is currently accepting peer group submissions on its website until next Friday, January 31, 2020, from public companies making proxy filings through July 31, 2020. For all other companies making proxy filings through January 31, 2021, the deadline for submissions is July 31, 2020.

Glass Lewis utilizes its Pay-for-Performance Model with its A-F grading system (the “P4P Methodology”) to assess the degree to which a company’s executive compensation aligns with the company’s performance. In turn, these assessments inform the quantitative input for Glass Lewis’ Say-on-Pay voting recommendations. Glass Lewis advises that its new proprietary peer group methodology now drives the P4P Methodology and is critical to its Say-on-Pay recommendations.
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A Snapshot of Board-Shareholder Engagement Trends

Directors of SEC-registered public companies are increasingly taking a more active role in the shareholder engagement process given the evolving corporate governance landscape, including the increasing number of requests for their participation by some of the largest institutional investors. The Conference Board and Rutgers University’s Center for Corporate Law and Governance have recently published a report showing the emerging practices surrounding when and how corporate directors engage with shareholders based on a survey administered in 2018. Because board-shareholder engagements are often undisclosed and private, the results from this survey provide greater insight about how these communications are evolving and may help public company boards prepare for their shareholder engagements going forward.
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Davis Polk Client Memo: IRS Issues Proposed Regulations under Section 162(m)

On December 16, 2019, the IRS issued proposed regulations under Section 162(m) of the Internal Revenue Code, which generally have the effect of limiting the tax deductibility of a public company’s compensation arrangements.

The proposed regulations provide highly anticipated guidance clarifying the substantial changes made to Section 162(m) by the Tax Cuts and Jobs Act.

This memorandum summarizes certain key aspects of the proposed regulations and identifies the components of the proposed regulations about which the IRS is seeking comment.

Read the full memo here.

Law Clerk Alexa Póo contributed to this publication.
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A Profile of Some of the Largest U.S. Tech Boards

The 2019 U.S. Technology Spencer Stuart Board Index (Tech Index) reflects the board practices and trends of 200 public tech companies with the highest revenues based on proxy statements released between July 1, 2018 and July 1, 2019.

I. Selected Spencer Stuart Perspectives

  • Like the S&P 500 companies, the largest tech companies are enhancing board diversity on multiple fronts including gender, skills and experiences as they add new independent directors.
  • The profile of the new director class is shifting, and CEO experience is required less often. While a technology background remains a priority, tech boards are also adding directors with more diverse functional and industry backgrounds.

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ISS Releases Preliminary Updates to 2020 Compensation-Related Policies

As we previously discussed, ISS recently released its U.S. Preliminary Compensation Policies FAQ, which provides interested parties an advance view of ISS’ answers to select questions posed to ISS regarding potential changes to its U.S. compensation policies.  Updated compensation-related FAQ documents and a methodological whitepaper—which will include a detailed introduction of ISS’ new Economic Value Added (EVA) metrics—will be available in mid-December.  These changes are effective for meetings held on or after February 1, 2020.  The below summarizes the key changes outlined by the preliminary FAQ.

Changes to the Quantitative Pay-for-Performance Screens for 2020 

ISS applies an initial set of quantitative screens followed by a set of qualitative screens when evaluating say-on-pay proposals. 
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ISS Releases Finalized 2020 U.S. Voting Policies, Preliminary Compensation Policies FAQ & Industry Group TSR Medians

Earlier this week, Institutional Shareholder Services Inc. (ISS) posted its U.S. Proxy Voting Guidelines, which include updates we previously discussed. The 2020 policies are effective for shareholder meetings occurring on or after February 1, 2020.

Also, ISS recently published the U.S. Preliminary Compensation Policies FAQ that is designed to address questions that have been posed to ISS regarding potential changes to its compensation-related policies. Unless the document states otherwise, the methodologies contained in this preliminary FAQ will apply to shareholder meetings occurring on or after February 1, 2020. ISS anticipates publishing the finalized compensation-related policies and FAQ as well as a methodological whitepaper in December 2019.
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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.
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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).
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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.
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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.”
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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.
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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.
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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.
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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. 
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