Last year, the Securities and Exchange Commission (“SEC”) issued new regulations applicable to proxy advisory firms, including Institutional Shareholder Services (“ISS”) and Glass Lewis, that codified earlier guidance that proxy advisory firms should be deemed proxy solicitors. The new regulations stipulated, among other items, that any reports from the proxy advisors should be free from material errors and omissions, the methodologies used by the proxy advisors must be disclosed and transparent, that any conflicts of interest within the proxy advisors must be disclosed, and any non-public information relied upon for vote recommendations must be disclosed and identified. The new regulations are scheduled to become effective on December 1 of this year.
However, on June 1, 2021, new SEC Chair Gensler asked Commission staff to revisit the regulations and the classification of proxy advisors as proxy solicitors in particular. This action has the potential to overturn the regulations adopted by the SEC last year, freeing the proxy advisors from having to comply with the anti-fraud provisions of the proxy rules that were used to support the regulations summarized above. The text of Chair Gensler’s brief statement is below:
June 1, 2021
“In September 2019, the Commission issued an interpretation and guidance addressing the application of the proxy rules to proxy voting advice businesses. [1] Last July, the Commission adopted amendments to Rules 14a-1(l), 14a-2(b), and 14a-9 concerning proxy voting advice. [2]
I am now directing the staff to consider whether to recommend further regulatory action regarding proxy voting advice. In particular, the staff should consider whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.”
We will continue to monitor this topic and will keep our readers apprised of further SEC guidance or actions on this important matter.
General questions about this Viewpoint can be directed to Jon Weinstein at jon.weinstein@paygovernance.com or John Ellerman at john.ellerman@paygovernance.com.
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In January 2021, Pay Governance conducted a comprehensive survey of the use of Environmental, Social, and Governance (ESG) metrics in incentive compensation as reported by 95 participating US companies. The survey documented the prevalence of this emerging trend and explored the types of metrics used, the ways in which they were measured, the types of incentive plans incorporating such metrics, and other important incentive design details. The survey revealed that only 22% of the US companies included ESG metrics in their 2020 incentive plans, whereas 29% of the same companies reported they were planning on including ESG measurements in their 2021 incentive plans. In summarizing the data and citing our conclusions about the survey results, Pay Governance stated that there appeared to be significant hesitancy among US companies to adopt such metrics, as companies considered which metrics and goals would be the most meaningful and consistent with their business objectives. Despite the reluctance on the part of many US companies in moving forward on this issue, we noted that “the inclusion of ESG in incentive plans is perhaps one of the most significant changes in executive compensation in over a decade.” [1]
In our desire to further study this issue, Pay Governance examined the use of ESG metrics in the incentive compensation plans of a select sample of companies in the United Kingdom (UK) and European Union (EU). Our research confirmed that UK and EU companies are well ahead of the US in the inclusion of ESG metrics in incentive plans, and their approach to measuring and rewarding ESG achievements could be a harbinger of strategies used by US companies over the next several years.
Pay Governance selected 30 companies from the UK’s FTSE 100 and EU’s STOXX 50 indices. Our research was based on public filings through April 2021. The companies selected reflect a broad spectrum of industry sectors and, in the case of the EU companies, a number of different countries. The 30 companies reported median 2020 revenues of $27B and a current median market capitalization of $73B.
Our survey of US companies earlier this year reported that 21 of the 95 participating companies (22%) included ESG metrics in their 2020 incentive compensation plans. Of the companies including ESG metrics in incentive plans, 95% included them in the annual incentive and 5% included them in the long-term incentive. By contrast, 90% of the UK and EU companies included ESG metrics in their incentive compensation plans. One UK/EU company that did not include ESG metrics in their 2020 incentives disclosed to its shareholders that ESG metrics would be included in both the 2021 annual and long-term incentives. The research revealed that 89% of the UK/EU companies included ESG metrics in the annual incentive and 41% in the long-term incentive. Thus, in addition to a much higher prevalence rate, UK/EU companies also had a much higher rate of inclusion in long-term incentive plans.
We did find a number of similarities in the use of ESG metrics between US companies and UK/EU companies as well, and the following text and charts highlight our main findings:
Based on our January 2021 survey of US companies and UK/EU company research, we have a number of observations and key takeaways that may benefit US companies considering the inclusion of ESG metrics in their incentive plans:
General questions about this Viewpoint can be directed to John Ellerman (john.ellerman@paygovernance.com), Mike Kesner (mike.kesner@paygovernance.com), or Lane Ringlee (lane.ringlee@paygovernance.com).
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Section 162(m) of the Internal Revenue Code (IRC) became effective in 1994. The intent of Section 162(m) was to limit the tax deductibility of compensation paid to the “covered employees” of publicly traded companies that was in excess of $1 million per year. Section 162(m) initially provided for an exemption for qualified performance-based compensation such as performance-based incentive plans that received shareholder approval and satisfied other performance criteria.[1]
In December 2017, Congress passed — and President Donald Trump signed — the Tax Cuts and Jobs Act of 2017, which included certain amendments to Section 162(m). These amendments eliminated the exemption for performance-based compensation and expanded the scope of individuals who may qualify as covered employees subject to the $1 million annual compensation limitation deductibility. The covered-employees provision of the IRC Section 162(m) was expanded to include the CFO position in addition to the CEO and the three other highest-compensated executive officers during the applicable year.[2] On December 18, 2020, the Treasury Department and Internal Revenue Service issued final regulations regarding the amendments made to Section 162(m) created by the Tax Cuts and Jobs Act of 2017.
In early March 2021, Congress passed — and President Joe Biden signed — the American Rescue Plan Act of 2021 (the “Act”), which is a $1.9 trillion economic stimulus bill. Designed to provide economic relief to the American people during the COVID-19 pandemic, primarily through the tax code in the form of stimulus payments, expanded employment benefits, and expansion of the child tax credit.
One of the lesser-known provisions of the Act is an expansion of the number of covered employees subject to the Section 162(m) compensation deduction limits. The Act specifies that for any taxable year beginning after December 31, 2026, the covered employees will include the company’s five highest-compensated employees for that year in addition to the CEO, CFO, and three other highest-compensated officers. As a result, the company will only be able to deduct $1 million in annual compensation expense for each of its ten highest-paid employees for the applicable fiscal year beginning in 2027. However, the five additional employees will not be treated as covered employees for all years thereafter and must be redetermined each year.[3]
Because the impact of this tax law change is five years into the future, most U.S. companies have not yet fully assessed the economic consequences of its potential impact.
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General questions about this Viewpoint can be directed to John Ellerman at john.ellerman@paygovernance.com.
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