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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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

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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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Pay for Performance: The Largest Institutional Investors’ View

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Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

Glass Lewis and CGLytics recently held a webinar to explain Glass Lewis’ new peer group methodology, taking effect from January 1 this year.

The new model implemented by Glass Lewis changes the way peer groups are determined for the Say on Pay recommendations in their proxy papers. During the webinar Glass Lewis’ Julian Hamud, Senior Director of Executive Compensation Research, explains:

“The new partnership with CGLytics has given the opportunity to provide better research for our clients. We are moving from a market-based approach to a proven peer-approach, which will improve our say on pay and compensation analysis.”

Hamud goes on to explain in detail the problems they encountered with the previous model including rigidity with no ability for manual adjustments to the peer algorithm when unique context of a company is justified, and large industry favoritism.

The impact on pay for performance grades and recommendations is also highlighted with a case study detailed by Aaron Bertinetti, Senior Vice President, Research and Engagement, Glass Lewis.

Using the example of Franklin Resources Annual General Meeting (AGM) being held on February 12, 2020,  Bertinetti shows the difference in pay for performance grades awarded using both the old and new Glass Lewis model and peer methodology. This example reveals an improved Grade C, whereas using the previous peer groups and model it would result in a Grade D.

Due to the change of Glass Lewis now using CGLytics data to power their Say on Pay recommendations, and adapting their methodology to peer-based approach, companies need to understand:

  • • How the Glass Lewis peer groups are now constructed,
  • • Why you and your company should care, and
  • • The benefits of the new peer group methodology.

 

To learn more, click here to watch the webinar by Glass Lewis and CGLytics.

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The DOs and DON’Ts when rethinking incentive plans

Why have 75% of first-time say-on-pay votes failed in 2019? A large number of negative votes can be attributed to incentives. Companies need to rethink their incentive plans and make sure metrics truly benchmark performance.

Seventy-five percent of first-time say-on-pay (SoP) votes failed in 2019, and a large number of these negative votes focused on incentives.

There is an increasing need for companies to fully rethink their incentive plans, as the CGlytics whitepaper “How to take the testing of equity-based compensation plans into your own hands” points out.

“It is imperative that companies design their equity pay plans to ensure they receive shareholder approval first time, every time. In order to meet investor expectations, companies need to understand how they, and the proxy advisors they rely on, evaluate equity plans and make voting decisions.”

Marc Ullman, a partner with Meridian Compensation Partners explains what to do and what not to do in rethinking incentive plans.

First of all, companies need to fully rethink their compensation plans, and not to just tweak them. Making just a few cosmetic changes will not suffice to ensure that incentives are effective. At least every two years, a real restructuring is needed.

Often shareholder pushback will incite a rethink, but even with shareholder support, benchmarking for effectiveness is critical as priorities change and the business climate evolves. The plan must reflect the new realities the business faces.

Or the incentive plan may simply become too complicated to be useful, as continually including more metrics and other add-ons makes application confusing. This often happens as businesses try to simply tweak the plan instead of really rethinking it.

 

Here are the do’s and don’ts to achieve as near optimal alignment between pay and performance as possible:

– If you need a full-scale rethink, don’t settle for a mere tweak. Make sure that what you do matters, don’t nibble around the edges. Make sure the metrics truly benchmark performance.

– But don’t overdo it. Pick out the key metrics and focus on that; don’t try to transform the whole structure unless you really feel that you have to.

– As the rethinking process is underway, take note of the solid rationale that stems from the business model. This will be something to communicate at the end of the process, and one that can be used for grounding the basis of your thinking.

– Make sure you include all the right people: Finance, HR, Corporate leadership, corporate leadership and the business unit. Everyone should buy in to the metrics and the targets that are being set.

– Make sure your plan pays something in year one. After a big rollout you need to make sure that design provides results. Otherwise it could hurt your credibility.

– Take advantage of feedback from shareholder outreach. More and more companies are actively talking to shareholders, and their points of view should at least be considered as the design is taking shape. Consider investor relations and investor perspective and proxy advisors like ISS and Glass Lewis.

– Communicate internally and externally. You have multiple audiences internally.

 

Predict Shareholder Approval with Glass Lewis’ Equity Compensation Model

 

The Glass Lewis Equity Compensation Model (ECM) allows you to instantly test and review your incentives plan using the same key criteria and scoring system as leading proxy advisor Glass Lewis. The ECM supports testing of 4,300+ publicly-traded U.S. firms including the Russell 3000 and exclusively available via CGLytics.

With the ECM you can confidently engage, knowing the strengths and weaknesses of your current and future equity plans. Ensure you get the votes to legally grant equity compensation to your executives, board members and staff.

Click here to learn more about the ECM application or request a no-obligation demonstration.

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Remuneration policy: Directors reward attracts more and more attention

A well-founded remuneration policy is no longer optional. The new European Shareholder Rights Directive demands transparency around remuneration of directors.

At many of the annual shareholders meetings, the remuneration of the directors will soon be prominently on the agenda. It is one of the most important governance issues for companies. In 2019, companies already received a taste of the increasing interest in this topic of shareholders and employees. We expect that this attention will only increase. It is not only shareholders who look critically at the remuneration of the directors and everything that is related to it. The legislator is also alert. De new European Shareholder Rights Directive (SRD II) demands the transparency of the company around the remuneration of directors and senior managers. The reward must also be in line with the long-term value creation.

Active involvement

An increasing number of directors, supervisors renumeration committees and investors are using corporate governance analytics to review remuneration policy. That helps determine an adequate reward structure. And overseeing it. The wide-ranging discussion on Shell-CEO’s remuneration, Ben van Beurden, illustrates that. It more than doubled to € 20.1 million in 2018. Important detail: the data shows that his wages are 143 times higher than the average wage of the British staff of Shell. At Shell’s most recent meeting, shareholders had the chance to vote on the pay package, 10 percent of the shareholders voted against.

Equal to employees

We also see how stakeholders can appreciate a long-term remuneration policy. For example, insurer ASR came into the news positively when it wanted to permanently put an end to bonuses and pay in shares for the board. After the agreement with the shareholders, it is also stipulated that there are no variable remuneration schemes for the members of the Board of Directors, thus the remuneration policy is equal to that of the other employees in the company.

Effect new law

It is clear that companies need to be aware of the effects of their remuneration policy. We see a positive effect if companies do talk about the remuneration policy with shareholders and other stakeholders before the general meeting of shareholders, underpinning this with data. We see signals that this reduces the number of oppositions to the proposed policy.

A well-founded remuneration policy is no longer optional. Dutch companies must draw up their remuneration reporting for the 2019 financial year in line with the new requirements of SRD II. This includes a comprehensive overview of the remuneration and benefits of each individual director covered by the advisory vote of shareholders. In addition, Dutch listed companies need to explain how their salary strategy connects with the long-term goals. The new law also gives shareholders more participation and influence. Since the introduction of the law, companies need 75 percent of shareholders’ votes to adapt their salary strategy. This was previously 50 percent. All the more reason for companies – also non-listed ones – to put their remuneration policy into perspective.

For more information about how CGLytics’ executive compensation data and tools informs companies of how they compare to their peers reumuneration practices click here.

About the Author

Aniel Mahabier: CEO and founder of CGLytics

Mahabier interviews and writes for Management Scope about the remuneration of directors and corporate governance analytics. This blog was published in Management Scope.

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How Glass Lewis improved their executive compensation analysis and Say on Pay recommendations for European markets

Andrew Gebelin from Glass Lewis talks through how he and his team of analysts have benefited from using the CGLytics data and tools to improve their executive compensation analysis and Say on Pay recommendations for European markets.

In the continuously evolving and sometimes volatile economic times, investors have to make tough decisions. To ensure they are making the best possible decisions they require greater insights into activities within portfolios. Whether it’s sustainability practices, gender and cultural diversity, or executive compensation and remuneration, Glass Lewis has experienced, first-hand, the increasing demand for additional information from their investor clients.

CHALLENGE

Glass Lewis had a vision to create the next generation version of their quantitative pay and peer analysis, which they include in their Proxy Papers for annual shareholder meetings. Their approach to proxy advising focuses on providing investor clients with independent, in-depth analysis that looks at each company on a case-by-case basis. When it comes to executive pay, regardless of the company’s size or sector, Glass Lewis’ methodology requires a contextual assessment incorporating two consistent peer comparisons: one against similarly sized peers in the same country, and the other against a wider geographic pool of companies in the same industry.

Prior to the partnership with CGLytics, Glass Lewis’ analysis of the relationship between executive pay and performance within the European market was limited by the quantitative pay and peer tools they had available. With their client investors expecting increasingly detailed evaluations of an
ever-wider pool of companies, Glass Lewis realized that achieving their vision would require tools that provide:

  • • Greater flexibility to model unique peer groups;
  • • An ability to view CEO pay comparisons over different time periods that appropriately reflect a company’s business cycle or performance period;
  • • Comparisons incorporating a larger range of key performance indicators and remuneration metrics, allowing deep-dives into individual pay practices;
  • • Flexibility to consider and make comparisons between grant-date, target and realized pay over different time periods; and
  • • The ability to model differences in pay outcomes based on any changes contemplated to the remuneration framework or metrics.
  • APPROACH

    For the 2018 proxy season Glass Lewis integrated CGLytics data and analytics into their analytical processes and Proxy Papers for the European markets.

    Working with CGLytics, Glass Lewis defined a new peer group methodology focused around two distinct comparator groups:cross-border industry groups, and in-country groups based on company size. These peer groups were proofed and refined with CGLytics’ support to ensure they provide an appropriate basis of comparison. Glass Lewis analysts then incorporated key metrics from CGLytics’ rich library of performance data, displayed against three years of realized pay to allow for a balanced assessment over the longer term.

    CGLytics’ platform allowed Glass Lewis to provide their clients with a standardized approach to pay analytics across Europe, while retaining flexibility to account for market-, company- or plan-specific features. The performance metrics included in the Proxy Paper analysis were chosen for the greatest possible consistency across all European listed companies, providing a common point of comparison regardless of market or sector. That said, not all companies (or pay plans) are alike. Where unique circumstances require bespoke pay analytics using different indicators or uniquely designed peer groups, access to the CGLytics SaaS platform allows Glass Lewis analysts to drilldown and perform a multitude of quantitative  comparisons and tests.
    With the new peer group methodology in place, CGLytics helped Glass Lewis develop a graphical layout that illustrates the relationship between pay and performance. The new Remuneration Analysis section within the Proxy Paper
    incorporates peer comparisons and a breakdown of remuneration components to present a comprehensive picture, allowing investors to assess pay outcomes on both a relative and absolute basis.

    SUCCESS

    Incorporating CGLytics compensation data and analytics into Glass Lewis’ Proxy Paper and voting recommendations has yielded overwhelmingly positive feedback from investor clients and from companies.

    By implementing a standardized display that allows every company to be compared on a like-for-like basis, while retaining the flexibility to utilize an array of customized key performance metrics, CGLytics and Glass Lewis developed the tools to produce quantitative pay analysis and peer comparisons that are second-to-none. Investors appreciate the easy access to CGLytics rich data and powerful tools, yielding valuable remuneration insights whether they are comparing the entire market or diving deep into a single pay plan. For the companies that Glass Lewis covers, the use of bespoke peer groups and the sheer range of options that can be customized provide reassurance that their company’s pay policies will be assessed appropriately.

     

    BENEFITS OF IMPLEMENTING CGLYTICS’ DATA AND ANALYTICS

    Analysts can access 10+ years of historical compensation data
    Glass Lewis analysts are able to both view historical pay practices over an extended horizon, and model the anticipated future impact of new pay policies.

    Comparison of pay practices on a like-for-like basis
    Standardized display options for every company across Europe supports greater consistency when comparing pay practices across industries and regions.

    Greater flexibility to analyze information beyond Proxy Papers
    Analysts can now use CGLytics SaaS platform to look at specific remuneration components and factors outside of the standard information displayed in Proxy Papers.

    Expanded European market coverage
    Glass Lewis expanded their European market with additional indexes and 200+ companies to cover more than 1,100 companies.

    50% time-savings when generating quantitative pay analysis
    Using graphical templates and standardized data, analysts were able to complete the
    quantatitive pay component of the Proxy Paper in half the time compared to prior years.

    Empowered investor clients to customize their own pay for performance analysis Glass Lewis clients have embraced the ability to customize their own analysis for Say on Pay in accordance with their own methodologies using CGLytics’ data.

    Leveled the playing field for corporate issuers
    With access to the same tools and underlying data as Glass Lewis, corporate issuers can now proactively understand how they are viewed in relation to their peers.

     

    USE THE SAME DATA AND TOOLS AS GLASS LEWIS

    Customers can now instantly view the Glass Lewis executive compensation analysis and peer group modeling for planning their Say on Pay agenda via CGLytics. CGLytics and Glass Lewis have established a global partnership to provide unmatched compensation data and analytics for corporates, investors and advisors.

     • Ensure effective engagement, risk oversight and modern governance practices with CGLytics.

     • Instantly view the Glass Lewis CEO and executive remuneration analysis in the CGLytics platform.

     • Use the same data set and analytical tools trusted by Glass Lewis’ global research team and featured in the reports used by its institutional investor clients.

     • Self-construct peer groups from an extensive global data set of 5,000+ public companies for benchmarking executive pay

    Click here to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, used by institutional investors, activist investors and advisors.

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    Trends in the opposition

    When shareholders are considering the impact of diluting their holdings, they require that any potential value lost by the equity incentive plan is offset by the value the business gains by meeting the qualifying KPIs. Whether this is Market Capitalization, Total Shareholder Return, EBITDA or free cashflow, there has to be a compelling strategic rationale for the award of equity. Further, the remuneration committee must ensure that the organization behaves is a prudent manner, even after the plan is agreed to.

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