Proxy advisory firms Institutional Shareholder Services (“ISS”) and Glass Lewis (“GL”) each published their annual policy updates for 2023, which updates made certain changes relating to executive compensation.[1]  As a general matter, the changes are incremental to the existing policies and do not significantly change the rubric by which ISS and GL review compensation programs.

ISS’s ANNUAL BENCHMARK POLICY UPDATE

Severance Payments.  ISS will continue to consider problematic severance pay on a case-by-case basis when determining its recommendation on say-on-pay and board member votes.  However, it has updated its policy on severance payments to require that companies accurately disclose the circumstances of an executive’s termination (voluntary vs. involuntary) when severance is paid.  Specifically, ISS’s list of factors that carry significant weight and may result in a “no-vote” recommendation on the say-on-pay and board member votes now includes severance payments made when the termination is not clearly disclosed as involuntary (i.e., a termination without “cause” or resignation for “good reason”).  In short, ISS objects to Form 8-K and proxy disclosures that seek to put a positive spin on an executive’s involuntary departure (e.g., describing an involuntary termination as a retirement).  Companies should be mindful of this issue when describing any termination on Form 8-K or the proxy statement for their annual meeting.

Value-Adjusted Burn Rates for Equity Plan Evaluations.  ISS’s 2022 Benchmark Policy Update included a change to how the burn rate should be calculated for purposes of its Equity Plan Scorecard evaluations after a one-year transition period.  With that period ending January 31, 2023, ISS has now updated its Benchmark Policy to remove its prior burn rate methodology and to only include the new methodology called Value-Adjusted Burn Rate (“VABR”).  The VABR methodology is intended to capture an option grant’s value more accurately by utilizing the Black-Scholes value for stock options (instead of the previous approach that used a volatility multiplier).

GLASS LEWIS POLICY GUIDELINES UPDATE

Long-Term Incentives.  GL has modified its position on performance-based awards within a company’s long-term incentive offerings.  Historically, GL has set a 33% floor on performance-based awards with a minimum of a three-year performance or vesting schedule, but now, GL may recommend a “no vote” on the say-on-pay proposal when a company’s long-term incentives fall below 50% performance-based.

Mega-Grants. GL clarified its approach when “mega-grants” have been granted and the awards, among other things, have excessive quantum, lack sufficient performance conditions, and/or are excessively dilutive.  GL will generally recommend against the compensation committee chair when such outsized awards have been granted.

Front-Loaded Awards.  Front-loaded awards are equity awards intended to provide for multiple years of equity compensation upfront.  GL recognizes the value that front-loaded awards may provide to compensation committees by locking-in executive service and incentives.  However, GL expanded on its concerns regarding the use of front-loaded awards due to the increased restrictions placed on boards to respond to unforeseen factors.

One-Time Awards.  GL had previously required that companies describe and explain the use of one-time awards.  GL expanded on this requirement by adding that the disclosure should discuss how the compensation committee determined the quantum of the award and its structure.

Compensation Committee Discretion.  GL affirmed its position that it respects a compensation committee’s need to be able to exercise discretion over incentive payments to account for “significant events that would otherwise be excluded from performance results of selected metrics of incentive programs.”  However, GL clarified that companies should provide a thorough discussion of how such events were considered in the committee’s decisions to exercise discretion, and if a company is not prepared to provide this discussion, GL indicated that the company should not apply discretion over incentive pay outcomes.

Disclosure Related to Say-on-Pay.  GL expanded upon what it considers robust disclosure in the event of low levels of support on a company’s say-on-pay vote.  Any decision for not making any changes that drove low support should be explained, as well as what the company’s intentions are going forward.

New SEC Pay vs. Performance and Clawback Rules.  GL will not take into account a company’s newly required pay vs. performance disclosure for purposes of GL’s Pay-for-Performance methodology, but the new disclosure may be considered as part of GL’s qualitative analysis.  To learn more about the SEC’s new Pay-vs-Performance disclosure requirements, read our blog post here.  Similarly, companies that make an early effort to meet the standards of the SEC’s new clawback requirements may mitigate GL’s concerns if the company only previously adopted a clawback policy consistent with the Sarbanes-Oxley Act.  For more background on the SEC’s new clawback rules, please see our earlier discussion in this blog post and this Law360 article.

LOOKING FORWARD

ISS will apply these new policies to annual meetings beginning February 1, 2023, and GL will apply its new policies beginning January 1, 2023.  Compensation committees should work with their counsel and compensation consultants to determine whether these changes impact their company, and, if they do, what, if anything, should be done to address the impact.

Proskauer’s Employee Benefits and Executive Compensation team regularly advises companies on best practices with respect to implementing executive compensation programs, including the potential impact of proxy advisor policies on the company.  Please contact a member of the team with questions.

 

[1] ISS released its  Benchmark Policy Update for 2023 on November 30, 2022, and GL released its Policy Guidelines on November 17, 2022.

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Photo of Colleen Hart Colleen Hart

Colleen Hart is a partner in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Colleen advises companies, executives and boards on complex executive compensation matters. She offers a multidisciplinary approach to compensation and benefits issues with a…

Colleen Hart is a partner in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Colleen advises companies, executives and boards on complex executive compensation matters. She offers a multidisciplinary approach to compensation and benefits issues with a focus on tax planning, securities laws and corporate governance. Matters she handles include the negotiation, structuring and implementation of employment and change-in-control agreements and deferred compensation, equity and incentive compensation plans. She advises on golden parachute and deduction limitation rules, securities reporting, registration and disclosure requirements and California employment laws. In addition, Colleen has extensive experience advising clients on compensation and benefits issues arising in mergers and acquisitions, initial public offerings, bankruptcies and finance transactions.

Colleen is a contributing author of The 409A Handbook (BNA 2016) and lectures frequently on executive compensation matters. As a U.S. Navy veteran, Colleen devotes a substantial amount of time to organizations that provide legal and support services to U.S. veterans.

Photo of Andrea Rattner Andrea Rattner

Andrea S. Rattner is a partner in the Tax Department and member of the Employee Benefits & Executive Compensation Group. For more than 30 years, her practice has focused on a broad range of executive compensation and employee benefits matters, advising clients on…

Andrea S. Rattner is a partner in the Tax Department and member of the Employee Benefits & Executive Compensation Group. For more than 30 years, her practice has focused on a broad range of executive compensation and employee benefits matters, advising clients on an ongoing basis as well as in the context of corporate transactions and other transformative and unique situations. Her clients include public and private companies, boards of directors, compensation committees and senior executives in a broad range of industries. Andrea has been involved in Firm management for many years, having served as a member of the Executive Committee and a former chair of the Tax Department.

Andrea counsels clients with respect to the tax, securities, corporate governance, stock exchange, ERISA and other implications affecting executive compensation arrangements. Andrea regularly provides advice regarding equity arrangements (such as stock options, restricted stock, RSUs, LLC/partnership interests and phantom equity), employment agreements, change-in-control agreements and all other types of compensation arrangements (including incentive awards, SERPs, deferred compensation and “409A” covered and exempt arrangements).

She counsels clients on benefits and compensation matters arising in all types of corporate transactions, including mergers & acquisitions, spin-offs, restructurings, joint ventures, debt and equity offerings and bankruptcies. In numerous transactions, she has addressed the treatment of stock options and other equity awards, change-in-control and “golden parachute” tax issues, severance obligations and separation agreements, the negotiation of new employment agreements and other executive arrangements, retention and other bonus plans, benefit plan liabilities, COBRA, PBGC-related issues and post-closing benefit plan and compensation structures and integration.

Andrea also advises clients on compliance with ERISA, the Internal Revenue Code, and other laws affecting employee benefit plans, as well as plan design, administration, termination, fiduciary duty issues, prohibited transactions, qualification requirements and other matters concerning pension, profit-sharing, employee stock ownership, 401(k), and other types of plans. She has extensive experience with respect to the legal consequences relating to the use of employer stock in tax-qualified plans such as ESOPs, profit-sharing, stock bonus and pension plans.

Andrea has been lauded by various legal rankings directories, including Chambers USA and Legal 500, noting that her “depth of knowledge and involvement in this practice area, [including] the business and trends, is terrific.” She is also recognized for having an “excellent understanding of the business community” and for being “pro-active in keeping clients up to date.” She writes and lectures frequently on employee benefits and executive compensation matters and is a co-editor and chapter author of Executive Compensation (Law Journal Press). Since 1993, she has served as an adjunct professor on the faculty of Cornell University (New York State School of Industrial & Labor Relations-Management Programs). Andrea is also active in Proskauer’s relationship with the Women Corporate Directors (WCD), the only global membership organization of its kind focused on helping women obtain and succeed in board positions.

Photo of Seth Safra Seth Safra

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined…

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined benefit to cash balance and floor-offset arrangements, ESOPs and 401(k) plans—often coordinating qualified and non-qualified arrangements. He also advises tax-exempt and governmental employers on 403(b) and 457 arrangements, as well as innovative new plan designs; and he advises on ERISA compliance for investments.

On the health and welfare side, Seth helps employers provide benefits that are cost-effective and competitive. He advises on plan design, including consumer-driven health plans with HSAs, retiree medical, fringe benefits, and severance programs, ERISA preemption, and tax and other compliance issues, such as nondiscrimination and cafeteria plan rules.

Seth also advises for-profit and non-profit employers, compensation committees, and boards on executive employment, deferred compensation, change in control, and equity and other incentive arrangements. In addition, he advises on compensation and benefits in corporate transactions.

Seth represents clients before the Department of Labor, IRS and other government agencies.

Seth has been recognized by Chambers USA, The Legal 500, Best Lawyers, Law360, Human Resource Executive, Lawdragon and Super Lawyers.

Photo of David Teigman David Teigman

David Teigman is a partner in the Tax Department and a member of the Employee Benefits & Executive Compensation Group. David focuses his practice on executive compensation and benefit matters, principally in connection with mergers and acquisitions, securities offerings and senior executive employment…

David Teigman is a partner in the Tax Department and a member of the Employee Benefits & Executive Compensation Group. David focuses his practice on executive compensation and benefit matters, principally in connection with mergers and acquisitions, securities offerings and senior executive employment relationships.

David regularly counsels public and private companies on compensatory and benefit arrangements, such as equity-based incentives, cash-based incentives and employment, change-in-control, retention, separation and consulting agreements. He also advises on corporate governance, tax law and securities law related to employment matters.

A frequent author, David has published the following articles:

  • “Share Reserve and Other Limits in Public Company Equity Plans” (Practical Law)
  • “Roadmap to Providing Appropriate Incentives to Employees When Your Company is Going to be Sold” (The M&A Lawyer)
  • “Taxation of an Option Exercise When the Shares are Subject to a Substantial Risk of Forfeiture” (Practical Law)

David is often called upon by leading industry publications, including Agenda/Financial Times, Law360 and Modern Healthcare, for his perspective on executive compensation and benefit issues.

David received his J.D., cum laude, from the University of Buffalo, where he was the Editor-in-Chief of the Buffalo Law Review and the Executive Editor of the Public Interest Law Journal, and his B.S. from Cornell University.

Photo of Nicholas LaSpina Nicholas LaSpina

Nicholas LaSpina is a senior counsel in the Tax Department and a member of the employee Benefits & Executive Compensation Group.

Photo of Jesse T. Foley Jesse T. Foley

Jesse T. Foley is a labor associate and a member of the Employee Benefits & Executive Compensation Group.

Jesse has a diverse practice advising multiemployer and single-employer clients on all aspects related to the legal compliance and tax qualification of ERISA-covered pension and…

Jesse T. Foley is a labor associate and a member of the Employee Benefits & Executive Compensation Group.

Jesse has a diverse practice advising multiemployer and single-employer clients on all aspects related to the legal compliance and tax qualification of ERISA-covered pension and welfare plans, including the treatment of such plans in corporate financings and transactions.

In his multiemployer practice, he represents a number of funds, counseling Boards of Trustees on issues such as healthcare compliance, cybersecurity, government investigations, benefit suspensions, special financial assistance, and withdrawal liability.

In addition, Jesse advises private, public, and not-for-profit employers on all aspects of their non-qualified executive compensation arrangements.  Jesse regularly provides technical and practical advice on the establishment, administration, and continued legal compliance of deferred compensation and supplemental employee retirement plans.  As part of his practice, Jesse routinely negotiates and drafts equity plans and awards, employment agreements, severance agreements, and other compensation arrangements.

Jesse earned his J.D. degree from the University of Southern California, where he was a Senior Editor of the Southern California Law Review.  Jesse also frequently contributes to Proskauer’s Employee Benefits & Executive Compensation Blog.