Compensation planning and the 2020 proxy season

As investors show increased interest in environmental, social, and governance (ESG) issues, the responsibilities of compensation and governance committees continue to move beyond oversight of executive and director pay. ESG will likely draw more attention in 2020, with a heightened focus on human capital management (HCM).

Reflecting this shift, CEOs of leading companies are urging a broader perspective on corporate purpose beyond creating shareholder value, and investors are using engagement and shareholder proposals to push for change. Meanwhile, the SEC has proposed rules to regulate proxy advisers and to make it harder for shareholders to submit proposals – which could give companies more leverage when they are challenged by proxy advisers or shareholders. Here’s more information on these developments, plus 10 tips to help companies gear up for the 2020 proxy season.

1. Focus on human capital management

ESG issues dominated the 2019 proxy season — particularly HCM. While investors have increasingly focused on the importance of human capital issues, CEOs recently joined the chorus. CEOs from the Business Roundtable issued a Statement on the Purpose of a Corporation advocating that companies should deliver value not only to shareholders, but to all stakeholders — employees, customers, suppliers, and communities. Companies are recognizing their workforce is a valuable asset not just a cost, and the Securities and Exchange Commission (SEC) has proposed a rule that would require companies to disclose information about their HCM policies and practices (for Mercer’s POV, see our comment letter). Actions to address workforce concerns include analyzing HCM risks and opportunities, enhancing board oversight, and voluntarily increasing disclosure.

2. Examine using incentive plans to reinforce ESG

Tying pay to ESG metrics can send a message to executives, employees, shareholders and other stakeholders about the company’s commitment to sustainability. A recent Mercer survey found that half of respondents either currently use ESG metrics in incentive plans (30%) or are considering their future use (21%) to support their strategy. But companies shouldn’t add metrics simply as window dressing or in response to competitors’ practices.

3. Consider adding context for CEO pay ratio

Investors and lawmakers are requesting companies provide more information about workforce pay and demographics, going beyond the required disclosure of the ratio of the CEO’s pay to that of the median-paid employee.

4. Avoid complacency about say-on-pay support

While shareholder support for executive pay programs continues to average about 90%, and few programs fail, weak say-on-pay support draws increased scrutiny from proxy advisers. Companies with low support should be sure to demonstrate responsiveness to shareholder concerns about their pay program to help boost support in the following year.

5. Don’t take equity plan approval for granted

Most equity plan proposals received majority support from shareholders, with support averaging about 89% in 2019. But equity plan votes are binding, so the impact of a failed vote — despite the low risk — is significant. And lawsuits alleging inadequate or inaccurate disclosures are targeting equity plan proposals, so companies should be meticulous about plan disclosures.

6. Validate director pay-setting process

Board pay continues to rise — S&P 500 company director pay hit a new high in 2018, according to a Mercer study — and higher pay brings some risks. Starting in 2020, Institutional Shareholder Services (ISS) will begin recommending that shareholders vote against board members responsible for setting director pay at companies with a pattern of “excessive” director pay. And investors are likely to continue targeting director pay programs in court. Companies should have a rigorous process for determining director pay, and describe it in their proxy statements.

7. Review board makeup

Average investor support for directors up for reelection in 2019 remained high (over 98%), but more directors faced “significant opposition” (less than 80% support) because of two key concerns: overboarding and diversity. Investors are voting against directors who sit on too many boards, or sit on the nominating committee of boards without a sufficient number of women. And lawmakers are pressuring companies to increase female and minority board representation.

8. Monitor changes in proxy adviser policies and process

Companies should monitor ISS and Glass Lewis policy changes and how they may affect 2020 voting recommendations. A negative say-on-pay recommendation from ISS is generally associated with a 20%–30% reduction in shareholder support. But a recently proposed SEC rule that would require proxy advisers to be more transparent about conflicts of interest, and allow companies to review and provide feedback on proxy voting recommendations, may rein in some of this influence.

9. Expect uncertainty in shareholder proposal process

Shareholder proposals are nonbinding on the company but have a track record of promoting corporate change. Recent developments from the SEC — including a proposal to tighten the requirements for submitting shareholder proposals and a new approach to addressing no-action requests — could dampen the effectiveness of the shareholder proposal process.

10. Prepare for new hedging disclosures

The newly-effective Dodd-Frank rule requires companies to disclose hedging policies in their proxy statements. Companies without a policy must state this fact. Most large companies already have and disclose hedging policies, but disclosures that address only named executive officers will have to be expanded to describe how their policies apply to all employees and directors.

Susan Eichen
Susan Eichen

Partner, Mercer

Amy Knieriem
Amy Knieriem

Senior Principal, Senior Legal Consultant

Carol Silverman
Carol Silverman

Partner, Senior Legal Consultant

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