Last week I looked at companies who made positive reforms on pay (see here, here & here). It was sort of the feel good, “Say on pay is a success” story. I think that fundamental assertion is true. Yet there are significant caveats and limits to those successes. I begin the “bad news” series with a look at companies whose changes were less inspiring, either because they just got around to making changes others had made in the past or because they eliminated practices they never should have had in the first place.
Many of the changes were smaller companies eliminating practices that companies in the S&P 500 eliminated soon after shareholders gained the right to vote on pay. I counted 26 companies that eliminated gross-ups (company payment for executive tax after change in control parachutes) and/or added or made changes to how equity would be treated following a change in control. (Important side note: performance grants are only truly performance based when they ONLY vest when criteria met.)
I tracked 10 companies that made changes to peer groups, 10 that increased their holding periods, and seven that adopted or improved their clawback policies.
Then there were the companies that eliminated practices they should not have had in the first place.
General Growth Properties – “Our Compensation Committee adopted a formal policy prohibiting guaranteed minimum bonuses in future NEO employment agreements.” The phrase “guaranteed minimum bonuses” tells you pretty clearly these aren’t in any way performance-based bonuses. The company also adopted a formal policy that future executive equity awards will not be 100% time-vesting.
Natural Gas Services – “The Compensation Committee approved a new framework for our long-term equity compensation. Equity awards now vest in one-third increments over three years.” Previously the company had awarded one-year restricted stock which is absurd to define as long-term.
Superior Industries “Modified our CEO’s employment agreement to eliminate the guarantee of annual time-based equity awards.” That is a contractual change, so more significant than others.
Several companies, including Tessero; Exelon; Bed, Bath & Beyond; and Verifone, adopted policies that cap certain future payouts. These particular payouts, generally relating to performance shares, were capped at target if there is “negative absolute TSR for 12 months.” Capping payments sounds good but note that even if shareholders lose money over the course of the year executives can achieve 100% of their bonus. In some cases this change was necessary because before it was made some of these executives could have received more than 100% of target in a bonus even with a stock price decline.
It is great that that these changes were made but it brings up a challenge familiar to educators: how does one respond to good faith efforts of improvement? There is reasonable tendency to want to reward effort to encourage further improvement. But if someone worked hard to address the cause of a failing grade, they should not be given an A or a B. (This has led to grade inflation, something outside my purview but not my interest).
Voting of course is binary: yes or no. I believe the desire to reward even incremental changes is one reason that we’ve seen an average increase on level of support for pay. Analyzing compensation is very time consuming so it is simpler to look for red flags. For the past several years many of the votes have reflected an attempt to get more companies to adopt best practices, or at a minimum eliminate the most egregious outliers.
Improved support levels at particular companies do not mean that shareholders are happy with the system, structure or stratospheric amount of pay generally. That misinterpretation is frequently made by one compensation consultant in particular. The increased level of votes often means companies with the worst practices have been rewarded for conforming.
That’s a good place to start, but by no means the end of the journey.