Q. How does Glass Lewis analyze say-on-pay proposals?
A. Glass Lewis applies a highly nuanced approach to analyzing advisory votes on executive compensation. We take pride in reviewing each advisory vote on a case-by-case basis, with the belief that each company must be examined in the context of industry, size, financial condition, its historic pay-for-performance practices, and any other mitigating external or internal factors.
Our analysis focuses on four key issues:
- Overall compensation structure;
- Disclosure of executive compensation policies and procedures;
- Amounts paid to executives; and
- The link between pay and performance.
By analyzing these four key issues, Glass Lewis determines whether a company’s executive compensation programs are designed to avoid excessive risk-taking. This risk assessment focuses on important features, including: the overall pay mix; performance measures and goals; and risk-mitigation features, such as the adoption of a recoupment policy, executive stock ownership guidelines, and share retention requirements. In instances where a company does not adhere to best practices, Glass Lewis identifies the structural flaw as an issue of concern. This approach includes market-specific analysis that identifies distinct issues arising in international markets.
Q. What is Glass Lewis looking for in terms of the structure of a compensation plan?
A. As previously mentioned, Glass Lewis conducts a comprehensive analysis of executive compensation practices. Glass Lewis rates an issuer’s structure on a Poor/Fair/Good scale.
Some of the primary issues that we examine as part of our say-on-pay analysis include:
- Use of peer groups, surveys and benchmarking of pay;
- Use of, and independence of, compensation consultant;
- Fixed/variable pay mix;
- Risk assessment and discussion by board; and
- Excessive executive perquisites.
- Defined maximum payouts;
- Performance metrics;
- Threshold, target and maximum performance levels; and
- Use of committee discretion.
Change-in-control provisions / severance agreements
- Use of excise tax gross-ups;
- Limiting severance multiplier to under 2.99x; and
- Single- vs. double-trigger arrangements.
- Pay chasm between the CEO and the other NEOs
Equity / long-term incentives
- Percentage of Performance-driven compensation;
- Defined and reasonable maximum payouts;
- Use of appropriate performance metrics;
- Vesting/performance periods of at least 3 years;
- Threshold, target and maximum performance levels;
- Appropriate and stretching target performance; and
- Use of committee discretion.
Market best practices
- Executive share ownership requirements;
- Incentive plan recoupment (“clawback”) provisions;
- STI-LTI balance;
- Post-vesting share retention requirements; and
- Elimination of excise tax gross-ups.
Q. What is Glass Lewis looking for in a company’s disclosure?
A. Glass Lewis believes that comprehensive, timely and transparent disclosure of executive pay is critical to allowing shareholders to evaluate the extent to which pay is keeping pace with company performance. When reviewing proxy materials, Glass Lewis examines whether the company discloses the performance metrics used to determine executive compensation. We recognize performance metrics may vary depending on the company and industry, among other factors, and may include items such as total shareholder return, earnings per share growth, return on equity, return on assets and revenue growth. However, we believe companies should disclose why the specific performance metrics were selected and how the actions they incentivize will lead to better corporate performance. As with structure, Glass Lewis rates an issuer’s disclosure on a Poor/Fair/Good scale.
Q. How does Glass Lewis analyze the link between pay and performance?
A. Glass Lewis believes an integral part of a well-structured compensation package is a successful and sustained link between pay and performance. To analyze this link, Glass Lewis takes both a qualitative and quantitative approach. For the qualitative aspect, we examine the balance between performance-based and time-based variable incentive plans. Further, we examine the appropriateness and the balance of the performance metrics used.
For the quantitative aspect, we rely on our proprietary pay-for-performance model to evaluate the link between pay and performance of the top five executives at U.S. and Australian companies. Learn More →
Q. What compensation practices automatically trigger an AGAINST recommendation?
A. Glass Lewis does not have an egregious pay-practice list of automatic triggers; as previously mentioned, we believe that a checklist approach would be inappropriate and contrary to our case-by-case approach. With that being said, the following is a list, though not exhaustive, of issues that when weighed together with other concerns, may steer Glass Lewis to recommend against a say-on-pay proposal:
- Inappropriate peer group and/or benchmarking issues;
- Inadequate or no rationale for changes to peer groups;
- Egregious or excessive bonuses, equity awards or severance payments, including golden handshakes and golden parachutes;
- Guaranteed bonuses;
- Targeting overall levels of compensation at higher than median without adequate justification;
- Bonus or long-term plan targets set at less than mean or negative performance levels;
- Performance targets not sufficiently challenging, and/or providing for high potential payouts;
- Performance targets lowered, without justification;
- Discretionary bonuses paid when short- or long-term incentive plan targets were not met; and/or
- Executive pay high relative to peers not justified by outstanding company performance.
Q. How does this analysis translate into vote recommendations?
A. In cases where we find deficiencies in the design of a company’s compensation program, implementation or management, we will recommend that shareholders vote against the say-on-pay proposal. Generally, such instances include evidence of a pattern of poor pay-for-performance practices (i.e., deficient or failing pay-for-performance grades), unclear or questionable disclosure regarding the overall compensation structure (e.g., limited information regarding benchmarking processes, limited rationale for bonus performance metrics and targets, etc.), questionable adjustments to certain aspects of the overall compensation structure (e.g., limited rationale for significant changes to performance targets or metrics, the payout of guaranteed bonuses or sizable retention grants, etc.), and/or other egregious compensation practices.
In the case of companies that maintain poor compensation policies year after year, without showing they have taken steps to address the issues, we may also recommend that shareholders vote against the chairman and/or additional members of the compensation committee. In addition, we may recommend voting against the compensation committee based on the practices or actions of its members, such as approving large one-off payments, the inappropriate use of discretion, or sustained poor pay-for-performance practices.
Q.How does Glass Lewis view the say-when-on-pay proposals?
A. The Dodd-Frank Act requires companies to allow shareholders a non-binding vote on the frequency of say-on-pay votes, i.e., every one, two or three years. Additionally, Dodd-Frank requires companies to hold such votes on the frequency of say-on-pay votes at least once every six years. We believe companies should submit say-on-pay votes to shareholders every year. We believe that the time and financial burdens to a company with regard to an annual vote are relatively small and are outweighed by the benefits to shareholders through more frequent accountability. Additionally, implementing biennial or triennial votes limit shareholders to voting against the compensation committee as their only means of holding a board accountable for its compensation practices in years without say-on-pay proposals. Unless a company provides a compelling rationale for presenting say-on-pay votes less frequently than annually, we will generally recommend that shareholders support annual votes on compensation.
Q. What types of say-on-pay research does Glass Lewis offer?
A1. Proxy Paper Analysis
Glass Lewis’ Proxy Paper contains a highly nuanced approach to analyzing advisory votes on executive compensation. Each advisory vote is reviewed on a case-by-case basis, with the belief that each company must be examined in the context of its industry, size, financial condition, historic pay-for-performance practices, and any other mitigating external or internal factors. The analysis focuses on overall compensation structure, disclosure of executive compensation policies and procedures, amounts paid to executives and the link between pay and performance.
A2. Pay Dirt
Every October, Glass Lewis publishes Pay Dirt, an annual assessment of the most overpaid and underpaid CEOs and executive teams in the S&P 500 and Russell 3000 indices. This extensive report relies on Glass Lewis’ pay-for-performance model to identify the egregiously overpaid or underpaid executives, while the body of the report examines how and why these individuals were singled out. Further, this report also utilizes Glass Lewis’ director database to isolate and identify directors serving as compensation committee members at multiple companies receiving a D or F grade in our pay-for-performance analysis.
A3. Say on Pay 2011: A Season in Review
In this special report, Glass Lewis provides a comprehensive examination and analysis of this hot topic, including a look at the actual vote results, the dispersion of Glass Lewis recommendations, and a deeper inspection of those companies that failed to garner majority support from their shareholders. Furthermore, this report provides a look at Glass Lewis’ structure and disclosure ratings, identifying companies that excelled in both areas as well as those who did not. Finally, this report also provides a glimpse of the comprehensive data collected by Glass Lewis, including the prevalence of certain best practices and compensation program features.
A4. Compensation Alerts
Glass Lewis works closely with clients to develop alerts and screening tools based on Glass Lewis’ analysis of the key details of executive compensation, including pay levels, award types, vesting provisions, performance metrics, potential payouts and the mix of fixed and variable pay.