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.

Summary of Larry Fink’s 2019 Letter to CEOs

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Early this week, Larry Fink, the Chairman and CEO of BlackRock, issued his annual letter to CEOs of public companies in which BlackRock is invested. If you haven’t already done so, go read Mr. Fink’s 2018 letter to CEOs before proceeding (it will help you better understand this year’s letter). I’ll wait.

Click HERE to access Mr. Fink’s 2018 Letter to CEOs

Okay. So now you know that in 2018 Mr. Fink urged CEOs to detail their strategy for long-term growth, starting with their company’s purpose. Mr. Fink also announced that BlackRock would be a bit more active in ensuring that BlackRock’s index funds looked at how the companies they held stakes in were going to ensure long-term growth. The 2018 Letter announcement marked a significant change in how index funds at BlackRock would operate. Given BlackRock’s size, this change will have an impact on both the public companies in which it holds stakes as well as other index funds.

In his 2019 Letter, Mr. Fink further refines his message and indicates that laying out a purpose alone is insufficient. Instead, companies need to articulate how they will generate profits long-term and serve all of its stakeholders effectively.

Mr. Fink’s 2019 Letter also asks that CEOs provide leadership (where they can) to help tackle and perhaps solve, social and political issues that are confronting the countries, regions, and communities in which their companies operate. One of these critical issues is retirement. Mr. Fink believes corporations need to reassert their traditional leadership role with respect to retirement that they used to hold. Mr. Fink sees helping workers navigate retirement as leading to the creation of not only a more stable and engaged workforce, but also a more economically secure population in the places a company operates.

Noting the shift in attitudes of the younger generation and the impending large trans-generational asset re-allocation, Mr. Fink argues that corporate valuations will be influenced by the shift in values between the current and younger generations, and companies should recognize that shift and start acting in a manner that will minimize the impact on their valuations.

Finally, Mr. Fink announced BlackRock’s Investment Stewardship engagement priorities for 2019:

  • governance, including a company’s approach to board diversity
  • corporate strategy and capital allocation
  • compensation that promotes long-termism
  • environmental risks and opportunities, and
  • human capital management.

Mr. Fink indicates that BlackRock will not focus on a company’s day-to-day operations, but will seek to understand a company’s strategy for achieving long-term growth. He also reiterates what his 2018 Letter said, “for engagement to be productive, they cannot occur only during proxy season when the discussion is about an up-or-down vote on proxy proposals. The best outcomes come from a robust, year-round dialogue.”

Click Here to see Mr. Fink’s 2019 Letter to CEOs

Are Environmental Goals the Next Big Thing?

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A number of recent stories covered the move by Royal Dutch Shell to incorporate carbon emissions into the performance goals for its executives incentives. For example, see this story by CNN, Shell is tying executive pay to carbon emissions. Here’s why it could create real impact.

Some may believe this is an appropriate action by one of the big oil companies. Other may dispute whether any such action is needed at all. But, assuming that society as a whole has focused on environmental issues to the extent that boardrooms have begun to take notice, Royal Dutch Shell may be the first in a new wave of companies adopting environmentally-focused performance goals for their executives’ incentives. The number of companies this could impact is staggering–everything from the typical companies thought of when considering environmental impact (oil companies, manufacturers, and utilities) to the less thought of, but sometimes having even more of an impact on some aspects of the environment. For example, just recall the recent focus on the types of straws folks use after it was disclosed that plastic straws lead to an overall increase in plastic pollution that endangers wildlife and the environment. Many companies immediately sought out more environmentally-friendly alternatives and suddenly paper straws are all the rage (and the one company in the U.S. that manufactures them is having a hard time keeping up with demand).

We have seen this focus on bags in the retail environment too as plastic bags have given way to reusable shopping bags or the return of paper bags for shopping needs. My point is that these matters likely will continue to surface and with a frequency unseen in history as social media makes it easier for consumers and individual citizens to gain focus on things that the wider community may want to consider. So, will fast food chains be integrating carbon emissions into their incentives? Probably not that soon. But, for large restaurant chains that have large, wide-spread distribution networks I could see them focus incentives on finding the most cost effective solution that balances environmental impact. Perhaps that means that their delivery fleets get powered by alternative fuel sources. There could be more action in this area as social awareness of environmental issues grows. It may seem far-fetched today that business leaders would be rewarded based on both how a company performs financially,  as  well as how the company manages its environmental (and social) impacts. 
However, I think in the not too distant future this will be part of incentive designs, especially at companies that take a more holistic approacg to their businesses and how they define success.

So when more companies start adopting Environmental (and Social) goals into their incentive plans, they will need to take care that they do not create any perverse incentives that could cause problems later. Adopting such goals should be done carefully and discussed and reviewed from all sides. The goals should be tested–preferably by a number of folks who enjoy finding the loopholes in things to best identify where the goals may present weaknesses. Those should be shorn up through the use of countervailing goals and/or careful monitoring. If done properly, these such environmental (and social) goals could help propel companies to greater financial returns, especially if the goals lead to behaviors that are recognized by society as appropriate.

CtW Engages Companies on Anti-Competitive Employment Practices

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On August 29, 2018, the activist investor, CtW Investment Group, kicked off a new initiative to engage 30 major companies (click HERE to see the list of companies) concerning their use of anti-competitive employment practices, including non-competes, no-poach agreements, non-disclosure agreements, and mandatory arbitration. CtW asked each company it contacted to:

  • Review its employment contracting practices, including the use of any of these provisions.
  • Report the board’s findings to shareholders before the next annual meeting.
  • Commit to increased human capital management disclosure going forward.

CtW was concerned about the potential liability and costs associated with such anti-competitive practices.  CtW also sees these anti-competitive practices as constraining the ability of individual workers to seek out new opportunities, causing an artificial limit the pool of potential matches available to employers. CtW sees the recruiting difficulties reported by many employers and attributed to “skills shortages” as more plausibly explained by the limits of workers mobility that employers themselves impose.

CtW made available several documents about its efforts (click for the source documents):

We will have to wait and see what impact CtW’s initiative has on these anti-competitive practices.  But, if my removing these impediments to worker mobility ultimately helps companies secure they need to grow their businesses, it should be a win for everyone.  However, it may take some time to get companies, management teams and Boards comfortable with the notion of forgoing these “protections” for their workforce. But, if CtW and other institutional shareholders take up this initiative, and large companies begin to comply, as with most things, it could eventually filter out to a broad swath of U.S. public companies.

Copyright © 2020 Edward A. Hauder. All right reserved