Are companies incorporating ESG factors into executive remuneration?

The last decade has seen a steady increase in the focus on Environmental, Social and Governance (ESG) factors from a range of stakeholders and that growing scrutiny appears to have reached a crescendo over the past 18 months. Only the topic of executive remuneration continues to be discussed as frequently as ESG.

FTI & CGLytics have conducted an analysis to determine whether those two topics are increasingly converging. Download the white paper to find out more.

A white paper from FTI Consulting and CGLytics

Are companies incorporating ESG factors into executive remuneration?

The last decade has seen a steady increase in the focus on Environmental, Social and Governance (ESG) factors from a range of stakeholders and that growing scrutiny appears to have reached a crescendo over the past 18 months. Only the topic of executive remuneration continues to be discussed as frequently as ESG.

FTI & CGLytics have conducted an analysis to determine whether those two topics are increasingly converging. While there is evidence that the number of companies including some form of ESG-measure has grown, the proportion of overall pay determined directly by performance against ESG criteria remains at the margin.

Download the report to find out more.

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The increasing trend of shareholder opposition to executive pay

Votes against executive remuneration are growing. In this article we look at this change in the European indices and the S&P500.

Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

Shutterfly: A Glass Lewis Use Case

Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

The increasing trend of shareholder opposition to executive pay

Votes against executive remuneration are growing. In this article we look at this change in the European indices and the S&P500.

During 2019 we saw an increase in the volume of shareholders making their feelings known about what they perceived as misaligned executive pay policies. This was brought on by lacklustre performance by their portfolios.

With a string of high-profile stories, executive compensation was rarely out of the news, and an increasing number of organisations became the focus of media outcry, damaging brands and forcing companies onto the defensive.

As the press and investor relations teams scrambled to justify the remuneration of their CEOs and other executives, CGLytics has taken a look into its historical data set to see whether this is part of an increasing trend of shareholder activism.

From the CGLytics coverage, which includes more than 5,500 companies across the globe, we have analysed the proxy votes submitted so far in 2019. During this time more than 3 trillion votes were cast against remuneration policies submitted. We have compared this number to the three years prior.

An accelerating trend

Looking back, we can see that shareholder opposition to director remuneration policies across Europe has increased. And increased significantly.

From 2016 to 2017 there was only a proportional 9% increase from 2.1% to 2.3% opposition, however in 2018 we see an indication that shareholders were getting frustrated.

Percent of votes against remuneration policies - Europe

From 2017 to 2018 there was a 40% increase in opposition to remuneration policies. While this is still a relatively overall small percentage of 3.2% opposition of the total votes, for some issuers this was a red flag and ensured that they proactively engaged with their shareholders to ensure clarity on awards and demonstrate that they were taking shareholder views into account.

However, many organisations failed to heed the warnings and 2019 saw the proportion of votes against director remuneration policies increase by 90%, up to 6.1% of total votes cast.

Meanwhile in the S&P500

Many US based companies have been under pressure from shareholders to curb perceived excessive pay, and this can be seen by the annual comparison below where in 2019, shareholders cast 16.3% of their votes against the recommended remuneration policies.

Percent of shareholder votes against remuneration policies - SP500

This consistently high level of shareholder opposition to executive remuneration reflects the idea that executives are receiving outweighted rewards compared to the overall growth and performance metrics that they are delivering.

What does 2020 have in store?

As you may have seen in our “Top 50 Highest Paid CEOs” article earlier in the summer, executive pay has the potential to increase significantly compared to relatively flat performance indicators (such as TSR), so it’s not unexpected that the shareholder opposition will continue to accelerate into the 2020 proxy season.

Proactive engagement is the key

CGLytics is the global compensation partner for Glass Lewis, the leading independent proxy advisor, who work with over 1,300 institutional investors around the globe. In our recent “behind the scenes with Glass Lewis” webinar, Andrew Gebelin, VP of Research, Engagement and Stewardship highlighted the benefits of organisations proactively engaging with both proxy advisors and investors to reduce the risk of mis-interpretation of remuneration policy elements and maximise the information available prior to AGM votes.

Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

Glass Lewis uses CGLytics as it’s global compensation data provider. For the 2020 proxy season our data will provide the basis of Glass Lewis’ Say on Pay recommendations.

 

Learn More

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Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

Shutterfly: A Glass Lewis Use Case

Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

How to take testing of equity-based compensation plans into your own hands?

Download the whitepaper and learn more about equity-based compensation plan best practice and how the ECM is supporting decision-making for Say on Pay.

How to take testing of equity-based compensation plans into your own hands?

Equity-based compensation proposals have attracted high levels of shareholder disapproval in the past, which costs a company valuable time and money. Both companies and investors need to ensure equity plans drive the company forward by supporting goals without being too costly or dilutive.

  • What are the common concerns for companies and investors surrounding equity compensation plans?
  • What should both companies and investors take into account when designing, amending or assessing equity plans?
  • How can Glass Lewis’ Equity Compensation Model (ECM) help users understand the strengths and weaknesses of plans?

Download the whitepaper and learn more about equity compensation plan best practice and how the ECM is supporting decision-making for Say on Pay.

DOWNLOAD THE REPORT

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Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

Shutterfly: A Glass Lewis Use Case

Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

Deutsche Bank: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Deutsche Bank, using CGLytics’ analytical tools.

For public companies based in Germany, Glass Lewis’ assessment of a company’s remuneration practices balances quantitative data with a variety of qualitative considerations. Since its introduction in 2018, CGLytics’ data analysis has helped us understand the pay structure and identify both quantum-related and broader governance issues.

CGLytics’ analysis of main profitability indicators illustrate the link between pay and performance. The tools are particularly useful when assessing a company’s remuneration in relation to local and European peers. That’s all the more important in Germany, where large companies usually include a significant number of US companies in their benchmarks, leading to a potentially skewed context for remuneration decisions and ultimate payouts.

In the following discussion, we describe how CGLytics’ analytical tools informed Glass Lewis’ review of Deutsche Bank ahead of the 2019 AGM.

Overview of DBK

Annual Say-on-Pay won’t be mandatory in Germany until SRD II is implemented, allowing Deutsche Bank to omit any remuneration-related votes from its 2019 AGM agenda; the multinational last sought shareholder approval of its remuneration policy in 2017. Nonetheless, for large cap companies Glass Lewis provides a remuneration analysis comprising CGLytics graphs and tables and a write-up to summarise any material issues. Even when there is no proposal focused solely on remuneration, this analysis informs our assessment of overall governance practices and the performance of the board, its committees and directors. Beyond the Proxy Paper report and voting recommendations, the analysis helps us to shape our engagement agenda and identify areas for further research.

Deutsche Bank’s KPIs have been consistently negative in the past years due to a number of legal disputes and organisational issues. In 2017, the Bank posted its third consecutive loss. Awards for those three years would have partially vested, mostly due to the achievement of the CET1 capital ratio and relative TSR targets. However, the management board decided to waive all variable remuneration payments and grants for fiscal years 2015 to 2017, in order to demonstrate that shareholders’ experience was reflected in the pay of top executives.

In 2018, the Bank reported its first consolidated net profit since 2014 and resumed the payment and grant of short- and long-term awards to management board members.

Overview of CGLytics Remuneration Analysis

CGLytics’ relative indicators confirmed that the company’s performance was below peers, while payouts were above. Moreover, the  analysis raised concerns about an excessive use of upward discretion and costs related to executive turnover.

Using CGLytics’ data, our analysis showed a poor alignment between pay and performance during an ongoing period of subpar results. In recent years, the management board’s waiver of variable remuneration had demonstrated a good appreciation of shareholders’ concerns – but a return to profitability in 2018 prompted an immediate return to the payment of incentives which appeared excessive and premature. While we acknowledged an improvement in performance, CGLytics showed that Deutsche’s EPS, ROA and ROE were still negative and below peers. Similarly, CGLytics’ analysis of relative TSR and realised pay showed a disconnect between above-median CEO costs and shareholder returns that remained significantly below peers.

The awards granted last year aren’t reflected in the charts below due to their deferral structure – nonetheless, CEO remuneration was still higher than that of German and European peers, highlighting quantum concerns and a wider issue of executive succession planning and turnover costs. Last year, departed Deutsche executives, many of whom presided over a period of underperformance, received over €7 million in immediate non-compete payments, with additional severance payments totalling millions to be paid in tranches over the next few years.

Source: CGLytics Compensation Data and Models

Glass Lewis Perspective

The context for this quantitative analysis centred on Deutsche’s role as a multinational bank. In the case of large  financial institutions , we recognise that the use of US and international peers is – to a certain extent – reasonable. In addition, we recognise that banks subject to CRD IV must cap variable pay at 200% of fixed, which tends to inflate fixed pay levels. We also noted that 2018 awards were subject to extensive deferral requirements.

On balance, while cognisant of the competitive marketplace, we remained concerned by salary levels – and moreover by the high cost of severance, with some payments set to continue for years to come, along with the level of  variable pay awarded given shareholder returns.

Conclusion

Deutsche didn’t have any remuneration-specific proposals on its AGM agenda in 2019. Nonetheless, the executive pay, succession planning and broader governance issues raised by CGLytics’ analysis contributed to our overall assessment of the company’s governance, and our recommendation that shareholders vote against the ratification of supervisory board acts.

Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

Glass Lewis uses CGLytics as it’s global compensation data provider. For the 2020 proxy season our data will provide the basis of Glass Lewis’ Say on Pay recommendations.

 

Learn More

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Shutterfly: A Glass Lewis Use Case

Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

WeWork’s initial public offering

WeWork has had a tumultuous build-up to their IPO. Many investors were hesitant to back the company as their corporate governance policies did not meet their standards. CGLytics looks at some of the key factors that created controversy.

Shutterfly: A Glass Lewis Use Case

Glass Lewis takes a look at the recent proposed amendment to the Shutterfly equity compensation program and the response from shareholders.

What exactly is a tech company? Shutterfly asked a similar question in proposing an amendment to their equity compensation program at the 2019 annual shareholder meeting. The plan included a number of best practice features and avoided many of the design pitfalls that often provoke shareholder ire, but the S&P 1000 firm still had quite a fight on their hands in securing shareholder support.

The main contentions related not to the terms of the plan, but rather to Shutterfly’s recent granting practices – and the appropriate context for analyzing them. The firm’s equity plan disclosure included relatively candid discussion of the impact of executive transitions, recent acquisitions and repurchase activity, as well as the general difficulty of existing in Silicon Valley. Indeed, that location is central to the company’s point; the disclosure takes specific umbrage with the firm’s inclusion in the retail sector for equity plan assessments. While the company acknowledges that the comparison also includes a narrower internet-specific sub-category, it argues that retailers generally “tend to place more emphasis on cash compensation and grant to a smaller portion of their employees than technology companies like Shutterfly[.]”

The equity compensation model that Glass Lewis uses to develop analysis and voting recommendations looks at multiple factors around cost and dilution, and many of Shutterfly’s concerns were accounted for. Changes in employee ranks and share counts are formally incorporated into the model, which assesses company practices based on a mixture of broad and specific GICS-derived groupings. Using a combination of CGLytics data and the ECM’s back-end information, we reviewed the model result in the context of some of the other claims.

First, we looked at some of the characteristics of the internet retail industry group to  identify how closely the more narrow group within the retail sector compared with Shutterfly. We began by comparing R&D/technology expenditures relative to revenue, which one might expect to be higher for ‘cutting edge’ firms. Shutterfly’s last fiscal year R&D spend was comparable the ECM industry group midpoints, each in the high single-digit percentages. However, to the company’s credit, spend was over 14% of revenue on a trailing basis and for the most recent fiscal year if the revenue from newly-acquired Lifetouch is excluded. Shutterfly also had only slightly lower operating margin than the group median and average, suggesting some comparability. We also found that, like Shutterfly, almost 40% of the industry group was headquartered in areas with a high cost of living. Still, the mix of tangible and intangible products sold by the group complicates this comparison. Ultimately, the industry used by the Glass Lewis ECM appeared to be a fair, if not perfect, peer group for comparing equity usage.

Of course, no peer group is truly perfect. Instead, they serve as a starting point for deeper investigation. In this case, based on the concerns raised above we took a closer look at a group of software & services companies within a range of Shutterfly’s revenue and market capitalization. Most of those firms did not provide the same level of R&D disclosure as Shutterfly, but had a higher average operating margin than the reluctant retailer. Shutterfly’s equity burn rate exceeded both the software & services group and the retail sector, even prior to the significant Lifetouch acquisition, and a close look at the company’s cost and dilution figures showed recent cost proportions well above the average for that sector.

Ultimately, just enough shareholders were convinced of the adequacy of the plan. The final vote tally showed roughly 56% support, a close margin for a type of proposal that usually receives near 90% approval. Any argument citing the poor fit of an established comparator group invites close review and a look at the comparison that ostensibly don’t work. Those reviews require good data – and the right tools.

The Glass Lewis Equity Compensation Model

Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

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Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

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Tailoring Executive Remuneration Analysis Using CGLytics: Persimmon plc

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component. In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

Glass Lewis’ assessment of executive remuneration reflects a balance of quantitative and qualitative considerations, with CGLytics’ suite of tools underpinning the quantitative component.

The Remuneration Analysis section, included in Proxy Papers for the UK and over a dozen markets, helps to identify whether CEO pay practices are aligned with company performance. The section covers the prior three years and can be adjusted to show realised, realisable or granted pay, both on an absolute basis and relative to country and industry peer groups developed by Glass Lewis in collaboration with CGLytics.

In the following discussion, we review the quantitative assessment with respect to Persimmon plc, using CGLytics’ analytical tools.

Persimmon

Background:

Back in 2012, Persimmon plc made a commitment to its shareholders: over the next decade, the UK homebuilder would return £1.9bn (£6.20 per share) of surplus capital through a series of dividends and share issuances. In order to encourage management to deliver on this commitment, the board proposed a new long-term incentive, the Capital Return Plan, which was intended “to provide a closer link between reward to executive directors and senior management for the successful implementation of our strategy.”

The plan gave roughly 140 senior employees, including executive directors, the rights to 10% of the company’s share capital so long as cumulative dividend targets were met at five measurement dates over a ten-year period. Shareholder returns didn’t just determine how much of the award vested, but also the value delivered to executives: while the awards were granted as share options with an exercise price of £6.20 (the per share return target), this exercise price was reduced by any shareholder distributions. Return the full amount to shareholders through dividends and issuances, and the awards would be free to exercise.

Between the Capital Return Plan’s size and structure, and in particular the duplicative reliance on a single measure of performance that could be manipulated by the award recipients, Glass Lewis was sufficiently concerned to recommend voting against adoption at an October 2012 general meeting. However, the decision to align payouts directly with shareholder returns over what appeared to be an extended ten-year period convinced nearly 85% of voting shareholders to support the plan.

The incentive was highly effective at aligning executive interests with shareholder returns – so much so that the ten-year period was quickly irrelevant, with distributions exceeding the 2019 target by the end of 2015. It’s unclear whether the accelerated returns reflected strong performance, insufficiently ambitious targets, or the unexpected tailwinds of the government’s Help to Buy scheme (or all three); regardless, the result was a total pot of approximately £99 million due to be awarded to the three participating executives in FY2017 (subject to a holding period), including approximately £45 million due to chief executive Jeff Fairburn – representing only the first of two tranches, and making Mr. Fairburn one the UK’s most highly paid executives.

CGLytics overview and analysis

Most UK plc’s follow a common template for executive remuneration: salary, cash in lieu of pension, cash and deferred share bonus, and a long-term award of performance-based shares. Accordingly, for most UK companies Glass Lewis’ Remuneration Analysis focuses on realised pay in order to capture the value of long-term performance-share awards.

However, the CGLytics pay-for-performance tool allows users to customize their analysis to show remuneration on a realised, or realisable, or granted basis. In the case of Persimmon, Glass Lewis’ Remuneration Analysis focuses on realisable pay to appropriately capture the Capital Return Plan’s use of share options, reflecting the UK “Single Total Figure of Remuneration” table.

Looking at realisable pay, CGLytics’ analysis illustrates the impact of the Capital Return Plan. Average pay within the industry and across the market remained largely static from 2016 to 2017—but due to the vesting of options at Persimmon, Mr. Fairburn’s pay spiked for both 2017 and 2018, significantly above the level received by either peer group.  A breakdown of absolute pay shows that the disparity stems exclusively from the long-term incentive component of remuneration.

REALISABLE PAY

ABSOLUTE PAY

ABSOLUTE PAY

The sooner- and larger-than-expected vesting in 2017 prompted significant public outcry and investor backlash, with far reaching consequences. Recognising that the Capital Return Plan could have included a more meaningful limit on the size of individual awards, both the board chair and senior independent director (who had chaired the remuneration committee) resigned from the board.  Under new leadership in advance of Persimmon’s 2018 AGM, the remuneration committee carried out extensive engagement with shareholders and reduced awards due to vest in the second tranche by 50%, applying a maximum entitlement of £29 per share.

These reductions were not enough to limit the fallout. In late 2018, Persimmon announced that Mr. Fairburn would leave by mutual agreement, explaining that although he was a “successful leader … the distraction around his remuneration … continues to have a negative impact on the reputation of the business and consequently on Jeff’s ability to continue in his role.”

Ultimately, Glass Lewis recommended that shareholders support the advisory remuneration report at Persimmon’s 2019 AGM. Whereas the remuneration disparity illustrated by CGLytics data had driven Glass Lewis to recommend voting against the initial plan and subsequent remuneration reports, our support in 2019 reflected a variety of factors, including the positive steps taken by the board and committee, such as personnel refreshment and reductions to the second tranche of awards; and an acknowledgement that (a) this is the last year that awards will vest under this plan, and (b) excluding FY2017 & FY2018 remuneration, Persimmon’s historical remuneration outcomes dating back to FY2014 have been aligned with peers and performance, as determined using CGLytics’ P4P tool.

Conclusion

By providing a variable, customized analysis in one centralised platform, CGLytics tools enable Glass Lewis to deliver a more nuanced assessment of executive remuneration in our Proxy Papers, supporting and enhancing our voting recommendations.

Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

Glass Lewis uses CGLytics as it’s global compensation data provider. For the 2020 proxy season our data will provide the basis of Glass Lewis’ Say on Pay recommendations.

 

Learn More

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Equity Compensation Model: Press Release

CGLytics and Glass Lewis set a new standard for transparency in equity-based compensation

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Newly released technology tests 11 key criteria that leading proxy advisor uses to assess plans

[Amsterdam, London, San Francisco – September 19, 2019] – CGLytics, a leading global provider of governance data and analytics, and Glass Lewis, the world’s leading independent provider of governance and engagement support services, today announced the launch of Glass Lewis’ Equity Compensation Model (ECM) – a powerful new application for assessing U.S. equity-based compensation plans, available exclusively via CGLytics.

This new application provides invaluable intelligence with year-round, on-demand access to Glass Lewis’ methodology which is used to evaluate the overall favorability of current and future equity plans, including tests against 11 key criteria. Companies and investors can now instantly test, review and adjust the same individual inputs as Glass Lewis’ analysts to ensure the best compensation, engagement and voting outcomes for their respective sides.

The ECM provides companies with immediate and proactive insight into the concerns regarding current and future equity plans, which Glass Lewis highlights to more than 1,300 investors representing more than $35 trillion in assets under management. In addition, with coverage of more than 4,300 publicly traded U.S. companies, investors can assess investment risks across their portfolio with regard to current equity plans or those being proposed.

Aaron Bertinetti, SVP of Research & Engagement at Glass Lewis explains: “Our analysts research and openly engage with thousands of companies and their investors every year, building invaluable insight and governance expertise as a result. We strongly believe that good governance is good for everybody, which means we must empower the capital markets by democratizing access to our deep governance expertise in a transparent, intuitive and unconflicted manner. The ECM gives companies and investors the same governance tools we use internally and have developed over many years. It will bring greater transparency, improved governance and market confidence by fostering alignment of corporate and investor interests in compensation plans.”

The ECM is available as a stand-alone service and is only available via CGLytics and its market-leading software. Corporate issuers can test and refine their equity plans, understand the level of concern from shareholders and ultimately be successful in seeking the shareholder support required to legally grant equity compensation. On the other hand, investors can test the equity plans for companies in their portfolio, perform comprehensive benchmarking of plan costs and evaluate the risk of any potential dilution to enhance their engagement and voting decisions.

Getting equity compensation right is a pivotal part of modernizing corporate governance. Issuers and institutional investors must be satisfied that proposed plans meet the long-term needs for the business and its shareholders. ECM will completely change the way both sides approach these challenges, setting a new benchmark for transparency in the decision-making process and driving good governance practices.” said Aniel Mahabier, CEO of CGLytics.

The offering, initially launched for the U.S. market, covers 4,300+ publicly traded U.S. firms including the Russell 3000, S&P 1500, S&P MidCap 400 and SmallCap 600.

About CGLytics

CGLytics is transforming the way corporate governance decisions are made. Combining the broadest corporate governance dataset, with the most comprehensive analytics tools, CGLytics empowers corporations, investors and professional services to instantly perform a governance health check and make better informed decisions. From unique Pay for Performance analytics and peer comparison tools, to board effectiveness insights, companies and investors have access to the most comprehensive source of governance information at their fingertips – powering the insights required for good modern governance.

About Glass Lewis

Glass Lewis, the leading independent provider of global governance and engagement support services, helps institutional investors understand and connect with companies they invest in. Glass Lewis is a trusted ally of more than 1,300 investors globally who use its high-quality, unbiased Proxy Paper research and industry-leading Viewpoint proxy vote management solution to drive value across all their governance activities.

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Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

The increasing popularity of linking equity compensation to socially responsible practices

Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

Historically, the primary concern of shareholders and company executives has been to deliver returns on investments and ensure that the company meets or exceeds their quarterly earnings expectations. Inevitably this led to a more short-term view with any projects that didn’t contribute to the present quarter / yearly results being at risk of cuts.

However, as some of the leading shareholders continue to embrace their roles in ensuring that companies are held accountable for their impact on both the environment and society, a growing trend has emerged of remuneration committees coming under pressure to link equity and compensation awards to sustainable environmental and socially responsible business practices (E.g. Alphabet 2019 Proxy Statement – Proposal 13).

A number of studies [Project ROI] have been carried out that link social and environmental impact to attracting and retaining customers, increasing revenue and building a vibrant corporate culture, whilst also having significant brand impact in a landscape where simply achieving results may become secondary to the “how” they were achieved.

Linking social impact to executive compensation

One of the most significant hurdles of linking the social impact of a company to the equity based compensation of senior executives and directors has been the attempt to identify  quantifiable measures for what can be a very subjective definition of success.

As the topic has come under more scrutiny there has been a visible appetite for businesses to provide more reporting and demonstrate measures that have been taken to ensure they partake in socially responsible practices. This can include:

  • Auditing suppliers to ensure that they and their subcontractors adhere to the values that they wish to demonstrate,
  • Allocating employee time and resources to positively impact society, or
  • Specific metrics regarding health and safety at work.

An example of this trend is Alcoa. In their 2019 proxy statement Alcoa links 30% of incentive goals to non-financial measures such as safety at work and diversity in the workforce, up from 20% in 2018.

In addition to the individual metrics defined by organizations, there has also been a growing trend of executive compensation being linked to the performance of a company on a corporate responsibility index (e.g. Dow Jones Sustainability Index). By linking elements of incentive multipliers to performance against a wider set of peers and the index, companies are able to not only create quantifiable targets to base awards on but are also focused on ensuring that they take a long term view in order to outperform competitors.

Gathering momentum

By defining these criteria and linking to long term incentives, businesses are more able to demonstrate their roles in a socially responsible business world. The positive financial impact of a socially responsible business is only a relatively recent trend. However, with a growing number of large investors taking an active role in the stewardship and engagement of their assets (Blackrock letter to CEOs), it is a trend that is likely to continue to gain traction.

Conversely, organizations that are perceived to be failing to meet their obligations to society will increasingly impact the brand, reputation, and ultimately the bottom line. Hence companies that traditionally have been focused on their financial results are exploring how they can adapt to the new criteria.

The Glass Lewis Equity Compensation Model

Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

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WeWork’s initial public offering

WeWork has had a tumultuous build-up to their IPO. Many investors were hesitant to back the company as their corporate governance policies did not meet their standards. CGLytics looks at some of the key factors that created controversy.

Equity Incentive Schemes: Examining the rationale behind shareholder rejection

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The Effect of Executive Departures on Company Performance

The Executive Management Team plays a pivotal role in the performance of a company. The dismissal or exit of one or more executives is often accompanied by a change in strategy. However, this isn’t always perceived as a positive change by investors.

Capri Holdings – A Glass Lewis Use Case into Executive Compensation Benchmarking

In this use case, Glass Lewis examine the “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

Glass Lewis’ two-pronged approach to executive compensation analysis in the North American market is delineated between the quantitative analysis and a qualitative assessment. The quantitative portion, while anchored by the pay for performance grade, incorporates additional considerations to supplement the standardized pay for performance analysis.

CGLytics’ suite of tools is fast becoming an integral part of the quantitative analysis for the North American market. In July 2019, the Compensation Analysis section became a part of Glass Lewis’ Proxy Paper for S&P 1500 companies in the U.S. and Canada. The page illustrates total realized compensation of CEOs based on data provided by CGLytics. Covering the past three years, realized CEO pay is presented on both an absolute basis and relative to country and industry peer groups developed by Glass Lewis using CGLytics tools.

In the following discussion, we examine the aforementioned “additional considerations” regarding the quantitative examination with respect to Capri Holdings, Inc. (formerly Michael Kors Holdings Ltd.) using CGLytics’ analytical tools.

Review of Capri Holdings’ Compensation Program

On August 1, shareholders gave their appraisals of executive pay practices at Capri Holdings, casting votes in favor or against the compensation packages of its named executive officers. The company is one of the few in the broader markets where multiple named executive officers receive pay at the CEO level or higher. Michael Kors as chief creative officer (CCO) and honorary chair and John Idol as CEO have received largely equivalent pay packages for most if not all of Capri Holdings’ history as a publicly traded company.

Multiple CEO-level pay recipients at individual companies have drawn the ire of shareholders in the past and no doubt will continue to do so in the future. However, executives from the apparel industry who engaged with Glass Lewis note that the industry is distinct in that the parity between chief executive and chief creative officer pay is not uncommon, but CCO pay is rarely reported on the Summary Compensation Table as these officers are not typically considered executives. In Capri Holdings’ case, however, perhaps because of his additional title of honorary chair, Mr. Kors is thus a named executive officer whose pay is subject to scrutiny at the Company’s annual advisory say on pay vote.

Overview of the Pay For Performance Grade and the Compensation Analysis Page:

Despite its dual CEO pay level executives, Capri Holdings received a “C” grade under Glass Lewis’ pay for performance model in each year from fiscal years 2015 to 2018, indicating adequate alignment. But in fiscal 2019, the company received a “D” grade after a jump in equity compensation to Messrs. Kors and Idol pushed Capri Holdings’ three-year weighted average compensation levels up – a move unsupported by the company’s weighted average performance that dipped in this year’s analysis. The analysis concluded that the company paid moderately more than its peers but performed moderately worse compared to peers.

Unique situations such as Capri Holdings’ case demonstrate the benefits that additional quantitative  analyses have had in Glass Lewis’ approach to executive compensation. One might contend that the pay for performance grade penalized Capri Holdings for common industry pay practices of chief creative officer pay, boosting total named executive officer pay above peers that do not also list their chief creative officer as a top executive.

The CGLytics-powered Compensation Analysis page in Glass Lewis’ research provided additional perspective to help consider Capri Holdings’ executive pay situation. Its focus on CEO pay underscored concerns flagged by the pay for performance analysis. In the same year that the company granted $7.5 million in equity incentives to each of Messrs. Kors and Idol, Mr. Idol’s fiscal 2019 total realized pay increased by 210% from $22.2 million to $68.9 million. At the same time, the Compensation Analysis reported that the median CEO total realized pay among industry peers remained relatively stagnant, highlighting the stark difference in realized pay levels for the CEO position at Capri Holdings compared to peers. While many companies often cite retention concerns due to low realized or realizable pay as reasons for significant increases in equity grants, the analysis using CGLytics indicated this to not be the case, at least for realized pay to the CEO.

Additional Perspectives Through CGLytics:

Beyond the Compensation Analysis page, by focusing on CEO pay using the CGLytics’ broader suite of tools, Glass Lewis found evidence to suggest deeper concerns with pay-setting for the short-term incentive. While the company provided Mr. Idol with no LTIP award in 2018 and only $1 million in 2017, the company’s incentives focused on short-term performance made up for the deficiency. Using CGLytics we can observe the following short-term incentive payout comparison to the industry peer median for most of Capri Holdings’ history as a publicly traded company where 2018 represents the most recently completed fiscal year for the company:

In our view, excessive upside opportunities under a bonus plan may unduly incentivize short-term performance and may undermine a long-term focus on company performance among executives. In fact, Mr. Idol received his maximum payout opportunity under the short-term incentive every year since 2012.

Switching gears in 2019, the Company decided to grant Mr. Idol $7.5 million in long-term incentives. Indeed, the grant resuscitated the level of Mr. Idol’s outstanding compensation following the exercise of a significant number of stock options. Mr. Idol exercised options to acquire 906,076 shares in fiscal 2019 – a value of $58.3 million according to the company’s proxy statement. The following chart shows the change in Mr. Idol’s total outstanding awards with the 2018 data representing the company’s fiscal 2019 and showing the net effect of his exercise of options and increased levels of long-term incentive grants during that year:

The effects of the long-term grant on total CEO pay was quite pronounced as seen in the graph below:

Review of GL recommendation:

In the end, an 89% year-over-year jump in Mr. Idol pay placed it at the 85th percentile of CEO compensation compared to the company’s self-disclosed peer group. The pay decisions for fiscal 2019 degraded the alignment between pay and performance in our analysis. Additional analysis into in the quantum of pay for Mr. Idol through CGLytics compounded our concerns. That Mr. Kors’ pay presented similar issues as Mr. Idol’s was also considered.

A deeper dive beyond our initial pay for performance analysis into the CEO’s total direct compensation uncovered a history of over-focus on short-term performance. Capri Holdings’ short-term incentive payouts rose well above the industry median since 2013. Due to the equity grants made to Mr. Idol during the most recently completed fiscal year, his pay spiked 1.2 times the median industry peer level, according to CGLytics’ multiple of median analysis.

As a result of these concerns, and following a qualitative assessment of the pay program, Glass Lewis recommended against supporting Capri Holdings’ executive compensation proposal for the 2019 annual meeting.

Conclusion:

Overall, the additional quantitative analysis using CGLytics underscored the concerns initially highlighted by Glass Lewis’ pay for performance grade by illustrating issues with pay regardless of the impact of Mr. Kors’ compensation on total NEO pay.

Access Glass Lewis’ Say on Pay analysis – Available through CGLytics

Glass Lewis uses CGLytics as it’s global compensation data provider. For the 2020 proxy season our data will provide the basis of Glass Lewis’ Say on Pay recommendations.

 

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In the second part of The Billionaire Battle Over Oil, we look at the outcome of the proposed deal between Occidental Petroleum and Anadarko.

After a contentious few weeks between Carl Icahn’s continuing proxy war against the Occidental Petroleum (Oxy)-Anadarko deal and the awaiting of the passing vote from shareholders in order for the acquisition to be completed, news has once again been made. Not surprisingly, the proposal passed with a 99% vote in favour of the deal that gives them $72.34 per share (based on last Wednesday’s price); Oxy and Anadarko secured the largest deal in the oil and gas industry since Royal Dutch Shell and BG Group.

However, with big deals come big costs, and the aforementioned is no exception. It adds over USD 40 billion to Oxy’s capital structure and leaves the company “with less flexibility to confront commodity price volatility” in the future. It is no surprise that Icahn chose to launch a proxy war and call for a replacement of board members in the wake of the deal.

Not to mention, Occidental Petroleum is selling USD 13 billion of debt to finance the acquisition after receiving more than USD 75 billion in orders for the deal at its peak. That’s the biggest demand for a debt sale since Aramco, but how will this play out?

Occidental will carry out the bond sale in 10 parts, the longest portion being a 30-year bond that yields around 2.25%. Further, to aid in the USD 10-15 billion divestment plan, Oxy has decided to sell off Anadarko assets in Africa to Total SA of France. The company is also searching for a buyer to hold majority control in the pipeline operator Western Midstream Partners LP, which Occidental is slated to inherit after the takeover.

The first week of August saw Occidental hedge nearly 40% of its combined oil production into 2020 as well, all in an attempt to reassure shareholders that dividend payouts will be possible while taking on an increased debt load.

While the deal may be a win from the company’s perspective, analysts and the market have voiced otherwise. Company ratings from analysts covering Occidental shifted, with the most telling from Evercore ISI “The company’s ‘Pledge’ for greater capital discipline and enhanced corporate governance proved fleeting with ROCE to decline significantly due to the Anadarko transaction. The commensurate decline in valuation places OXY at a 10-year low in the equity market.” The deal is claimed to be value-destructive, and the market bared its teeth towards Occidental and its antics; Year to date (YTD) shares are down nearly 26%, off more than 41% from the trailing twelve-month period, and down 30% since the acquisition was announced.

Generally, good financial stewardship hedges against overvalued, high-impact dealings. Thus, it begs the question: how could such a complex deal be so vigorously accepted internally, despite market kickback and open disagreement?

Viewing Occidental’s board of directors and their relevant skills and expertise within CGLytics’ platform, it is apparent that financial expertise and oversight is lacking.

Occidental Petroleum Corporation’s Board Expertise

Source: CGLytics Data and Analytics

It is possible that the lack of financial oversight was manifested when Occidental Petroleum decided to move forward with its acquisition and outbid Chevron for Anadarko. Increased financial responsibility may have produced different results, but the oil industry is ridden with mergers, acquisitions, and deals that walk a fine line in terms of good corporate governance practices.

It begs the question if the oil industry is in need of a corporate governance overhaul in the near future, as the story of Oxy-Anadarko is a tell-tale sign that a lack of expertise can lead to a less-than-stellar outcome.

Corporate boards and executive teams increasingly require insights and analytical tools to identify any potential areas of reputational risk. Without this oversight, companies may be targets of activist campaigns and cannot proactively prepare.

To learn more about how CGLytics’ deep, global data set and unparalleled analytical screening tools can potentially help you identify these areas of risk, click here.

Did you miss it? Read the article of The Billionaire Battle over Anadarko (Part 1) here.

About the Author

Rollin Buffington

US Research Analyst

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