As compensation committees finalize executive pay decisions and prepare 2021 proxy disclosures, including how to address the impact of the pandemic on incentive awards, proxy adviser Glass Lewis is weighing in. New guidance for the US and Canada explains how Glass Lewis will apply its pay-for-performance qualitative analysis to COVID-related pay decisions during the 2021 proxy season.

 

As we said when Institutional Shareholder Services (ISS) released COVID-related FAQs last October (see Mercer’s article: ISS issues COVID-related executive pay FAQs), while support from proxy advisers is important, it is more critical for companies to engage with their top shareholders to understand what they would consider a reasonable response to the challenges presented by the pandemic. Compensation committees must consider multiple factors in making pay decisions — including the company’s business strategy, broader workforce actions and executive retention risks — even if decisions may negatively impact the company’s say-on-pay vote result. See Mercer’s article: Addressing in-flight incentive awards: A holistic approach for compensation committees.

Key themes

 

The pandemic has not changed Glass Lewis’ approach to assessing executive pay. The proxy adviser continues to believe that its use of a three-year weighted average for measuring pay and performance and its peer company methodology will smooth out recent volatility and discrepancies between companies. But Glass Lewis will be flexible in its approach this year, if pay outcomes are proportionate and reasonable and pay decisions take into account the impact of the pandemic on all stakeholders.

 

Key takeaways from the new guidance suggest the proxy adviser will:

 

  • Scrutinize granting one-time awards outside a company’s regular incentive plans, replacing performance-based awards with guaranteed or time-based awards, and changing performance metrics and performance periods near the middle or end of a performance cycle
  • Be more receptive to pay program changes that are tied to a defined time period (e.g., moving to time-based long-term incentives for only one grant cycle and explicitly stating this in the CD&A)
  • Favor future target incentive opportunity increases over high payouts for backward-looking performance
  • Be more lenient on companies with a track record of good governance, pay-for-performance alignment and appropriate use of board discretion

In all cases, Glass Lewis demands robust disclosures that allow stakeholders to understand and evaluate pay-related decisions, and sets a high bar for what will be acceptable with a warning:

 

“Issuers would do well to consider that the pandemic has made executive pay a more salient issue for many investors. All companies, especially those seeking special support from governments or executing significant employment cuts, should consider the reputational risk associated with poor pay decisions, particularly quantum payouts. Even those companies who have managed to perform well during this time may face additional challenges in justifying high executive payouts to their shareholders.”

 

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