Over the previous two proxy seasons, 2018 and 2019, CalPERS, the largest US public pension fund, has implemented and refined its proprietary model for evaluating say-on-pay proposals. The 2020 changes will make the model and evaluation significantly more complex.
- The P4P™ Score measures 5-year CEO pay and 5-year company TSR relative to a peer group. A negative score may indicate that pay may be too high relative to shareholder returns.
- The CEO and Shareholder Financial Outcomes Analysis measures the change in 5-year CEO cumulative realizable pay versus 5-year CEO grant date target pay and compares this metric on an absolute basis to the company’s 5-year TSR. A significantly negative score, which means that that the company’s weighted pay score is higher than its weighted performance score, would indicate that “the financial experience of shareholders is significantly worse than that of the CEO.”
- Short vesting periods and insufficient holding periods for long-term equity awards;
- Short performance periods for long-term performance plans;
- Overlapping or comparable measures for short-term and long-term incentive plans;
- Adjusted metrics or non-GAAP metrics on compensation plans without sufficient justification and prominent disclosure of the reconciliation with GAAP metrics;
- Lack of a comprehensive clawback policy;
- Discretionary pay, one-time awards, and guaranteed bonus without sufficient justification; and/or
- Lack of comprehensive disclosure of the incentive plan structure and features.
In an unprecedented level of opposition, CalPERS has disclosed that it voted against the SOP proposal at 53% of its portfolio companies in 2019, up from 43% in 2018. In comparison, ISS issued negative vote recommendations against approximately 13% of Russell 3000 companies in each of the previous five years.
Companies are facing a growing number of different investor say-on-pay evaluations as well as increased complexity in each evaluation. This, in turn, may be influencing proxy advisory firm analyses. For example, ISS will use EVA metrics beginning February 1st, 2020, to evaluate companies sitting on the border of concern levels within its quantitative model. Likewise, Glass Lewis announced significant changes to its peer group approach this year.