On January 26, Glass Lewis issued illustrative guidance on how the firm will apply its voting policies to executive compensation in the context of the COVID-19 pandemic. The proxy advisor indicated that its overall approach to executive compensation and pay-for-performance remains unchanged. However, the operating landscape for certain companies has shifted significantly due to the pandemic making the following supplemental policy guidance necessary.
Glass Lewis anticipates that this year’s say-on-pay votes will be dominated by companies’ responses to the COVID-19 pandemic. Early Glass Lewis research indicates that a number of companies have made adjustments to executive pay that may be viewed as a token gesture of solidarity.1 To determine its say-on-pay vote recommendation, Glass Lewis indicated that it will look beyond token gestures and focus on broader changes to the compensation program that impact the alignment of pay and performance, such as:
- Increases to Quantum – Increases to short-term pay levels or above-target payouts will be viewed with great scrutiny unless companies have performed very well on relative and absolute bases. Companies that adjust their programs to enhance pay outcomes will need to provide compelling supporting rationale to receive Glass Lewis’ support. Specifically, Glass Lewis will look for disclosure regarding (i) design features that address misalignment between relative and absolute performance, (ii) the rationale for any material adjustments to the calculation of performance, (iii) the justification for any upward discretion, and (iv) the link between payouts from qualitative or nonfinancial incentives and overall company performance.
- Forwards vs Backwards Adjustments – Year-over-year increases to target incentive payout opportunities remain preferable to high payouts for backward looking performance, contingent on the plan incorporating robust performance requirements reflective of executive efforts.
- One-Off Awards – Glass Lewis will continue to be wary of one-off awards granted outside of regular incentive programs, specifically those designed to offset pandemic-related salary reductions or below-target incentive payouts. Companies providing such awards are expected to disclose the structure of the award and the rationale for the grant. To determine the reasonableness of the award, Glass Lewis will evaluate the grant size relative to peers and past grants, the performance conditions of the award, and the company’s history of special grants.
- Major Structural Changes – Any major structural program changes will be viewed with caution. Glass Lewis will scrutinize mid-cycle adjustments to performance awards or the replacements of performance awards with time-based awards. Mitigating factors include the strength of the supporting rationale and the magnitude of any replacement award.
- Potential Windfalls – Glass Lewis will scrutinize program changes that result in windfall benefits to executives. Examples provided include changing the timing of grants such that they are awarded when the company stock price is at historic lows or the removal of performance-based conditions.
- No Penalty for Late Bloomers – Glass Lewis will not penalize companies that did not provide a discussion of their response to the pandemic in last year’s proxy statement but will give credit to those that did provide insight. In addition, companies that made material adjustments in early 2020 will be evaluated negatively if the company recovered during the remainder of the year and no offsets to the “short-sighted concessions” can be identified. Glass Lewis also noted that in cases where it opposed a pay program last year due to company actions in response to the pandemic, it would refrain from issuing a repeat negative vote recommendation based on the same factors assuming actions later in the year do not raise concern.
- Company History – Glass Lewis will view companies that have exhibited a healthy governance and compensation track record through a more accommodating lens than companies who historically have not.
Equity Plan Proposals
Although the firm’s approach to equity plan proposals remains unchanged, Glass Lewis anticipates that elevated dilution levels will be flagged under its equity plan evaluation model at companies that continue to experience depressed stock prices and/or are relying more heavily on equity compensation to conserve cash. As a result, Glass Lewis will consider the supporting justification for the share request (i.e., an urgent need to conserve cash or exhaustion of reasonable compensation alternatives) and whether historical awards have been allocated to executives or to other employees when determining its vote recommendation.
Option Repricing Proposals
Glass Lewis clarified that while it continues to oppose the repricing of options, it recognizes that there are certain circumstances in which a repricing program may be an acceptable course of action due to volatility in the market and the impact of the COVID-19 pandemic. Companies that pursue this course will need to demonstrate that an exhaustive list of alternatives was explored and that only late-term options with insufficient time for recovery are eligible for the plan.
Golden Parachute Proposals
Glass Lewis acknowledged that companies negatively impacted by the pandemic may have resulted in the need to find a strategic alternative. When reviewing golden parachute proposals, Glass Lewis will consider both the background of merger-related payments and any pay adjustments made in response to the COVID-19 pandemic to determine if the proposal results in pay-for-failure outcomes.
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Glass Lewis’ complete supplemental policy guidance document can be found here. For additional information regarding Glass Lewis and ISS policies for 2021, please see our 2020 blogs dated October 20, November 5, November 30, and December 29.
1 See FW Cook’s blog for insights into COVID-related incentive decisions among S&P 1500 companies
Caprice Herjavec’s consulting engagements focus on all elements of executive and board compensation. She engages with clients, both public and private, across various industries and throughout different stages of the business cycle. Caprice specializes in executive compensation trends, peer group development, IPO transactions, and annual and long-term incentive program design.
Hannah Reich engages with both public and private clients across a variety of industries. Her consulting engagements focus on all elements of executive and board compensation. Hannah specializes in executive compensation trends, director compensation, peer group development and annual and long-term incentive program design.
David Yang has advised numerous public and privately-held companies on all aspects of executive and board compensation. His experience covers a wide range of industries, including healthcare, financial services, retail, consumer products, transportation, and technology among others. He is a frequent speaker on executive compensation topics and a regular author of the firm’s alert letters.