As You Sow Releases 2019 Annual Report on Overpaid CEOs

As You Sow Releases 2019 Annual Report on Overpaid CEOs

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As You Sow published its annual report on the Top 100 Overpaid CEOs among S&P 500 companies on February 21, 2019. As you might expect, the report details those companies who in As You Sow’s view have overpaid CEOs.

https://www.asyousow.org/report/the-100-most-overpaid-ceos-2019/

Key findings of the report:

  • Large institutional shareholders are opposing more CEO Pay packages by voting Against Say-on-Pay votes
  • The number of companies where a large number of shares were voted Against the CEO pay package has increased
  • Companies that As You Sow’s first report 5 years ago identified as Overpayers have underperformed the S&P 500

The report also includes many helpful charts and graphs looking at institutional shareholders and how they have reacted to CEO pay and their votes against CEO pay packages.

Incentive Plan Changes Making News

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We are on the cusp of the 2019 proxy season. Reporters are getting geared up to review the proxy statements of large, household named, public companies and report what they discover. Ahh, the sweet smell of anticipation! A heady aroma of blood, sweat, tears, and a bit of nervousness?

In any event, reporters got started a bit early this year (and who could really blame them given what companies have already disclosed). There have been a number of stories that look at changes in incentive plans that have been announced by companies so far in 2019:

  • Shell–will link high-level employee pay to carbon reduction targets after engaging with shareholder activist Climate Action 100+
  • BP— will factor greenhouse gas emission reductions into rewards for 36,000 employees worldwide after engaging with Climate Action 100+
  • Chevron— plans to set greenhouse gas emissions targets and tie executive compensation and rank-and-file bonuses to the reductions
  • Facebook–plans to incorporate social issue-related metrics into its employee bonus program to reflect updated company goals; none of the factors reportedly will have pre-assigned weightings or monetary values attached to them, instead Committee will use discretion to determine performance.
  • Goldman Sachs–announced that as a result of the on-going investigation into the Malaysian investment fund if the investigation reveals information that would have impacted the company’s year-end compensation decisions, the Committee may reduce or clawback the executives’ 2018 year-end equity awards.

All of the above companies are in a similar situation–events outside of their immediate control (shareholder activists or the media) caused them to revise how they will measure compensation. As shareholder activism increases and the notion of what is good for our society under goes a shift as younger folks begin taking over key roles in society, we are likely to see this trend continue.

Consequently, companies should keep a close eye on emerging issues in their industry and the broader market, identifying those that may require changes to their compensation plans and designs, and keep a “work in progress file on how such changes potentially could be made as well as potential implications for the company of both making and not making such changes. For companies with the foresight to do such planning, they will be rewarded with the ability to better respond to changing events more rapidly, instead of floundering for a bit to find the path that best suits the company’s long-term, strategic goals.

CII’s Board Evaluation Disclosure Report

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This month the CII (Council of Institutional Investors) Research and Education Fund released its report on Board Evaluation Disclosure. The report posits that there are seven indicators of strength and then provide ten examples of good disclosure by companies.

The seven indicators of strength are:

  • Three-tiered review
  • Consideration of peer review
  • Appropriate timing and format
  • Evidence of follow-through
  • Linkage to succession planning
  • Strong independent director leadership, and
  • Prudent use of third parties and technology

The report includes examples of effective disclosures from the followig companies:

  • Allstate
  • Bank of America
  • ConocoPhillips
  • Exelon
  • ICE
  • McDonald’s
  • Regions
  • Splunk
  • Unum, and
  • W.W. Grainger

https://www.ciiref.org/boardevaluationdisclosure

More on ISS’ Excessive Non-Employee Director Pay Policy

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ISS announced that it would not apply its excessive non-employee director (NED) pay policy until meetings on and after February 1, 2020. But in the U.S. Compensation Policies Frequently Asked Questions, Updated December 14, 2018, ISS indicated that adverse vote recommendations could be issued under this policy for meetings occurring on or after February 1, 2020 where ISS has identified excessive NED pay without compelling rationale in both 2019 and 2020.

This means that companies that might have excessive NED pay and wanted to addresses it so it would not be an issue in 2020, will need to address NED pay now. That’s because most companies are setting their director compensation for 2019, that will be disclosed in their 2020 proxy statements.

Therefore, if a company will have an issue under ISS’ NED pay policy in 2020, it will be extremely difficult to avoid that result. So, the way ISS is implementing this policy creates a real possibility that companies will be trapped into being amongst the top 3% NED pay in both their 2019 and 2020 proxy statements and have no real opportunity to address NED pay levels (since 2019 pay being set shortly) before ISS applies the policy in 2020.

Companies should therefore carefully review ISS’s new FAQ on NED pay and determine whether their director pay for any director would place him/her at the 90th percentile or higher for companies in their 2-digit GICS code in their index (S&P 500; combined S&P 400 and S&P 600; remainder of the Russell 3000 index; and, the Russell 3000-Extended). If so, then they should consider adding an explanation in their proxy explaining why their pay is higher for those directors and also consider better laying out the process used to set director pay, especially timing, so that shareholders and ISS can more easily see that the Company had very little opportunity to address NED pay levels for the 2020 proxy.