The DOs and DON’Ts when rethinking incentive plans

Why have 75% of first-time say-on-pay votes failed in 2019? A large number of negative votes can be attributed to incentives. Companies need to rethink their incentive plans and make sure metrics truly benchmark performance.

Seventy-five percent of first-time say-on-pay (SoP) votes failed in 2019, and a large number of these negative votes focused on incentives.

There is an increasing need for companies to fully rethink their incentive plans, as the CGlytics whitepaper “How to take the testing of equity-based compensation plans into your own hands” points out.

“It is imperative that companies design their equity pay plans to ensure they receive shareholder approval first time, every time. In order to meet investor expectations, companies need to understand how they, and the proxy advisors they rely on, evaluate equity plans and make voting decisions.”

Marc Ullman, a partner with Meridian Compensation Partners explains what to do and what not to do in rethinking incentive plans.

First of all, companies need to fully rethink their compensation plans, and not to just tweak them. Making just a few cosmetic changes will not suffice to ensure that incentives are effective. At least every two years, a real restructuring is needed.

Often shareholder pushback will incite a rethink, but even with shareholder support, benchmarking for effectiveness is critical as priorities change and the business climate evolves. The plan must reflect the new realities the business faces.

Or the incentive plan may simply become too complicated to be useful, as continually including more metrics and other add-ons makes application confusing. This often happens as businesses try to simply tweak the plan instead of really rethinking it.

 

Here are the do’s and don’ts to achieve as near optimal alignment between pay and performance as possible:

– If you need a full-scale rethink, don’t settle for a mere tweak. Make sure that what you do matters, don’t nibble around the edges. Make sure the metrics truly benchmark performance.

– But don’t overdo it. Pick out the key metrics and focus on that; don’t try to transform the whole structure unless you really feel that you have to.

– As the rethinking process is underway, take note of the solid rationale that stems from the business model. This will be something to communicate at the end of the process, and one that can be used for grounding the basis of your thinking.

– Make sure you include all the right people: Finance, HR, Corporate leadership, corporate leadership and the business unit. Everyone should buy in to the metrics and the targets that are being set.

– Make sure your plan pays something in year one. After a big rollout you need to make sure that design provides results. Otherwise it could hurt your credibility.

– Take advantage of feedback from shareholder outreach. More and more companies are actively talking to shareholders, and their points of view should at least be considered as the design is taking shape. Consider investor relations and investor perspective and proxy advisors like ISS and Glass Lewis.

– Communicate internally and externally. You have multiple audiences internally.

 

Predict Shareholder Approval with Glass Lewis’ Equity Compensation Model

 

The Glass Lewis Equity Compensation Model (ECM) allows you to instantly test and review your incentives plan using the same key criteria and scoring system as leading proxy advisor Glass Lewis. The ECM supports testing of 4,300+ publicly-traded U.S. firms including the Russell 3000 and exclusively available via CGLytics.

With the ECM you can confidently engage, knowing the strengths and weaknesses of your current and future equity plans. Ensure you get the votes to legally grant equity compensation to your executives, board members and staff.

Click here to learn more about the ECM application or request a no-obligation demonstration.

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Basic Energy Services, Inc. (BAS): Hitting the Brakes on Dilutive Granting Practices

Basic Energy Services, Inc. could well have benefited from some foresight when plotting out the award schedule under its new 2019 Long-Term Incentive Plan. Glass Lewis use their equity compensation model to examine the shareholder opposition and how it could have been potentially avoided.

A little foresight can go a long way. Glass Lewis’ new Equity Compensation Model (ECM) tool allows users to predict the likely Glass Lewis voting recommendation for equity plan proposals, allowing companies to modify share requests, avoid potential pitfalls, and reduce the uncertainty that surrounds securing shareholder approval.

Simulating the eleven tests used in Glass Lewis’ equity plan analysis framework, the ECM tool predicts the proxy advisor’s recommendation for an equity plan proposal based on the size of the share request, the company’s granting history, plan terms and features, and other user-inputted datapoints. In addition, the ECM tool generates specific datapoints from the tests exactly as they would appear in Glass Lewis’ proxy paper. This data includes information that is closely monitored by the proxy advisor’s institutional clients, informing their ultimate voting decisions for both equity plan proposals and Say on Pays.

Basic Energy Services, Inc. could well have benefited from some foresight when plotting out the award schedule under its new 2019 Long-Term Incentive Plan (2019 LTIP). Announcing its 2019 annual shareholder meeting, the company sought approval of the 2019 LTIP, which would have authorized 1.8 million new shares for future issuance. However by the time the meeting took place, investor opposition had forced last-minute amendments to the agenda, including a cancellation of the share request.

In its analysis of the equity plan and the broader advisory vote on executive compensation, Glass Lewis raised concerns regarding massive grants made to executives after the 2018 fiscal year. In fact, much of the additional 1.8 million share request that would be voted upon at the May 2019 annual meeting was already ear-marked for April 2019 incentive awards to named executive officers, pending shareholder approval. After the plan failed a number of Glass Lewis’ tests, including measures of the company’s historic pace of grants and cost of the share request, the proxy advisor recommended that shareholders vote AGAINST the proposal.

An AGAINST recommendation for an equity plan proposal from Glass Lewis is infrequent and typically driven by particularly egregious granting practices and/or highly shareholder-unfriendly provisions. Cost concerns drove 21.97% of the advisor’s AGAINST recommendations during the 2019 proxy season; dilution issues accounted for 13.64%; and evergreen and repricing/buyout provisions together spurred 62.12% of the negative recommendations.

Glass Lewis’ voting recommendation contributed to growing investor momentum against the proposal. However, it appears that Basic Energy Services’ board and management had not anticipated the scope of opposition. As a result, the company, which had climbed out of Chapter 11 bankruptcy in 2016, found itself in what appeared to be another scramble — this time to revise its equity plan proposal with only eight days to go before the annual meeting.

On May 6th, with some investors having already cast their votes, the company filed an amendment to its 2019 proxy statement announcing that it was no longer seeking an additional share request. Instead, shareholders would vote on whether to move currently available shares from prior plans into the 2019 LTIP for future issuance.

Meanwhile, to compensate for the elimination of the 1.8 million share request, the large April 2019 grants that the company made to its named executive officers were revised to rely less on equity-settled payouts and more heavily on cash. Subsequent to the amended proposal, and in the absence of either a share request or associated problematic features (such as repricing provisions or evergreen replenishment authority), Glass Lewis revised its voting recommendation to FOR.

Basic Energy Services’ revision of its equity plan proposal and NEO grants represented more than just a minor hiccup in front of a public audience of voting shareholders. While the equity plan was ultimately approved, it received just 75% support, relatively low for this type of proposal. Obtaining that approval required a costly last-minute engagement campaign, a series of supplementary fillings, and an outsized outlay to fund the switch of executives’ 2019 awards from equity to cash—all with the company’s shareholder meeting looming.

Well before filing its proxy statement, the company could have understood that the rate of granting over the last three fiscal years would be an important concern—and one that would be exacerbated by the additional awards granted in April. Using the intelligence provided by CGLytics’ ECM tool, the company could have foreseen concerns regarding plan costs and granting pace under the equity analysis plan framework, designed a proposal that was more widely acceptable to investors, and avoided the costs and uncertainty associated with renegotiating proposals and compensation policies in the days before a shareholder meeting.

Set the Agenda

The benefits of the ECM go well beyond its predictive proposal recommendation abilities. The tool is an integral part of the executive pay decision-making process and longer-term compensation program planning with real-time calculations of cost, burn rate and overhang information.

Well before equity awards are granted, the ECM can identify policies and practices that draw shareholders ire. For Basic Energy Services, which failed Glass Lewis’ tests on its historical pace of grants, the ECM tool could be used to evaluate the impact of potential grants, and help the company manage its available share pool to avoid excessive dilution.

More than just an internal planning tool, the ECM provides important intel to prep directors and executives during shareholder engagement efforts. The analyses generated on the platform provide comparisons to industry benchmarks relating to cost, overhang, burn-rate and grants to named executive officers, which can help a company control and inform its messaging during its annual outreach to shareholders.

Armed with such information, a company could not only avoid missteps such as the one experienced by Basic Energy Services. It could also use the data to more effectively formulate its message to its shareholders on matters related its executive compensation program for its annual say on pay vote.

Another interesting insight is that Hampton is not currently sitting on any other company’s board, unlike Symonds who is currently sitting on four different boards (including HSBC Holdings plc). One could easily argue about the effectiveness of that choice when it comes to availability and focus/time dedication for the heavy incoming agenda.

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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