Glass Lewis issues COVID-related executive pay guidance

As we said when Institutional Shareholder Services (ISS) released COVID-related FAQs last October (see Mercer’s article: ISS issues COVID-related executive pay FAQs), while support from proxy advisers is important, it is more critical for companies to engage with their top shareholders to understand what they would consider a reasonable response to the challenges presented by the pandemic. Compensation committees must consider multiple factors in making pay decisions — including the company’s business strategy, broader workforce actions and executive retention risks — even if decisions may negatively impact the company’s say-on-pay vote result. See Mercer’s article: Addressing in-flight incentive awards: A holistic approach for compensation committees.
Key themes
Key takeaways from the new guidance suggest the proxy adviser will:
- Scrutinize granting one-time awards outside a company’s regular incentive plans, replacing performance-based awards with guaranteed or time-based awards, and changing performance metrics and performance periods near the middle or end of a performance cycle
- Be more receptive to pay program changes that are tied to a defined time period (e.g., moving to time-based long-term incentives for only one grant cycle and explicitly stating this in the CD&A)
- Favor future target incentive opportunity increases over high payouts for backward-looking performance
- Be more lenient on companies with a track record of good governance, pay-for-performance alignment and appropriate use of board discretion
In all cases, Glass Lewis demands robust disclosures that allow stakeholders to understand and evaluate pay-related decisions, and sets a high bar for what will be acceptable with a warning:
“Issuers would do well to consider that the pandemic has made executive pay a more salient issue for many investors. All companies, especially those seeking special support from governments or executing significant employment cuts, should consider the reputational risk associated with poor pay decisions, particularly quantum payouts. Even those companies who have managed to perform well during this time may face additional challenges in justifying high executive payouts to their shareholders.”
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