‘Tis the Season for 2018 Proxy Disclosure Preparation


 

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While we were all watching the tax reform process unfold on Capitol Hill, the calendar of corporate governance kept moving forward, bringing a number of executive compensation issues into sharper focus for 2018.  

In preparation for the upcoming proxy season, guidelines and voting policies have been released by various proxy adviser firms and influencers, helping to inform institutional investors and other shareholders on vital corporate governance matters. 

Here’s the rundown of items relating to executive compensation garnering attention for the upcoming year from the Investor Stewardship Group (ISG), Institutional Shareholder Services (ISS), and Glass Lewis & Co.

Aligning Incentive Pay and Company Performance

ISG, a collective comprised of senior corporate governance practitioners from 50 of the largest U.S.-based institutional investors and global asset managers, specifically included executive compensation considerations in its 2018 Corporate Governance Principles. The framework states that “boards should develop management incentive structures that are aligned with the long-term strategy of the company.” 

Incentive-based compensation is, of course, a central tenant of executive compensation design. 

More particularly, ISG notes that boards or compensation committees should identify both short- and long-term performance goals related to the company’s long-term strategy. They should, accordingly, integrate these performance goals into management incentive plans and explain such actions to shareholders. 

Additionally, ISG states that “all extraordinary pay decisions” relating to named executive officers should be explained to company shareholders. 

Focus on Non-Employee Director Compensation

Institutional Shareholder Services’ 2018 policy updates impact CEO pay-for-performance policy and non-employee director compensation policy for shareholder meetings beginning Feb. 1, 2018.

ISS revised its existing pay-for-performance quantitative analysis mechanism in this round of updates. The analysis will now include a relative assessment of the company’s CEO total pay and company financial performance within a peer group, each measured over a three-year period. 

Citing the interest of investors in examining the magnitude and structure of non-employee director compensation, ISS is introducing a new policy—although it will not impact vote recommendations in 2018. The new policy provides for adverse vote recommendations for board or committee members responsible for approving and/or setting NED compensation where there is a recurring pattern (identified as two or more consecutive years) of excessive NED pay “without a compelling rationale or other mitigating factors.” 

Pay-Ratio Reporting Data Considered

Finally, Glass Lewis has released its 2018 Proxy Paper Guidelines, applying to shareholder meetings held on or after Jan. 1, 2018. Unlike other entities, Glass Lewis will begin displaying CEO pay ratio as a data point in its Proxy Papers provided to investor clients prior to a company’s annual meetings. 

The Pay Ratio rule, implementing Section 953(b) of the Dodd-Frank Wall Street Consumer and Protection Act, requires issuers to disclose the compensation of the median employee, the compensation of the CEO, and the ratio of the two amounts beginning in 2018. However, the Guidelines note that at this point, such information will not rise to the level of a determinative factor in voting recommendations. 

Another Dodd-Frank-based recommendation from Glass Lewis for 2018 provides that companies should submit say-on-pay votes to shareholders yearly (while the final Securities and Exchange Commission rule provides for every three years), unless the company is able to provide some compelling rationale or unique circumstances that dictate otherwise. 

Another guideline relates to compensation clawbacks—even though the SEC has yet to finalize rules relating to Dodd-Frank’s clawback requirements. Section 954 of Dodd-Frank directed the SEC to create a rule requiring listed companies to adopt policies for recouping certain compensation or become ineligible for listing on the national stock exchanges. Earlier this year, this item was moved to the SEC’s long-term action list. 

Even though SEC non-compliance isn’t a looming risk, Glass Lewis says companies should adopt “detailed and stringent bonus recoupment policies” to ensure executives cannot retain performance-based awards “that were not truly earned.” Such a policy would be triggered by a restatement of financial results or a revision of performance indicators upon which the bonus was based.