How the SEC’s new proxy voting rules will impact executive compensation

There are many software applications and tools now available to support compensation decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Compensation Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for Say-on-Pay decisions.

How the SEC’s new proxy voting rules will impact executive compensation

 

In July of 2020, the Securities and Exchange Commission (SEC), under pressure from public companies (Issuers) and their lobbyists voted to tighten regulations affecting proxy advisory firms, like Institutional Shareholder Services (ISS) and Glass Lewis & Co., who provide proxy research services and voting recommendations to investor groups large and small.  The new proxy voting rule changes were justified based on allegations, mostly made by corporate managers, that proxy advisor recommendations are error prone, rife with conflicts of interests and that proxy advisors wield outsized influence over the shareholder voting process.  In response, Advisors claim that the allegations are not only false, but that they represent an effort on the part of Issuers to reign in what is seen as troublesome shareholder activism. That is attempts by shareholders to insert environmental, social and governance initiatives into the corporate voting agenda.  The new regulations came as amendments to section 14a of the 1934 Securities Exchange Act and are the latest development in a long running controversy over the role of Proxy Advisors and the future of corporate accountability.

 

The New SEC Proxy Voting Rules

 

The SEC has stated that the new regulations are needed in order to “ensure that clients of proxy voting advice businesses receive more transparent, accurate and complete information on which to make voting decisions”. Although the new changes to the law appear to be providing public companies with a greater means of challenging the advice of Proxy Advisors.  Highlights include:

 

Redefinition of “Solicitation”

 

Rule 14a-1(l) has been amended to expand the definition of solicitation specifically to include proxy advice.  Solicitation, usually taken to mean an act of enticement or inducement, is now defined as any communication to shareholders “… reasonably calculated to result in the procurement, withholding or revocation of a proxy”.

 

Changes to Filing Exemptions

 

Rules 14a-2(b)(1) and 14a-2(b)(3) have been altered to place new requirements on solicitor exemptions.  To avoid the information and filing requirements the SEC places on solicitors, Proxy Advisors have historically relied on two exemption provisions.  To be eligible for those exemptions they must now meet new disclosure and policy requirements:

  1. Proxy Advisors must provide specified conflicts of interest disclosure in their recommendations to shareholders. And …

 

  1. They must adopt policies and procedures to ensure that voting recommendations are made available to Issuers at the same time that they are provided to shareholders, at no cost. They must also …

 

  1. Provide shareholders with a means to be made aware of any written statements from Issuers regarding the recommendations of Proxy Advisors.

 

Anti-Fraud Provisions

 

Rule 14a-9 has been modified to include examples of compliance failure.  Should Proxy Advisors fail to disclose certain material information, e.g. business methodology, information sources and conflicts of interest, their recommendation may be considered misleading under the Rule.

The new regulations are effective 60 days after publication in the Federal Register. However, the new disclosure requirements will not be in effect until December 1, 2021, making the 2022 Proxy season the first regulated under these laws.

 

Implications of New Proxy Voting Rules

 

The new SEC proxy voting rules have implications for all parties involved.

Implications for Issuers

 

The new SEC rules certainly offer public companies a greater opportunity to dispute the recommendations of proxy advisors.  However, the ultimate impact on the accuracy of proxy advisor reports and the overall effect on shareholder behavior is likely to be negligible.   Whereas shareholders will ostensibly become “better informed” by being provided greater access to counter arguments, they are not in any way guaranteed to a heed this information or to take additional time to deliberate. Not to mention they may very often simply disagree with management’s position.  Such is the nature of the franchise.   For Issuers, the opportunity to have a better window into proxy advisor methodology will be instructive and perhaps lead to more effective shareholder relations. In the end however, the realities of the investment business and evolving sensibilities on governance will guide voting behavior.  That said, significant concessions have been won and public companies can count the July decision as a victory.

 

Implications for Proxy Advisors

 

The new policy requirements on solicitor exemptions, specifically to include Issuer messaging into proxy reports will likely increase the strain on publication timelines and voting operations. Thus, it may not be unreasonable to expect complications during the 2022 proxy season as the industry adjusts to the new rules. However, the full implications for proxy advisors remain to be seen and will probably only become fully understood after the implementation.

 

Implications for Shareholders

 

The SEC’s July decision, because of the disruptions it will create by placing added requirements on proxy advisors, could potentially add costs and delays to the proxy voting process.  Should Institutional Investors wish to avoid any added expenses or complications it is unlikely proxy research will move to an in-house model.  This is due to the very large diversification of Institutional portfolios, which are prohibitively expensive to research to the level needed and in the timeframe required.  This is partly the reason why Institutional Investors outsource this work to proxy advisory firms that can take advantage of economies of scale.  Without a proxy advisor Investor groups will either abstain from voting entirely or vote in accordance with management’s recommendations, known as the Wall Street Rule—as was the case before the rise of the proxy advisor business.  The overall impact on shareholders is that voting has become more costly and more difficult.  And it may be worth considering whether this effect is the intention? As well as what this means from a governance standpoint?

 

Summary of New Proxy Voting Rules

 

The actions taken by the SEC to increase regulation of Proxy Advisors has come primarily at the prompting of corporate leadership and lobbyist firms such as the Business Roundtable (BRT) and the American Council for Capital Formation (ACCF) that have cited concerns over accuracy and excessive reliance.  In an ACCF study that was cited in the Harvard Law School Forum on Corporate Governance, researchers found that “175 asset managers managing over $5.0 trillion in assets have historically voted consistently with ISS recommendations 95% of the time” illustrating that the biggest asset managers vote with proxy advisors 100% of the time, seeming to show evidence of over reliance.  Another report cited in the same article found that numerous errors were reported by public companies.

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Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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S&P 500 Banking Industry’s Response to COVID-19

CGLytics examines how S&P 500 banks responded to the volatility of the pandemic prior to the Fed’s announcement to cap bank dividends and prohibit share repurchases until Q4 following its annual stress test of banks.

08.13.2020

On June 25, 2020, the US Federal Reserve Bank issued a statement following its annual stress test of banks, saying that it would cap Q3 dividends for banks and prohibit share repurchases until Q4.  COVID-19 has created a tumultuous economic environment for many companies.  This has prompted many to respond with executive pay cuts and dividend reductions, and suspensions of share buyback programs.

In the wake of this economic situation and announcement by the FED, it is worth looking at how the banking sector responded to the COVID-19 crisis and its corporate governance implications.  This article analyzes the S&P 500 Banks Industry Group Index which is broken up into two sub-indexes; S&P 500 Regional Bank Index and S&P 500 Diversified Bank Index.

Looking at the banking sector’s performance during the COVID-19 pandemic, when comparing the S&P 500 Bank Industry Group Index to the S&P 500, Year to Date (YTD) change in value as of July 22, 2020; the S&P 500 Banks decreased in value by 34.31% while the S&P 500 increased  by 0.82%.  When breaking the S&P 500 Bank Industry Group down further into its two sub-indexes, the S&P 500 Regional Bank Index decreased in value by 32.66% while the S&P 500 Diversified Bank Index decreased by 34.74%.

While the S&P 500 has rebounded significantly since its steep decline following the COVID-19 outbreak. The banking industry has yet to see the same recovery.

Source: CGLytics Data and Analytics

Prior to the FED’s announcement, not one of the banks in the S&P 500 Diversified Banks Index announced a suspension, reduction, or change in their dividend.  Also, during this time, none of these banks recorded any changes to executive compensation due to COVID-19.  All five of these banks (JPMorgan Chase, U.S. Bancorp, Citi Group, Wells Fargo, and Bank of America) announced on March 15, a suspension of share repurchases.

Examining the S&P 500 Regional Banks Index prior to the FED’s announcement in June 2020, seven banks (Region Financial Corp, Citizens Financial Group, Fifth Third Bancorp, KeyCorp, PNC Financial Services Group,. Trust Financial Corp, Comerica) all announced plans to temporarily suspend their share repurchase plans in the middle of March 2020. Hunting Bancshares however announced that it planned to continue its share buyback program during this same period.  First Republic Bank, M&T Bank Corporation, People’s United Financial, Zion Bancshares, and SVB Financial Group all did not comment regarding share buyback programs during this time period.  Concerning dividends, no bank in the Regional Bank Index suspended or changed their dividend during this period.

Source: CGLytics Data and Analytics

However, when analyzing Russel 3000 companies during the time period from March 15th through to April 17th, at least 105 companies reduced or adjusted executive and director compensation in response to the COVID-19 according to research by CGLytics’s.  In addition, over the same period at least 47 companies reduced or suspended their dividend and at least three companies suspended share buyback programs.

When analyzing Diversified Banks in the S&P 500 and their response to the FED’s announcement at the end of June to cut dividends, only Wells Fargo announced a reduction in its dividend, with all five companies (JPMorgan Chase, Citigroup, Bank of America, US Bancorp, and Bank of America) announcing that they would maintain their current dividend.

Regional Banks provided a similar response as Diversified Banks following the FED’s June 25 stress test.  Out of the 13 banks labeled as Regional banks, six provided responses to the FED’s stress test (Truist Financial Corp., Region Financial Corp., Huntington Bancshares Incorporated, Fifth Third Bancorp., KeyCorp, Citizens Financial Group).  All six stated that the company would maintain its dividend.  The other seven companies (Zion Bancshares, SVB Financial Group, PNC Financial Services Group, M&T Bank Corporation, People’s United Financial, Comerica, First Republic Bank) did not provide a statement regarding the results of the FED’s stress test.

Ultimately, COVID-19 has exposed the vulnerability of the banking industry to external shocks and their readiness for market developments. The pandemic has generated significant uncertainty and high volatility in global capital markets and the banking industry is of no exception. While the full impact is yet to be determined, it’s predicted that the adverse effects are expected to linger from the virus’ knock-on effects and are likely to affect liquidity, profitability and valuation of these issuers eventually affecting returns to investors.

To understand how companies are adapting their executive pay practices and adhering to regulations during the pandemic, institutional investors and proxy advisors use CGLytics data and analytics software tools.

CGLytics offers the broadest and deepest global compensation data set in the market for reviewing corporate executive compensation plans, assessing Say on Pay vote proposals and performing benchmarking analysis.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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How to independently and efficiently benchmark executive compensation for Say-on-Pay

There are many software applications and tools now available to support compensation decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Compensation Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for Say-on-Pay decisions.

08.04.2020

A 5-minute guide to support Compensation Committees, Heads of Reward and Compensation Professionals when selecting software and tools for compensation decisions. Read and learn about the four considerations that should be taken into account before purchasing.

1. Look for tools that support peer group modeling functionality

2. Access the same peer groups as leading proxy advisor Glass Lewis

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

4. Check the quality of data available in the software platform you choose

We live in a digital age where access to information has never been easier. No longer having to scroll through complex and endless spreadsheets and obtain an analytical degree to understand trends – insights and information is at our fingertips.

For Compensation Committees, Heads of Rewards and Benefits, and Compensation Professionals it is no different.

Ensuring executive compensation, bonuses, and incentives are in line with market standards, has never been so important.

Activist activity has increased in 2020, with traditional investors changing their position from passive to active engagement and focusing on executive pay. In a recent article by the Financial Times, it was reported that misalignment of incentives and negative say-on-pay votes at annual meetings increase the likelihood of a company suffering share price underperformance.

Software that provides flexibility for assessing compensation in comparison to peers, and supports say-on-pay resolutions, is available and increasingly implemented by companies, activist investors, and proxy advisors.

When a user begins searching for compensation software there are questions typically asked:

  • – Does it contain information on the executive pay practices of my peers and competitors?
  • – How does is support benchmarking my company’s executive compensation practices?
  • – Does it show me how my company’s compensation practices are perceived in the market?
  • – Can I find tailored insights in seconds to be sure my company’s CEO, NEO and Director pay is aligned to market standard and company performance?

 

Sustainable and justifiable decisions surrounding executive compensation has kept rewards and benefits professionals up at night, with additional key questions that should be asked:

  • – How can I access high-quality, reliable executive compensation information that I do not need to maintain?
  • – Where can I find standardized compensation information for efficient comparison and instant benchmarking?
  • – What software and tools are available in the market that other compensation professionals, activist investors, proxy advisors and compensation consultants currently use?

 

How to utilize software and tools for fast, efficient, and flexible executive compensation and rewards benchmarking.

 

Greater scrutiny calls for companies and their boards to be one step ahead

Transparency encourages market confidence. With the current pandemic causing havoc on stock prices and resulting in employee layoffs, salary and bonuses paid to executives has again been pushed to the front and center.

Compensation policies and reporting are continuing to come under scrutiny from investors, shareholders, employees and the media. Boards must have clear and transparent compensation processes in place that allow for investors to see a fair comparison has been made of executive payouts and promised rewards, against peers and taking into account the broader market context.

How peer companies are adapting their executive compensation practices and adopting new measures needs to be clearly understood for socially responsible decisions about executive pay – continuing to be highlighted again by the events and happenings of 2020.

Decisions made need to be based on fact, not fiction, with easy to understand explanations for investors to digest. Granted, no one wants to become a media headline or attract attention from activist investors.

 

How can Compensation Committees, Heads of Reward and Compensation Professionals model different scenarios with software tools, and benchmark against their companies’ peers?

 

1. Look for tools that support peer group modeling functionality

 

Generating your own peer groups allows for benchmarking and comparison on a like for like basis. Companies that have very few similar peers in their region, index and sector might need to look further afield to design an appropriate group to justify the competitiveness of pay plans. Modeling against different peers can significantly change the scenario and perception of pay. Using CGLytics platform, fit-for-purpose peer groups can be created in seconds with access to 5,900+ globally listed companies, for instant comparison of compensation practices.

2. Access the same peer groups as leading proxy advisor Glass Lewis

 

Do you know how your compensation is viewed by activist investors and proxy advisors? As Glass Lewis and large activist investors are already using data and software provided by CGLytics, Compensation Committees should be doing the same. This allows Compensation Committees and Heads of Reward to proactively plan for, and justify, any compensation decisions that may attract unwanted attention.

Glass Lewis CEO and Executive Compensation analysis (used in their proxy papers globally) is found in the CGLytics platform ready for companies use.

As stated in the recent webinar by Glass Lewis’ SVP & Global Head, Research & Engagement, Aaron Bertinetti:

“All the data that we now use, whether it’s compensation data, peer data, or other types of governance data that we may need…we exclusively source from CGLytics. Not just within the United States but globally. The only other firm outside of Glass Lewis that has access to our methodology is CGLytics.”

Using the same data set, peer modeling and analytical tools as Glass Lewis, and leading institutional investors, for reviewing public company CEO compensation and Say on Pay proposals, results in Compensation Committees being market intelligent and one step ahead. This fosters better dialogue with stakeholders and data-based decisions justified with relevant and real-time information.

Learn how Glass Lewis Europe improved their executive compensation analysis with governance data from CGLytics

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

 

Compensation Committees and HR Professionals are empowered by modeling scenarios against different KPIs and measurements using software tools. With the recent volatility in market performance, justifying indictors used to design compensation plans mitigates risk. Boards need to be equipped with in-depth analysis of their company’s pay practice and compare against their peers to preempt say on pay risk.

As mentioned by Ronald Kliphuis, Global Head of Rewards at Randstad (a large market leading global HR company):

“In the past only consultants had access to the information that CGLytics provides. We can now play with data and information and make fair comparisons. We understand the potential risks and vulnerabilities a lot better.”

Learn more about Randstad’s Head of Rewards making data-based decisions going into the AGM

Powerful pay-for-performance benchmarking tools allow for efficient comparison and automated output of CEO and executive compensation against competitors and peers.

4. Check the quality of data available in the software platform you choose

 

Where the data is sourced from and how often it is updated should be a concern when deciding on insights to trust for effective engagement. In addition to how many years of compensation data is recorded in the software platform. A wealth of global and structured data for meaningful comparison of executive compensation practices across industries and borders, should be a large consideration of tools purchased to support compensation decisions.

Compensation Committees, Head of Rewards and Benefits, and other HR Professionals can ensure reliability when using CGLytics software with executive compensation data sourced from millions of publicly listed company filings, proxy materials and social networks, which undergoes rigorous checks by a dedicated team of equity market research analysts 24/7. More than 10 years of historical compensation data is standardized for efficient comparison of 5,900+ companies’ pay and rewards across different regions, industries, and sectors.

Downloadable data and insights in an array of formats (such as excel) allow compensation professionals to model and easily transport charts directly into their board decks and presentations, for the ultimate time and cost savings.

 

CGLytics offers the broadest and deepest global compensation data set in the market for reviewing corporate executive compensation plans, assessing Say on Pay vote proposals and performing benchmarking analysis.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

How to independently and efficiently benchmark executive remuneration for Say-on-Pay

There are many software applications and tools now available to support remuneration decisions, but what should be taken into consideration before purchasing? This 5-minute guide details what Remuneration Committees, Heads of Reward and Compensation Professionals should take into account when selecting software and tools for remuneration decisions.

07.28.2020

A 5-minute guide to support Remuneration Committees, Heads of Reward and Compensation Professionals when selecting software and tools for remuneration decisions. Read and learn about the four considerations that should be taken into account before purchasing.

1. Look for tools that support peer group modeling functionality

2. Access the same peer groups as leading proxy advisor Glass Lewis

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

4. Check the quality of data available in the software platform you choose

We live in a digital age where access to information has never been easier. No longer having to scroll through complex and endless spreadsheets and obtain an analytical degree to understand trends – insights and information is at our fingertips.

For Remuneration Committees, Heads of Rewards and Benefits, and Compensation Professionals it is no different.

Ensuring executive remuneration, bonuses, and incentives are in line with market standards, has never been under such scrutiny.

Activist activity has increased in 2020, with traditional investors changing their position from passive to active engagement and focusing on executive pay. In a recent article by the Financial Times, it was reported that misalignment of incentives and negative say-on-pay votes at annual meetings increase the likelihood of a company suffering share price underperformance.

Software that provides flexibility for assessing remuneration in comparison to peers, and supports say-on-pay resolutions, is available and increasingly implemented by companies, activist investors, and proxy advisors.

When a user begins searching for remuneration software there are questions typically asked:

  • – Does it contain information on the executive remuneration practices of – peers and competitors?
  • – How does is support benchmarking my company’s executive remuneration practices?
  • – Does it show me how my company’s remuneration practices are perceived in the market?
  • – Can I find tailored insights in seconds to be sure my company’s CEO, NEO and Director pay is aligned to market standard and company performance?

 

Sustainable and justifiable decisions surrounding executive remuneration has kept compensation professionals up at night, with additional key questions that should be asked:

  • – How can I access high-quality, reliable executive compensation information that I do not need to maintain?
  • – Where can I find standardized remuneration information for efficient comparison and instant benchmarking?
  • – What software and tools are available in the market that other compensation professionals, activist investors, proxy advisors and compensation consultants currently use?

 

How to utilize software for fast, efficient, and flexible executive remuneration and rewards benchmarking, and the tools that are available.

 

Greater scrutiny calls for companies and their boards to be one step ahead

Transparency encourages market confidence. With the current pandemic causing havoc on stock prices and resulting in employee layoffs, salary and bonuses paid to executives has again been pushed to the front and center.

Remuneration policies and reporting are continuing to come under scrutiny from investors, shareholders, employees and the media. Boards must have clear and transparent remuneration processes in place that allow for investors to see a fair comparison has been made of executive payouts and promised rewards, against peers and taking into account the broader market context.

How peer companies are adapting their executive remuneration practices and adopting new measures needs to be clearly understood for socially responsible decisions about executive pay – continuing to be highlighted again by the events and happenings of 2020.

Decisions made need to be based on fact, not fiction, with easy to understand explanations for investors to digest. Granted, no one wants to become a media headline or attract attention from activist investors.

 

How can Remuneration Committees, Heads of Reward and Compensation Professionals model different scenarios with software tools, and benchmark against their companies’ peers?

 

1. Look for tools that support peer group modeling functionality

 

Generating your own peer groups allows for benchmarking and comparison on a like for like basis. Companies that have very few similar peers in their region, index and sector might need to look further afield to design an appropriate group to justify the competitiveness of pay plans. Modeling against different peers can significantly change the scenario and perception of pay. Using CGLytics platform, fit-for-purpose peer groups can be created in seconds with access to 5,900+ globally listed companies, for instant comparison of remuneration practices.

2. Access the same peer groups as leading proxy advisor Glass Lewis

 

Do you know how your compensation is viewed by activist investors and proxy advisors? As Glass Lewis and large activist investors are already using data and software provided by CGLytics, Remuneration Committees should be doing the same. This allows Remuneration Committees and Heads of Reward to proactively plan for, and justify, any compensation decisions that may attract unwanted attention.

Glass Lewis CEO and Executive Compensation analysis (used in their proxy papers globally) is found in the CGLytics platform ready for companies use.

As stated in the recent webinar by Glass Lewis’ SVP & Global Head, Research & Engagement, Aaron Bertinetti:

“All the data that we now use, whether it’s compensation data, peer data, or other types of governance data that we may need…we exclusively source from CGLytics. Not just within the United States but globally. The only other firm outside of Glass Lewis that has access to our methodology is CGLytics.”

Using the same data set, peer modeling and analytical tools as Glass Lewis, and leading institutional investors, for reviewing public company CEO compensation and Say on Pay proposals, results in Remuneration Committees being market intelligent and one step ahead. This fosters better dialogue with stakeholders and data-based decisions justified with relevant and real-time information.

learn how Glass Lewis Europe improved their executive compensation analysis with governance data from CGLytics

3. Ensure Pay-for-Performance alignment and benchmarking tools are included

 

Remuneration Committees and Compensation Professionals are empowered by modeling scenarios against different KPIs and measurements using software tools. With the recent volatility in market performance, justifying indictors used to design compensation plans mitigates risk. Boards need to be equipped with in-depth analysis of their company’s pay practice and compare against their peers to preempt say on pay risk.

As mentioned by Ronald Kliphuis, Global Head of Rewards at Randstad (a large market leading global HR company):

“In the past only consultants had access to the information that CGLytics provides. We can now play with data and information and make fair comparisons. We understand the potential risks and vulnerabilities a lot better.”

Learn more about Randstad’s Head of Rewards making data-based decisions going into the AGM

Powerful pay-for-performance benchmarking tools allow for efficient comparison and automated output of CEO and executive compensation against competitors and peers.

4. Check the quality of data available in the software platform you choose

 

Where the data is sourced from and how often it is updated should be a concern when deciding on insights to trust for effective engagement. In addition to how many years of compensation data is recorded in the software platform. A wealth of global and structured data for meaningful comparison of executive compensation practices across industries and borders, should be a large consideration of tools purchased to support remuneration decisions.

Remuneration Committees, Head of Rewards and Benefits, and other Compensation Professionals can ensure reliability when using CGLytics software with executive compensation data sourced from millions of publicly listed company filings, proxy materials and social networks, which undergoes rigorous checks by a dedicated team of equity market research analysts 24/7. More than 10 years of historical compensation data is standardized for efficient comparison of 5,900+ companies’ pay and rewards across different regions, industries, and sectors.

Downloadable data and insights in an array of formats (such as excel) allow compensation professionals to model and easily transport charts directly into their board decks and presentations, for the ultimate time and cost savings.

 

CGLytics offers the broadest and deepest global remuneration data set in the market for reviewing corporate executive remuneration plans, assessing Say on Pay vote proposals and performing benchmarking analysis.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

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Understanding ESG & Annual Incentive Plan

Understanding ESG & Annual Incentive Plan ESG refers to a series of environmental, social and governance criteria taken into consideration by the funds during the investing process. Investing in ESG funds allows shareholders to support companies in transition, that wish to act and develop in a more sustainable and responsible manner. In practice, many indicators … Continue reading “Understanding ESG & Annual Incentive Plan”

Pay for Performance: The Largest Institutional Investors’ View

Pay for Performance: The Largest Institutional Investors’ View   Executive compensation has been one of the trickiest issues within the corporate governance space as of late. Across the board, there seems to be no end in sight to finding the perfect compensation package or philosophy for corporate executives. In this article, we will discuss the … Continue reading “Pay for Performance: The Largest Institutional Investors’ View”

How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

CNBC Report: More activist investors to focus on corporate governance and executive pay

This week CGLytics CEO discussed the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals that activist investors are broadening their focus.

07.20.2020

CGLytics CEO, Aniel Mahabier, discusses the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals the growth in the number of activist campaigns and how activist investors are broadening their focus.

Increase in activism

The CGLytics report Activist Investors Broaden their Focus analyzes the number of activist campaigns carried out over the previous four years and deep dives into the increasing areas that are attracting activism.

During the interview with CNBC, Aniel notes that shareholders are beginning to focus on areas such as diversity and performance. And, even though there has been an overall increase in the number of activist campaigns this year, not all of them have been successful.

The changes we are seeing during the pandemic, are that activists are focused on improving corporate performance. Having the right board composition and board diversity are the areas activists have been focusing on. Culture is another area where we have seen activists putting more focus on to improve corporate performance. – Aniel Mahabier, CEO of CGLytics

Regional shift in activism

The research report notes that now activist investors are finding a lot of opportunity in APAC, but not so much in continental Europe. The question is, do we expect this trend to change, and if so, when?

Social, cultural, and economic factors play a big role, along with the European market being highly regulated. This doesn’t provide a lot of opportunity for activists to play a role. I expect to see a marginal change taking place over time. – Aniel Mahabier, CEO of CGLytics

Executive pay

On this topic of executive pay, CNBC recalls that there has been a lot of focus from activists. Shareholder have objected to senior salaries in the past, even so companies have continued to pay out. During the pandemic, these senior salaries have been cut, and in some cases, granted in stock options. What are activists going to do with compensation?

A focus area of activists is to make sure executive pay is in line with the company performance. The median of CEO pay has risen, regardless of companies’ CEOs and Directors taking a pay cut. This is on both the S&P 500 and FTSE 100. We expect to see more focus on CEO pay in the upcoming proxy season. When it comes time for the AGMs in 2021, reflecting the 2020 performance year. – Aniel Mahabier, CEO of CGLytics

Source: CNBC Street Signs Europe

Board diversity

CNBC mentions about the motivation to change the makeup of boards, and that the representation of women on boards on the FTSE, is abysmal (still remaining below 30%). Will boards be motivated to improve diversity, due to the pandemic and the Black Lives Matter campaign?

The activist landscape is changing. We used to have the traditional activists playing a big role. Now you have passive institutional investment managers changing their style and becoming more active.

If you look at the BlackRocks and the Vanguards of the world, they are focusing on boards being composed with the right mix. Diversity plays a big role. Not only from a gender perspective, or a race perspective, but making sure you have the right skill set in place, the right tenure, and the right age diversity. It’s a number of things that make a board very effective, and I expect diversity to continue to be a focus going forward. – Aniel Mahabier, CEO of CGLytics

Companies need to be prepared for activist investors and engage with shareholders on a more timely basis. Proactive engagement between investors and companies will prevent activist campaigns going forward. Companies need the right information and tools to ensure their corporate governance risks are reduced and any deficiencies are quickly resolved.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

 

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise, and skills.

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COVID-19: Changes to Executive and Shareholder Pay in Europe’s Biggest Banks

To evaluate the financial industry’s response to the COVID-19 crisis, CGLytics reviews the executive compensation changes and dividend amendments of 20 listed banks across Europe.

In March 2020, the European Central Bank (ECB) published a recommendation to banks on dividend distribution, asking financial institutions to refrain from paying dividends or buy back shares during the COVID-19 pandemic. The measure was introduced to help banks cope with losses and support lending in times of the crisis and concerned dividends for financial years 2019 and 2020. The ECB suggested banks to amend dividend proposals for the upcoming Annual General Meetings, at least until October 1, 2020[1]. This article reviews the executive compensation changes and dividend amendments of banks across Europe in response to the COVID-19 crisis.

Numerous banks across Europe decided to follow the recommendation and cancelled, or delayed, dividend payments. Furthermore, senior management and non-executive directors of some institutions also decided to waive parts of their compensation to support the business or donate to the pandemic funds. Some other banks, however, have not announced any changes to executive remuneration at the time of generating this report.

To evaluate the financial industry’s response to the COVID-19 crisis, CGLytics has looked at the executive compensation changes and dividend amendments of 20 listed banks across Europe, with market capitalisation varying from EUR 9B to EUR 148B. The geographical representation of the peer group covers eight countries – Spain, United Kingdom, France, Norway, the Netherlands, Italy, Belgium and Sweden.

Changes in Executive and Non-Executive Compensation

Top executives across the industry chose to contribute part of their fixed or variable compensation in order to help their company or society to combat the crisis. 12 out of the 20 evaluated banks announced various actions taken by the executives, among them reductions in a salary, cuts or waiving of a bonus, or agreement to postpone planned compensation increase.

Source: CGLytics Data and Analytics

For example, the CEO of Banco Santander SA, José Antonio Alvarez, contributed half of his base salary as well as his bonus to the medical equipment fund[2]. Chief executives of three UK banks also announced that both their salary and variable bonuses will be affected by donations or cost cuts. These banks are HSBC Holdings plc, The Royal Bank of Scotland Group plc and Standard Chartered PLC.

Out of the reviewed sample, only Barclays plc chose to delay releasing of a portion of the long-term incentives awarded in 2017 and due to vest in June 2020. In addition, both the CEO and CFO of the bank have requested any increase to their fixed pay to be postponed until at least 2021. The bank’s Chief Executive, James Staley, has also volunteered to contribute one-third of his salary for the next six months to charitable causes[3].

Eight out of 20 banks have not reported any changes to the executive remuneration caused by the pandemic, including all Swedish banks represented. However, it is worth noting that senior management of Swedbank AB has been affected by pay cuts due to a money laundering scandal[4].

The situation with compensation adjustments for non-executive directors differs significantly for the chosen peer group. Only six out of 20 banks announced that the Chair or members of the Board of Directors agreed to forego wholly or partially the annual fees.

BOD Compensation Cuts
Source: CGLytics Data and Analytics

Chairs of Banco Santander, Barclays PLC, Banco Bilbao Vizcaya Argentaria and The Royal Bank of Scotland Group took cuts in their fees to support charities. Mark Tucker, Chairman of HSBC Holdings plc, donated his entire fee for 2020 (roughly GBP 1.5m)[5].

Non-executive directors of Banco Santander volunteered to contribute 20% of their fees to charity while Directors of Svenska Handelsbanken AB proposed to recall an increase of the Board fees. However, no other banks from the sample announced any changes to the fees paid to non-executive directors due to the pandemic crisis.

Changes in Dividend Payments

All 20 banks announced changes to the dividend payments in response to the ECB recommendations or the losses due to the crisis. Banks chose to cancel or postpone the dividend payments for 2019 financial year until more certain circumstances.

Dividends 2019
Source: CGLytics Data and Analytics

Following the ECB suggestion, the banks did not cancel interim dividends that have already been paid out but amended payments of the final dividends for 2019. Most of the banks chose to postpone the decision regarding the dividends for 2019 until later this year, hoping for clearer overview of the results and forecasts, while allocating the 2019 profits to the reserve accounts. CaixaBank SA decided instead to reduce 2019 dividends and change the 2020 dividend to a cash pay-out not higher than 30% of reported consolidated earnings[6].

Regarding the interim dividends for financial year 2020, some of the banks have already announced that they do not plan to undertake any dividend payments until uncertainties caused by COVID-19 disappear.

Financial regulators and banks across Europe are taking measures in times of the COVID-19 pandemic to support the economy. The recommendation of the European Central Bank to refrain from paying 2019 dividends until more certain times led to many financial institutions cancelling or postponing the dividend payments and using all funds available to combat the crisis or as a reserve backup.

Moreover, top managers and members of the Board of Directors are voluntarily donating part of their fees for 2020 financial year to charities and to support the business. Even though all evaluated banks have chosen to amend dividend payments, only some have been spotted on account of voluntary contributions from the top management. The results and impact of current decisions made by the banks will be visible by the end of the current crisis, when companies will evaluate the state of their business to estimate what kind of return they will offer to their shareholders.

Would you like to see how your executive compensation is viewed by leading independent proxy advisor Glass Lewis?

Click here to learn more about the Glass Lewis CEO compensation analysis and peer group modeling for Say on Pay engagement, available exclusively via CGLytics.

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2020 CEO Pay Review: The Top 50 Highest Paid CEOs

As proxy season progresses and companies file their annual reports, CGLytics surveys the world’s highest paid CEOs (so far) and looks at how executive compensation has grown since the last year.

CEO Pay is again in the spotlight of the 2020 AGM Proxy Season. With the COVID-19 pandemic affecting many aspects of the business, a large portion of companies have proceeded with executive compensation adjustments as a response.

How has the compensation scene changed over the last year? Of course, the proxy season has yet to be finished, hence the ranking of the companies and analysis will change over time. Nevertheless, it is worth reviewing the changes over the year so far, and the impact of any decisions made to the compensation practices of companies.

In this article we have included how the performance of the company has changed to understand how executives are rewarded compared to company performance.

Key CEO pay takeaways in 2020 so far:

    • – The sum of the top 50 total granted compensation has decreased by 53% from 2018 to 2019 ($4.73bn in 2018 down to $2.24bn in 2019).
    • – Last year’s top paid individual and company is not included in this year’s top 50 highest paid executives as he was granted only USD 23,760. He exercised, however, a total of USD 30,483,520 in options. Last year, Elon Musk’s pay accounted for over 50% of the $4.73bn granted of the 50 highest paid executives.
    • – This year’s first place for highest paid CEO, belongs to Sundar Pichai of Alphabet Inc., whose payment represents almost 13% of the $2.15bn.
    • – A few companies that have made it onto the list of the top 50 highest paid CEOs have also made changes due to COVID-19, either on their compensation practices or dividends:

 

  • The Walt Disney Company: The Walt Disney Company (DIS) announced that in response to the business challenges relating to COVID-19, each of the Company’s named executive officers agreed to receive a temporary reduction in their base salaries, effective with the payroll period commencing April 5, 2020. The Executive Chairman, and former Chief Executive Officer, of Walt Disney agreed to forego all of his compensation except a portion of his base salary.
  • Burlington Stores, Inc.: Burlington’s CEO, Michael O’Sullivan, will not take a salary, while the company’s Board of Directors will forfeit their cash compensation, and the Company’s executive leadership team has voluntarily agreed to decrease their salary by 50%.
  • Comcast Corporation: Comcast Chief Brian Roberts, NBCUniversal CEO Jeff Shell and other division leaders at Comcast will donate their salaries to coronavirus-related relief efforts as the world grapples with the devastating pandemic.
  • Fiserv Inc.: Fiserv Inc.’s top executives are taking temporary base salary pay cuts to compensate employees, who experience financial hardship due to the COVID-19. The Company disclosed that its Chairman & CEO, Jeffery Yabuki, and President & Chief Operating Officer, Frank Bisignano, have each agreed to forgo 100% of their base salary.
  • Wells Fargo & Company, Arconic, Inc.,The Walt Disney Company, The Kraft Heinz Company, and Fiat Chrysler Automobiles N.V. have also implemented dividend cuts or changes due to COVID-19.

 

  • – It is also worth noting, the average growth in market capitalization in 2019 (of the 50 highest paid Executives) was 43%. A big increase compared to the growth of 1% seen in 2018.
  • – One-year Total Shareholder Return (TSR) growth also saw an increase of as much as 42%!

Please note: Compensation in USD – exchange rates based on single point of time, end of tax year 2019.

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AGMs: Tactics for a Plague Year

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible. What are the best options for running AGMs during a plague year?

What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

AGMs: Tactics for a Plague Year

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible. What are the best options for running AGMs during a plague year?

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible.

Postponing them may also not be a good option. Advisors, analysts, shareholders, investors, employees and all other stakeholders are all eager to understand their companies’ way forward in such troubled times, and the AGM offers the best way to address this. Postponing the AGM, even for good reasons, sends a bad signal to the markets at the very time when addressing investor and broader social concerns is critical.

For example, many companies are considering reducing dividends due to the challenging economic conditions, yet CEO pay reductions are not on the AGM agendas. CEO pay continues to rise, regardless of performance. The top 35 highest-paid CEOs on the S&P 500 received a combined Total Realized Compensation (TRC) of almost $3 billion in 2019, yet pay-for-performance alignment is badly skewed at nearly half of the companies on the index as our statistics show.

If postponing is not an option, companies do have two other options at their disposal: Running a ‘hybrid’ AGM, which would combine physical presence with virtual communications, or making the entire AGM virtual. Most companies don’t have such options included in their Articles of Association, but the first step at the hybrid or virtual AGM would mean voting on such changes. The London Stock Exchange is currently pushing for emergency legislation to change the companies act to allow all companies to stage virtual shareholder meetings. 

The hybrid option means that either board members are physically present at the AGM, while shareholders communicate with them via virtual links, or that shareholders send representatives to physically attend the meeting while board members communicate via video or audio communications. Voting ahead of meetings is also an option, working with proxy advisors.

Swedish telecoms and networking firm L.M. Ericsson has chosen the former hybrid option for its 2020 AGM on 31 March. The President and CEO Börje Ekholm will not attend in person, but will participate via links (it is not clear whether other board members will attend in person). A live webcast of the meeting will be available to shareholders.

To keep the numbers of attendees down, Euroclear Sweden will offer shareholders who are individuals the option to vote via proxy, and other opportunities to work with proxies are made available to shareholders. “No food or refreshments will be served,” the official invitation warns.

Ericsson’s official invitation offers links to Nomination Committee proposals as well as to some shareholder motions.

But, in this hybrid approach to the AGM, is it clear that board members will be able to fulfil their fiduciary responsibilities in communicating with shareholders? Will it be possible to hold a dynamic discussion of the company’s affairs? Will shareholders be able to work with proxy advisors on such short notice – how will policies be communicated? Will a shareholder wishing to pose a complex question to the CEO get sufficient airtime?

The alternative hybrid approach to running AGMs would mean that board members are physically present, while shareholders communicate with them entirely via audio, video and messaging. And there is the further alternative, in which all communication takes place virtually.

Each of these alternatives poses many of the same questions that we’ve raised above. One of the virtues of the physically-attended AGM is that a shareholder can follow up on questions, or insist on attention to specific subjects. Can shareholders be sure this will happen online?

The even larger question being asked at some companies will be whether all shareholders have had access to sufficient information to vote before the AGM. For example, under current conditions, it may not be possible for the audit of financial statements to be concluded. Some companies are opting to work with financial reporting that is incompletely audited. This poses a serious corporate governance challenge that the board would have to address at the AGM.

The diffusion of extensive financial and non-financial information to shareholders and their representatives ahead of the meeting is also critical for these virtual or semi-virtual AGMs to succeed. Given that shareholders must accept somewhat limited access to the board, they must be certain that all of the information relevant to decision-making on matters such as executive compensation, director election, Stock Purchase Plan has been provided in advance.

Boards that take all the necessary steps to ensure that shareholders have the information they need ahead of the AGMs will be fulfilling their fiduciary responsibilities to shareholders. At the same time, Shareholders will need to step up and leverage technology and information to support their engagement. The AGM will provide the basis for the company to move forward even in a Plague Year.

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What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

This article by CGLytics CEO, Aniel Mahabier, first appeared in Dutch in Mgmt. Scope on 11th March 2020: https://managementscope.nl/opinie/bestuurdersbeloningen-bedrijfsprestaties

Executive compensation gains attention in the run-up to annual shareholder meetings. The key question is whether compensation plans are socially responsible and align with company performance relative to its peers.  In 2019, companies already got a taste of the increasing interest in CEO pay from shareholders. “That attention is only increasing,” says Aniel Mahabier, founder and CEO of CGLytics, the leading global provider of governance data and executive compensation tools. “Executives  and directors  who are not sufficiently prepared are facing reputational risks.”

As shareholders and other stakeholders prepare themselves for annual shareholder meetings, it’s the moment to speak out on these important issues. Shareholders will again make themselves heard this year. For several years now, engagement between shareholders and companies has been growing. Parties are more likely to vote and use their voting rights to steer business policy: the number of votes against remuneration policies are increasing proportionally at the meetings of the 5,900 listed companies we track. An increasing number of shareholders want compensation to reflect the company’s long-term performance and value creation (in other words, pay for performance and earnings per share).

Pay for performance

It is obvious that the compensation of executives should reflect the company’s performance, however data shows a different picture.

In a large number of the publicly listed companies, there is pay for performance misalignment. The CEO’s compensation is – consciously or unconsciously – not in line with the value create by the company over multiple years.

More than half of companies in the US S&P 500 Index lack a correlation between CEO compensation in 2019 and the development of the company’s earnings per share over the past three years.

In some instances, the CEO compensation is lower than expected based on CEO value creation. With a much larger proportion of companies, the value created by the CEO is much lower than you would expect based on the level of their compensation received. In many situations, at the general meeting of shareholders, companies proposed increasing executive pay, although the company’s performance declined.

Mismatch

This misalignment between CEO compensation and company performance is increasingly gaining the attention of shareholders, employees, governments and other stakeholders. The top 35 executives of companies in the S&P 500 collectively earn almost more than $3 billion, which contributes to the discussion. In Europe we see a similar picture. For a third of the listed companies in the Benelux, the CEO’s compensation does not align with the realized value creation. A similar picture is seen at a third of companies in Britain’s FTSE 350 Index.

Drivers of change

The focus on responsible compensation is in line with the focus in society on sustainable business growth.

Large investors – pension funds and insurers – are drivers of the change in compensation.  Passive investors, such as asset managers Vanguard and BlackRock, are also increasingly using their control to influence compensation proposals.  We see that they are trying to encourage a more socially responsible compensation policy in different ways. For example, by engaging  on compensation  policies and proposals with shareholders and other stakeholders before the general meeting of shareholders and underpinning this with data. We see signs that this is reducing the number of dissent votes against the proposed policy.

Shareholders do not hesitate to enforce change where necessary. For example, by voting against incentive proposals including equity plan proposals at the meeting. A large investor has stipulated that if more than 25% of shareholders speak out against a compensation proposal, they will in turn vote against the reappointment of the chairman of the compensation  committee. The same strategy is used if the compensation proposals provoke a substantial number of counter-voters in two consecutive years.

Reward regulators

All efforts to promote sustainable value creation are having an effect: short-term pay is making way for a long-term performance-based compensation structure. Several listed companies have either decreased, shifted or changed the variable compensation component of their executives’ pay plan into fixed compensation. The latter includes, more often, a combination of cash and shares of the company. Using shares as an incentive, there is a direct alignment between the pay of the CEO and the performance of the company.

The same development is also seen when looking at the compensation of directors (non-executive directors). Where it is common practice in the United States to reward directors with, among other things, shares of the company, this was not common, or even prohibited, in Europe for a long time. That has changed. For example, the new corporate governance code in Belgium offers the possibility to reward non-executives partly in shares. This creates a shared interest with shareholders.

Sustainable criteria

An important development is seen in the use of non-financial metrics for executive and CEO compensation.

Shareholders expect companies to include non-financial guidelines such as ESG criteria in their compensation system in addition to financial guidelines – such as earnings per share and Total Shareholder Return (TSR). These criteria show how the company takes into account various ESG  sustainability criteria: Environmental, Social (social policy) and Governance (good governance).

In many countries in Europe, listed companies are obliged to include such non-financial disclosure in their annual reports. It therefore seems logical to also link the compensation of the executives to the goals set by the company in the field of corporate social responsibility. The recent governance crisis at a major Swiss bank illustrates how the lack of good governance can affect the oversight and value creation of a company in the long term.

Although attention to the inclusion of non-financial metrics is increasing, the application is still limited in practice. Only 27% of FTSE 350 and ISEQ 20 companies have included some form of measurable ESG criteria in incentive plans. And even in these companies, the proportional share of compensation determined by ESG performance is small. This deserves attention: if the sustainable objectives are not included in executive compensation, there is a risk that the compensation policy will lose connection to the business strategy.

Risk factors

A responsible compensation plan based on financial and non-financial metrics is more important than ever. An increasing number of directors, regulators, compensation committees and investors are therefore scrutinizing CEO compensation and use CGLytics data and pay for performance benchmarking tools to review compensation proposals and policies. Directors are using this information to prepare their engagement with active shareholders, proxy advisors like Glass Lewis and other stakeholders. Investors are looking for red flags, undiscovered risk factors that threaten the quality of governance in the company. Having access to similar information and tools ahead of the proxy season, is allowing compensation committees to respond in a timely manner to pitfalls in the existing compensation plan and proposal to avoid potential reputational and activism risk.

Would you like to gain instant insights into more than 5,900 globally listed companies’ board composition, diversity, expertise and skills?

Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Click here to request a demo to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, currently utilized by world-leading institutional investors, activist investors and advisors.

About the Author

Aniel Mahabier: CEO of CGLytics

Aniel Mahabier  is CEO and founder of CGLytics, the leading global provider of governance data and executive compensation tools. Mahabier interviews and writes for Management Scope about the remuneration of directors and corporate governance analytics.

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CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

The UK Investment Association, which represents more than £7 trillion ($9 trillion) in assets, responded to investor dissent of FTSE350 companies not acting on executive pay concerns by issuing a new version of executive pay guidelines for disclosures in 2019. With a statement claiming, “companies need to demonstrate the link between pay and company performance. If they don’t, they should brace themselves for more shareholder revolts”. It is clear from this statement that executive pay and pay regimes are still hot topics.

In the US, the Council of Institutional Investors (CII) have also commented in the past on the “excessive complexity in U.S. executive pay plans, and questions on the effectiveness of approaches to pay-for performance.”

There are indeed vast disparities between compensation at select companies within the S&P500 index and their Total Shareholder Return (TSR).  CGLytics, as part of its S&P 500 CEO/Executive Compensation review, has developed an extremely granular view of CEO pay in comparison with performance for the index, helping to focus the debate on the issue.  The review examines different aspects of CEO pay among the constituents of the S&P 500index, including fixed v. variable compensation mix, overview of Pay vs. TSR, and a pay for performance review on a one- and three-year basis.

Realized Pay Correlates with Growth

CEOs received an average of $14,748,284 in Total Granted Compensation (TGC) and $19,276,476 in Total Realized Compensation (TRC) in 2018, the report shows.  Yet the average TSR for S&P 500 companies in 2018 was -6 percent. While this is an improvement from 2008, in which average TSR was -39 percent (average granted pay was $9,563,165 and average realized pay was $10,318,656), it is not a result that is likely to satisfy shareholders.

Indeed, the report indicates a trend that supports the need for performance-related incentives: Granted pay steadily increases from year to year while realized pay tends to coincide with absolute growth.

 

That need is further supported by the comparison of CEO pay with TSR. Naturally a zero-percent margin or zero disparity between a CEO’s realized pay and the company’s TSR is considered perfect alignment.

Historic number of shareholders oppose boards on executive pay

Companies such as Michael Kors Holdings Limited, NVIDIA Corporation, Constellation Brands, Inc., Goldman Sachs Group, and Capital One Financial Corporation all had CEOs rank in the top of their sectors for Total Realized Compensation in 2018. Yet, each of these companies also had a 2018 TSR in the bottom 20 percent of their industry.

Not surprisingly, this leads to shareholders questioning the pay practices of the board, and, in fact, opposition from shareholders for executive compensation issues is at an all-time high. In total, about six percent of director nominees have received less than 80 percent support, and 0.3 percent have not secured majority support. Eight percent of Say on Pay votes have secured less than 70 percent support, and two percent have not achieved majority support.

These numbers may seem small, but they are actually historic in significance compared with previous years’ levels of opposition for related AGM items. It is clear that large passive investors have become more hesitant to approve large one-time retention awards, unrestricted equity to executives, and executive incentive grant with no performance criteria.

To learn more about the Say on Pay landscape of the S&P 500 index, click here to download the full report.

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