This recent Pay Governance memo confirmed that now — well over 10 years into mandatory say-on-pay votes — increased shareholder democracy on executive compensation has still not had the effect of lowering CEO pay. (At least not to the extent intended. A recent academic study suggests that the say-on-pay vote lowers total CEO pay levels by about 6.6%.) Using a constant company sample of 166 companies in the S&P 500 over 2008 to 2022, Pay Governance research has shown that:
– CEO pay has continued to increase post-Dodd-Frank
– CEO pay increases were reflective of a 64% increase in revenue and more than doubling of market cap for a constant sample of S&P 500 companies over the same period
That said, there has been a significant shift in pay practices and focus on quantum of pay at certain levels:
– There’s a continued trend of pay compression at large public companies with significantly lower increases in pay at the 90th percentile than other percentiles (before SOP, CEO pay at the 90th percentile was 4.5 times the 10th percentile; more recently, that ratio is 2.5)
– S&P 500 CEO pay is significantly more performance-based (90% of CEO pay is now delivered in annual or long-term incentives versus 84% before SOP)
– The mix of long-term incentives has shifted significantly towards PSUs (from 34% before SOP to 63% today)
The article argues that the strong, typically 90+ percent average support for say-on-pay proposals validates the historical increases and today’s performance-based pay model.
Programming Note: I can’t believe I’m saying this, but this is our final post on The Advisors’ Blog in 2024 (barring any major developments)! Thanks for your participation in our sites this year – we couldn’t do this without you! I’m so thankful for this professional community, and my New Year’s wish for us all is more community — personal and professional! I hope I get to see many of you in 2025! Happy Holidays!
Yesterday, the SEC announced that it settled charges against a company related to an alleged failure to disclose approximately $1 million worth of perquisites predominantly related to its CEO’s use of chartered aircraft. The SEC’s order against the company states that its process did not apply the “integrally-and-directly-related standard.” Instead, the company’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” and “incorrectly viewed the CEO’s business expenses to include expenses associated with the CEO’s personal flights, including transportation, meals, and hotel.” If this sounds familiar, it is!
In this case, the company discovered the error and revised its disclosure in a subsequent proxy statement:
On April 28, 2023, Express filed its fiscal year 2022 proxy statement, which, among other things, provided revised disclosures regarding perquisites and personal benefits provided to the CEO for fiscal years 2020 and 2021. Express also disclosed that the CEO voluntarily reimbursed the company approximately $454,000 for private air travel and expenses that were determined to be perquisites or personal expenses.
At the risk of sounding like a broken record, I’m going to share this reminder from the order:
According to the Adopting Release, “an item is not a perquisite or personal benefit,” and does not need to be reported, “if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.” The Adopting Release also states that “the concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.”
According to the Adopting Release, even where the company “has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,” that determination “is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes.” Indeed, “business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”
As always, the devil is in the details! For a refresher, check out the “Perks & Other Personal Benefits” Chapter of our Executive Compensation Disclosure Treatise — many pages are devoted to airplane use!
On Friday, ISS posted updated FAQs on executive compensation policies (new and materially updated questions are highlighted in yellow). This follows an off-cycle update in October of this year, which noted that another update would follow in December. Question 46, addressing when a clawback policy is considered “robust,” is highlighted but unchanged from the October updates.
Here’s a paraphrased recap of the questions that were materially updated:
– Computation of Realizable Pay (Question 24): The realizable pay chart will not be displayed for companies that have experienced multiple CEO changes (2 or more) within the three-year measurement period. (This was previewed in October.)
– Evaluation of Program Metrics (Question 39): While still not endorsing TSR or any other specific metric, ISS will consider the following factors when evaluating metrics: Whether the program emphasizes objective metrics that are linked to quantifiable goals, as opposed to highly subjective or discretionary metrics; The rationale for selecting metrics, including the linkage to company strategy and shareholder value; The rationale for atypical metrics or significant metric changes from the prior year; and/or The clarity of disclosure around adjustments for non-GAAP metrics, including the impact on payouts.
– Changes to In-Flight Programs (Question 42): Consistent with a prior FAQ focused on COVID-era pay program changes, ISS still generally views changes to in-process pay programs (e.g., metrics, performance targets and/or measurement periods) negatively. Clear disclosure is expected addressing rationale and how the changes do not “circumvent pay-for-performance outcomes.”
Most importantly, ISS added the following new FAQ, which was also previewed by the proxy advisor when it announced the opening of the comment period on proposed changes to its benchmark voting policies:
ISS previously announced adaptations to the pay-for-performance qualitative review effective for the 2025 proxy season, relating to the evaluation of performance-vesting equity awards. What does this entail? (Question 34) Beginning with the 2025 proxy season, ISS will place a greater focus on performance-vesting equity disclosure and design aspects, particularly for companies that exhibit a quantitative pay-for-performance misalignment. While ISS has historically analyzed the disclosure and design of incentive programs as part of the qualitative review, investors have increasingly expressed concerns with the potential pitfalls surrounding performance equity programs. As such, existing qualitative considerations around performance equity programs going forward will be subject to greater scrutiny in the context of a quantitative pay-for-performance misalignment. Typical considerations include the following non-exhaustive list:
– Non-disclosure of forward-looking goals (note: retrospective disclosure of goals at the end of the performance period will carry less mitigating weight than it has in prior years);
– Poor disclosure of closing-cycle vesting results;
– Poor disclosure of the rationale for metric changes, metric adjustments or program design;
– Unusually large pay opportunities, including maximum vesting opportunities;
– Non-rigorous goals that do not appear to strongly incentivize for outperformance; and/or
– Overly complex performance equity structures.
Multiple concerns identified with respect to performance equity programs will be more likely to result in an adverse vote recommendation in the context of a quantitative pay-for-performance misalignment.
Aon’s Laura Wanlass shared this helpful commentary on this new FAQ on LinkedIn:
ISS did signal proactively in previous weeks that there would be a requirement for more forward-looking goal disclosure at the onset of a performance period and it has been codified in FAQ 34. The middle ground practice has always been to commit to and actually disclose full performance plan design and outcome information at the conclusion of the performance period (i.e., some companies don’t give forward looking guidance and/or there are competitive harm considerations). I suspect this factor won’t be a deal breaker on a stand-alone basis but will likely require one or more additional issues from this new list of qualitative evaluation factors to drive a negative vote recommendation.
Yesterday, ISS also posted updated FAQ documents for equity compensation plans, the pay-for-performance mechanics, and the peer group methodology, with very minimal changes. With respect to equity compensation plans, I’m happy to report that the only highlighted FAQ reads: “For 2025, there are no new factors, and no changes to factor weightings or passing scores for any of the EPSC models.”
While a majority of companies don’t modify their CEO’s LTI vehicle mix or vesting schedules in the years leading up to retirement, this WTW memo makes the case for taking steps to “optimize” a CEO’s compensation before their pre-retirement years. Staying the course may not make much sense at a point when a CEO is a few years from retirement.
For example, assume a CEO annually receives grants comprised of PSUs (50%), stock options (30%) and RSUs (20%). Stock options with a standard 10-year term would be “out of sync with the remaining tenure” and don’t really have the intended effect of aligning the CEO’s interests with those of the company and shareholders.
After projecting the timeframe to retirement, assessing current equity award terms and estimating the value of in-flight awards that will be prorated or truncated, the article notes a few example alternatives to consider:
– A larger final equity grant made two or three years before retirement could continue to align your CEO’s pay with their final-years performance while effectively avoiding proration, truncation and/or lost value.
– A special performance-based grant could help to underscore and celebrate achievements toward the end of the CEO’s successful tenure.
– A change to the equity pay mix and/or vesting period could help to do the same.
In the above example, the article says, “it would be reasonable to grant no more stock options to the retiring CEO, while delivering final grants via PSUs and/or RSUs.”
I’ve previously described costs & disclosure approaches for executive security arrangements. Unfortunately, these arrangements are top of mind for many companies right now. This Baker McKenzie blog discusses the personal & corporate tax issues to consider if you are enhancing your security programs. And here’s a reminder that John shared yesterday on TheCorporateCounsel.net:
In light of the shocking murder of UnitedHealth’s CEO last week and the risk that similar events may occur in the future, many companies are enhancing security arrangements for their executives or establishing those arrangements for the first time. While companies may be inclined to conclude that these security arrangements are a necessary business expense, they need to be aware that the SEC typically views them as “perks” subject to disclosure in proxy materials. This excerpt from Chapter 7 of our Executive Compensation Disclosure Treatise (available on CompensationStandards.com) explains the SEC’s position:
From the company’s perspective, [personal security] expense is integrally and directly related to the performance of its executives’ duties—necessary to ensure their safety, particularly where they frequently travel internationally or their celebrity makes them an inviting target for kidnapping or other personal injury.
Notwithstanding these beliefs, the SEC has expressly stated that it considers expenditures incurred to ensure the personal safety of a named executive officer to be a disclosable perquisite. Specifically, the SEC has held that business purpose or convenience does not affect the treatment of an item as a perquisite where it is not integrally and directly related to the performance by the executive of his or her job.
Accordingly, a company’s decision to provide an item of personal benefit for security purposes does not affect its characterization as a perquisite. For example, a company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.
Companies should also note that as part of its qualitative evaluation of executive comp programs, ISS has sometimes been critical of the amounts expended for executives’ personal security arrangements. Whether recent events will prompt the SEC to take a more nuanced position or ISS to reconsider what security expenditures should be regarded as “excessive” remains to be seen.
I blogged a few months back about comment letters that the Corp Fin Staff has started to issue for disclosures that may implicate a clawback recovery analysis. Although comment letters are always specific to the particular company and its circumstances, they also give the rest of us insight into issues that the Staff is prioritizing in its reviews. Now, more comments are rolling in. Here are a couple of tips based on recent correspondence:
– If you check the second box on your 10-K cover page, the Staff expects to see disclosure about a recovery analysis (see this comment letter).
– If you disclose a recovery analysis, make sure to include an Interactive Sata File in accordance with Rule 405 of Reg S-T (see this comment letter – and this FPI comment letter).
Wilson Sonsini has released its 2024 Silicon Valley 150 Corporate Governance Report, which analyzes governance and proxy season trends among the Valley’s largest public companies. Lots of interesting stuff in here – including commentary & data points for say-on-pay, pay ratio, perks, and pay versus performance. Beginning on page 55, the report looks at clawback policy trends in the SV 150. Here are a few takeaways:
– Companies that adopted the required new NYSE/Nasdaq clawback policy overwhelmingly kept those policies strictly on terms with the NYSE/Nasdaq requirements (although a handful went beyond, either in terms of officers covered or types of conduct that could result in a clawback).
– Even companies with more than one clawback policy only filed the one required NYSE/Nasdaq policy with the 10-K — although surprisingly 7 companies that were required to file their policy missed the requirement altogether and didn’t file it (note to form checkers in 2025 . . .).
– At least 67 of the companies kept their old clawback policy too and describe the terms in their proxy statement.
As we’ve noted, proxy advisors – and some investors – are now factoring the scope of clawback policies into their voting decisions.
Meredith recently shared info about ISS’s peer group review & submission window, which has now passed. Glass Lewis has also opened its peer group submission window for companies with meetings from March 2025 to September 2025, and it runs through this Thursday, December 12th. Glass Lewis uses company-selected peers as part of its say-on-pay analysis.
On its website, the proxy advisor walks through how and why to submit your peer group – as well as info about its methodology. Here are reasons you might want to submit an update:
– You recently disclosed an updated peer group on your website, Form 8-K, or elsewhere in the public domain, but it’s not in your latest Form DEF 14A or Management Information Circular.
– Your most recent proxy statement includes two peer groups (e.g., one for fiscal 2023 and another for fiscal 2024). Confirm your preferred peer group for Glass Lewis’ peer group selection process by submitting it.
– You publicly disclosed your fiscal 2023 peer group with changes for fiscal 2024, but without listing the full fiscal 2024 group. Submit an update to confirm the fiscal 2024 peer group.
There’s no need to submit an update if there’s been no change in the group you disclosed for your most recent annual meeting. Glass Lewis will use that same group in its analysis for 2025 if you don’t send any update.
If you’re looking for a resource that covers peer group info for both ISS & Glass Lewis, check out this Compensia alert, and you can also visit our “Proxy Advisors” Practice Area.
We’ve posted the transcript for our webcast “Surviving Say-On-Pay: A Roadmap for Winning the Vote in Challenging Situations” – full of practical tips for say-on-pay scenarios that companies frequently encounter – from D.F. King’s Zally Ahmadi, Compensia and CompensationStandards.com’s Mark Borges, Orrick’s JT Ho, Foot Locker’s Jenn Kraft, and Tesla’s Derek Windham. They covered the following topics:
You will definitely want to check this out as we enter the proxy season, and the transcript is a low-time-and-effort way help you think through any changes you want to make on how you approach your say-on-pay proposal in 2025.
Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
You probably saw yesterday’s Wall Street Journal article on the Delaware Chancery’s latest decision related to Elon Musk’s 2018 Tesla pay package. There are very few takeaways for executive compensation professionals in the decision, but it seems worthy of addressing here — even if only for its novelty. So, keeping with the theme of my April post on Tesla’s proxy filing — including the proposal requesting that stockholders ratify said pay package after the Chancery Court ordered it rescinded — here are five things to know about the latest decision:
– This opinion was still at the Chancery Court level — penned by Chancellor McCormick, who was also responsible for the initial post-trial decision ordering rescission of the award. The order addressed the defendants’ motion to “revise” the post-trial opinion based on the stockholder vote and plaintiff attorneys’ petition for fees and expenses.
– Chancellor McCormick used this opportunity to clarify/emphasize a few points from the initial post-trial opinion. Specifically, that the decision did not hold that the Tesla board should have paid Musk nothing. She says, “there were undoubtedly a range of healthy amounts that the Board could have decided to pay Musk. Instead, the Board capitulated to Musk’s terms and then failed to prove that those terms were entirely fair.” She also clarified that none of the legal theories applied in the opinion were novel — if anything was novel in the opinion, it was simply that those legal principles had not previously been applied by the court to Musk vis-a-vis Tesla.
– The opinion considered events post-dating the initial post-trial decision, including the actions of the single-member special committee that was formed to assess the redomestication of Tesla to Texas and whether Musk’s 2018 award should be submitted to a second stockholder vote and the 2024 stockholder vote intended to “ratify” the award.
– Chancellor McCormick found that the “ratification” argument had four fatal defects — three expected, one surprising.
First, there are no procedural grounds for flipping the outcome of a post-trial decision based on evidence created after trial. Procedural rules allow the court to reopen the trial record for newly discovered evidence (“in existence at the time of trial”) but not newly created evidence. From a policy perspective, if this was allowed, “lawsuits would become interminable” and it would “eviscerate the deterrent effect of derivative suits.”
Second, as an affirmative defense, common-law ratification is waived if not timely raised. And, “wherever the outer boundary of non-prejudicial delay lies,” raising the defense “six years after this action was filed, one and a half years after trial, and five months after the Post-Trial Opinion” was too late.
Third, in a conflicted-controller transaction, the “maximum effect” of stockholder ratification is to shift the burden of proving entire fairness; it doesn’t shift the standard of review, which would require MFW’s additional protection of an independent committee and conditioning the transaction on the dual protections before negotiations. Defendants tried to argue that MFW was invoked after the post-trial opinion, to which the opinion says, “One does not ‘MFW‘ a vote, which is part of the MFW protections; one ‘MFW‘s a transaction.”
Finally, the proxy statement contained material misstatements. Tesla went to great lengths to avoid any argument that this second vote was not fully informed — having annexed 10 documents to the proxy, including the opinion and the special committee’s report to the board. But the legal impact of the stockholder ratification was unclear — and, trying to be transparent, the proxy said as much. That was a problem. “To be fully informed for ratification purposes, ‘the stockholders must be told specifically . . . what the binding effect of a favorable vote will be.’” Plus, the proxy used phrases like “extinguish claims,” “any wrongs … should be cured” and the disclosure deficiencies “corrected,” which were “materially false and misleading.”
– Using “sound” methodology, the plaintiff’s attorneys asked for $5.6 billion in freely tradeable Tesla shares as attorney fees. To this, the opinion says, “in a case about excessive compensation, that was a bold ask.” To avoid a windfall and reach a reasonable number, the opinion adopts the defendants’ approach of using the $2.3 billion grant date fair value to value the benefit achieved and applies 15% to that amount, resulting in a (still massive) fee award of $345 million.