'THE DAILY CORPORATE GOVERNANCE DIGEST’ (for public company boards, the C-suite and GCs)
Please see the items below with the related links (NOTE: access to link content may be metered, require a no-charge registration or require a paid digital subscription)
(i) Intel and JP Morgan join AT&T, GE and Phillips with failed say-on-pay votes at their AGMs this year: At both Intel's AGM held last Thursday, and JP Morgan's AGM held yesterday, the 'say-on-pay' votes were defeated, Intel and JP Morgan thus joining such other large-cap U.S. companies as AT&T, Phillips and GE, with failed say-on-pay votes this year. Below is from this WSJ article yesterday, "JPMorgan Shareholders Reject Jamie Dimon’s $50 Million Bonus" (As regards Dimon's retention bonus discussed below, see (ii)(b) below for more on retention bonuses):
"JPMorgan Chase & Co. shareholders objected to a roughly $50 million retention bonus for Chief Executive Jamie Dimon. Only 31% of shareholders voted in favor of the bank’s pay plans at the annual shareholder meeting.....The vote comes as the bank has faced criticism over its spending and investments, which Mr. Dimon and leaders are expected to address at a May 23 investor presentation.
"The bank in January disclosed that Mr. Dimon was paid $34.5 million for his 2021 compensation. Last year, the bank also gave him the special retention bonus......The bonus is in restricted stock options that require shares to trade above certain levels and for him to remain the chief executive until 2026. He also can’t sell any of the awarded stock until 2031. The bank and directors had argued it was a rare extra bonus for a top leader on Wall Street, and a way to clarify that Mr. Dimon would remain in his position for several more years......
"Institutional Shareholder Services Inc. and Glass Lewis & Co., two firms that advise shareholders on voting, had both recommended voting against the pay package, because of the retention bonus and a smaller grant given to Daniel Pinto, the president and chief operating officer. ISS said the awards weren’t tied closely enough to the bank’s performance."
JP Morgan responded at the AGM to the failed vote, as reported in this FT article yesterday, "JPMorgan shareholders vote against Jamie Dimon’s pay":
"In response to shareholder questions about the award at the investor meeting,Dimon, who is also chair of JPMorgan’s board of directors, said the board “appreciates the feedback received from shareholders regarding compensation”. “The board takes it very seriously and we will continue to actively engage with them,” Dimon added....."
As reported in this Fortune article yesterday, "Intel shareholders rejected the company’s executive pay program....", at its 2022 AGM last week, some 54.2% of Intel shareholders voted against the company’s executive compensation program according to this Form 8-Kfiled with the SEC on Monday. Here is Intel's statement in response to the vote, as reported in this CNBC article yesterday, "Intel shareholders reject executive pay":
"We take our stockholders’ feedback very seriously, and we are committed to engaging with them and addressing their concerns,” an Intel spokesperson said in a statement. “We have already taken specific steps to address investor questions regarding compensation, including making our overall compensation approach easier to understand, clarifying our annual performance bonus goals, clearly linking pay to performance, and increasing our disclosures and transparency.”
Below is from the Fortune article:
"Intel shareholders voted against the company’s executive compensation program last week, which included part of a $178.6 million payout to CEO Pat Gelsinger, according to a regulatory filing published Monday. Around 1.78 billion votes, making up around 54.2% of shareholders of the chip-manufacturing giant, were cast against the executive compensation, while 932 million votes were made in favor......
"This isn’t the first time shareholders have voted against executive compensation packages in recent months. Shareholders at AT&T, Phillips, and General Electric all voted against hiking CEO pay and executive compensation packages after poor results this year. Proxy votes against executive pay at S&P 500 companies became more common last year according to a report by As You Sow, a shareholder advocacy group focused on ESG matters. After many companies released earnings with "questionable practices and metrics"—easing performance targets during the COVID-19 pandemic, for example—shareholders voted to push back on executive compensation at record numbers. In 2021, a record 16 companies had the pay of their executives rejected by more than half of their investors—up from 10 in 2020 and seven in 2019, according to the report....."
(ii) CEO pay at the S&P 500: the WSJ analysis/the current prevalence of granting retention awards to key executives at the largest U.S. companies:
(a) Over the weekend, the WSJ published its annual analysis of CEO pay at the S&P 500 companies, based on data collected by MyLogIQ LLC, a provider of public-company data and analysis (Note that the WSJ published in April a preliminary analysis based on data from one-half of the S&P 500 companies: see item (iii)(b) from April 6/22). The full list of the pay of all S&P 500 CEOs (from highest paid to lowest) is here, and the pay analysis is discussed in this WSJ article, "CEO Pay Packages Rose to $14.7 Million in 2021, a New High":
"The median pay package for chief executives of the biggest U.S. companies reached $14.7 million in 2021, setting a sixth-straight annual record as strong profits and robust markets boosted performance measures. Total compensation rose by at least 12% for most of the executives, and most companies recorded annual shareholder returns of nearly 30%, according to a Wall Street Journal analysis of data for more than 400 companies from MyLogIQ LLC.
"Much of the pay consisted of equity awards that could ultimately prove to be worth more or less than initially reported. The median salary, bonus and other cash compensation was $4.1 million. In 2020, the median pay package was $13.4 million for the same companies, with median cash compensation of $3.1 million. Large equity awards and multiyear pay packages pushed pay up at the top end of the WSJ’s latest ranking. Nine CEOs got pay packages worth at least $50 million last year—up from seven in 2020 and one in 2016. The Journal analysis uses pay figures and the value of equity awards as reported by companies in their securities filings, typically before gains or declines from market activity or performance multipliers.
"Roughly two-thirds of CEO compensation comes in the form of stock or stock-option awards, which typically vest over several years. For the 25 top-paid CEOs—each of whose packages exceeded $35 million—equity accounted for 78% of their total compensation......Boards have emphasized equity awards over the years, in part because institutional investors have pushed to better align executive pay with shareholder returns. Some big investors are also asking to link CEO pay to climate, diversity and other measures—RBC Capital Markets estimates that $1.4 trillion in assets globally are managed by stock funds that heavily emphasize environmental, social and corporate-governance criteria when making investment decisions. Still others worry that complex packages might weaken the ties between pay and performance......"
(b) The prevalence today of the largest U.S. companies granting retention awards to key executives is noted and discussed in this WSJ article yesterday, "In a Hot Job Market, Companies Hand Out Big Awards to Retain Key Executives":
"Big U.S. companies are doling out one-time awards to executives in an effort to retain high-performing leaders amid record employee turnover and reward them for managing through a couple tough years. Retention awards, provided in addition to standard compensation plans, are a focus of companies’ pay disclosures this year as concerns about the tight labor market are extending to the C-suite. Leadership teams want to keep their best people on board as companies battle high inflation, supply-chain disruptions and other challenges.
"Companies including Coca-Cola Co., Hewlett Packard Enterprise Co. and Tyson Foods Inc. during the 2021 fiscal year provided supplemental awards to senior executives, according to proxy filings. The awards, mostly made in the form of stock and often worth millions of dollars, are designed to motivate executives and encourage top talent to stay in their jobs......
"The level of anxiety and stress across the organization, surprisingly from the CEO to the manufacturing floor, has been unprecedented,” said Bill Glenn, executive chairman of Crenshaw Associates, a human resources advisory firm, discussing challenges facing leadership teams since the pandemic began. Coca-Cola said in a March proxy filing that last year it authorized a one-time award for about 1,000 employees, including the company’s top executives. The stock award was “granted to motivate and reward employees” to help the beverage company emerge stronger from the pandemic, Coca-Cola said in its proxy filing.......
"The way retention awards are disclosed in corporate pay disclosures makes it difficult to identify every instance of a retention award provided to an executive officer. Mercer, a consulting firm, identified 44 such awards granted in the 2021 fiscal year in a sample of 233 companies within the S&P 500. Most of the awards were provided to individuals or to a small group of executive officers, rather than to entire leadership teams. Over a third of companies cited retention as the primary reason they offered a supplemental award to a chief financial officer, either individually or as part of a larger group, making it the most frequently cited reason, according to advisory firm Willis Towers Watson PLC, which reviewed a sample of 68 supplemental awards provided to finance chiefs in the S&P 1500. Stock awards with time-based vesting schedules, which executives receive for staying on the job for a period of time, made up the largest share of retention-related stock awards reviewed by Willis Towers Watson and Mercer......
"Technology company Hewlett Packard Enterprise said this year it provided its CFO, Tarek Robbiati, with a one-time equity award of $7.5 million, which includes both restricted and performance-adjusted stock. The award—provided solely to Mr. Robbiati, who has served as CFO since 2018, in addition to other increases in his salary and incentive pay—was meant to“promote his continued engagement during a very complicated multi-year strategic transformation,” the company said in its proxy filing........"
(iii) Norway Oil Fund's CEO on executive pay: Nicolai Tangen, the CEO of Norway's Oil Fund, the world's largest sovereign wealth fund ($1.2 trillion in assets), spoke to the FT last week about executive pay, and his comments appear in this FT article last Friday, "Norwegian oil fund denounces ‘corporate greed’ over executive pay." Below are excerpts:
".......Nicolai Tangen, chief executive of Norway’s $1.2tn oil fund, told the Financial Times that it would in particular target large salary packages that were not justified by performance, or were opaque or insufficiently long-term. “We are in an inflationary environment, where we are seeing many companies with pretty mediocre performance coming out with very big pay packages. We are seeing corporate greed reaching a level that we haven’t seen before, and it’s really becoming very costly for shareholders in terms of dilution,” he said.
"The oil fund, which owns the equivalent of 1.5 per cent of every listed company in the world, voted against executive pay at Intel’s annual meeting this week and against Apple in March. It also voted against IBM this year, citing consistently high pay despite disappointing performance, General Electric for a complex pay package lacking in transparency, and against Harley-Davidson, saying it had not presented a compelling business case for offering higher salaries than competitors.
"Tangen, a former hedge fund manager, said the problem would only get worse if investors did not do anything. “If shareholders are not becoming stricter on how they vote, this will just continue.” “We feel to a certain extent, shareholders haven’t really done their job in this area. We are sensing a bit of a shift in sentiment among the large shareholders in the world towards more scrutiny and more requirement for alignment.” But the “main blame is clearly with CEOs and boards”, he added.....Tangen said falling markets also added to the urgency of the issue. “It’s even more important to address it when we go through periods where value creation potentially is smaller for the shareholders. Because as a proportion the pay packages stand out even more.”.......
"Carine Smith Ihenacho, chief governance and compliance officer at the fund, said it was focusing on the US because that was where “the high pay packages” were but that it would also look at Europe and elsewhere....The fund said it was not automatically against large pay packages, and pointed to JPMorgan and Amazon as examples where it has voted in favour of simple, long-term remuneration policies. Ihenacho said: “We look at many things. One is how aligned is it really with long-term value creation . . . Are they many multiples above the median of peers? What is the dilution of shareholders? It doesn’t mean we vote against all large pay packages.”.....Ihenacho insisted the fund set no ceiling for pay, but preferred companies to offer packages with large equity portions that vest over five or preferably 10 years, to try to ensure executives are aligned with shareholders....."
(iv) Moderna's chair defends the board's vetting process in its recent CFO hire: As follow-up to item (i) from Monday on the "challenges and pitfalls of the vetting process in executive searches in the wake of the sudden departure of Moderna's newly hired CFO", Moderna's chair discusses and defends the Moderna board's hiring process in this FT interview today, "Moderna chair defends executive hiring process after CFO fiasco":
"Moderna’s chair has launched an unflinching defence of the board’s executive hiring process after its new chief financial officer stepped down last week following just one day in the job. Noubar Afeyan dismissed suggestions the board could have done anything differently, insisting it had asked all the right questions but was not told about an internal investigation into financial reporting at Jorge Gomez’s former employer because of legal constraints.
"Afeyan said the executive search company contracted by Moderna, the biotech company behind one of the leading Covid-19 vaccines, was also blameless because it was unaware of the probe by dental equipment maker Dentsply Sirona, which was disclosed last week. “I’m quite convinced that the fact that those facts were not obtainable to us had a legal context,” Afeyan said in an interview with the Financial Times, adding that there was no doubt “whether we asked enough questions or the right questions”.
“Both the process of recruiting and vetting, and the process with which we reacted to the new facts that came out, were completely appropriate,” added Afeyan, who has chaired the biotech since he co-founded it in 2010. “I can’t think of a different approach that we could have used under those circumstances.” Some corporate governance experts have criticised the Moderna board for failing to detect potential problems at Dentsply, especially after the dental products group fired its former chief executive Don Casey on April 19 without explanation. Casey’s ouster happened several weeks before Gomez started his new job at Moderna.
"Companies the size of Moderna, which has a market valuation of $57bn, typically conduct exhaustive due diligence on C-suite hires, and the biotech company’s failure to unearth the issues at Gomez’s previous employer has rekindled long-simmering concerns about its governance. Moderna said it acted quickly upon learning of the investigation by Dentsply, announcing Gomez’s departure the next day on May 11. Since then, the company has said it will attempt to claw back Gomez’s $700,000 exit payment, equivalent to one year’s salary, if any wrongdoing is unearthed by the investigation......"
(v) trends in performance metrics and performance measurement periods of long-term incentive plans at the large cap companies: Last month, executive and director compensation consultants, Compensation Advisory Partners (CAP), posted on its website this memorandum, "Long-Term Incentive Plans: Payouts and Performance Alignment", based on an analysis of 120 large U.S. public companies across 10 industries. Below is from the "Summary of Findings":
"Performance Measurement Period: Three-year performance periods are most common. 97 percent of the companies in CAP’s study with long-term performance plans have at least one plan with a three-year performance period. Only three percent of companies have a plan with a performance period of longer than three years (i.e., four or five years).
"Performance Metrics: Long-term performance plans predominantly use objective financial or stock price metrics. The most common long-term performance plan metrics are relative Total Shareholder Return (TSR), Return measures, and Earnings per Share (EPS). Many companies use a combination of financial and stock price metrics to balance line-of-sight for executives and direct alignment with shareholder outcomes.
"A handful of companies use strategic or non-financial metrics in long-term incentive plans, though it is far less common in long-term vs. annual incentive plans. For example, companies have increasingly incorporated Environmental, Social, and Governance (ESG) metrics into the annual incentive plan but few have added such metrics to the long-term incentive plan. Companies that use long-term strategic or non-financial metrics often do so because they have key non-financial objectives and priorities that are important to the business and measurable, like safety or emissions......As companies continue to define objective goals around their long-term ESG strategies, we may see more companies use these metrics in long-term equity plans as many companies view ESG and strategic goals as longer-term in nature......"
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