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In this Client Update, we suggest that compensation committees and boards should have confidence in using their business judgment to identify key measures for evaluating company performance in incentive plans. Using reported earnings measures highlighted by Amazon.com, Inc., we provide a demonstration of how financial performance can be very closely tied to shareholder value creation over time. We also compare EVA (ISS’s latest preferred approach) to stock price over this same period. We find using Amazon’s reported financial performance to be a very strong gauge of shareholder value creation. If the Amazon example is any indication, compensation committees should feel comfortable in applying their own business judgment, rather than feeling the need to turn to ISS’s one-size-fits-all notion that EVA presides over all. 
Ben Burney spoke to the Chicago chapter of NASPP about trends in relative TSR. Topics covered include overall prevalence and peer group usage, among other topics. The presentation also included summary results of a Monte Carlo simulation of the S&P 500. The graphic depicts how companies in some sectors may be expected to outperform or underperform depending on market conditions.
Download the presentation here. In this Client Briefing, Exequity explores the usage of relative total shareholder return (RTSR) within long-term incentive plans across S&P 500 companies using data from 2019 filings. We examine overall prevalence of RTSR, differences in usage between industry sectors, and key design elements of these plans.
Click here to download the Client Briefing. This Client Briefing looks at the steps companies should consider if they had a low or failed Say-on-Pay (SOP) vote in 2019. The Client Briefing discusses SOP vote results among the Russell 3000 as well as gives examples of companies whose SOP votes failed in 2018, yet were able to secure approval above the average 90.9% support level in 2019.
Click HERE to download the PDF. On August 21, 2019, the Securities and Exchange Commission (SEC) issued guidance to proxy advisors regarding the applicability of the proxy rules to proxy voting advice. The SEC also issued separate guidance to investment advisers regarding their proxy voting responsibilities. Combined, this guidance likely will impact both proxy advisors and how investment advisers handle proxy voting, which, in turn, could significantly change the proxy voting landscape for public companies.
This Client Alert reviews this SEC guidance as well as some of the potential impacts. Click here to download this Client Alert In Exequity’s August 20, 2019 Client Briefing, ISS, EVA, and Economic Voodoo, we responded to contentions made by Institutional Shareholder Services (ISS) and author Bennett Stewart (ISS Senior Advisor) in the white paper EVA, not EBITDA: A Better Measure of Investment Value. ISS and Mr. Stewart identify economic value added (EVA) as a “superior” measure of “investment value” over EBITDA. Readers may recall, EVA is ISS’s latest preferred approach to performance measurement. In contrast to ISS’s analyses, which appear to have been conducted based on data as of a single point in time, we described how EBITDA was better correlated over time with stock price and total enterprise value (TEV) than EVA.
This Client Update is a follow-up to ISS, EVA, and Economic Voodoo and offers further insights into the relationship between EVA and EBITDA versus stock price and TEV. Read more below or click here to download a copy of this Client Update. Institutional Shareholder Services (ISS) recently introduced Economic Value Added (EVA) as its latest approach to measuring company performance. Now a purveyor and proponent of EVA, ISS is marketing its product, including a recent publication, EVA, not EBITDA: A Better Measure of Investment Value. This Client Briefing examines ISS’s contention that EVA is a superior gauge of “investment value” to EBITDA.
Download the Client Briefing here (PDF). Download information on the EVA formula we used and companies analyzed here (PDF). When you hear the words “Monte Carlo simulation,” do you:
a) Scream; b) Pack your suitcase—Mediterranean vacation! (Simulation? Nah!); or c) Ponder the link between 19th century botany and modern valuation techniques? If you chose a) and would rather b), read this Client Briefing to c). Monte Carlo simulations are often only marginally understood by decision makers—and trying to comprehend them makes some want to scream. But while Monte Carlo simulations are complicated, the way we explain them does not have to be. This Client Briefing offers a plain-English guide to Monte Carlo simulations, which are used to value market-based performance awards (e.g., relative TSR). The goal is to help companies understand the implications of design choices on valuation outcomes in a conversational manner. Click here to download the Client Briefing (PDF). This Client Briefing provides an overview of ISS's EPSC model which ISS uses to review equity compensation plan proposals to develop its vote recommendations for such proposals. The Client Briefing looks at the three categories of the EPSC model and indicates where companies are most likely able to impact EPSC model outputs. The Client Briefing also discusses the timing of running the EPSC model and other considerations for developing a good equity compensation plan. If your company is thinking about taking a proposal to shareholders to request more shares and ISS has significant influence on your institutional shareholders, this Client Briefing will help you understand how ISS will review your equity plan proposal and develop its vote recommendation.
Originally Published September 13, 2018 Updated February 12, 2019 to reflect ISS Policy Updates for the 2019 Proxy Season Click here to download the Client Briefing (PDF) In December 2018, ISS released two documents covering frequently asked questions (FAQs) on final U.S. Compensation Policies and U.S. Equity Compensation Plans. The FAQs on Equity Compensation Plans also contained the ISS burn rate benchmarks applicable to meetings on or after February 1, 2019. This Client Alert reviews the changes in the FAQs and includes the 2019 ISS burn rate benchmarks.
Click Here to download the Client Alert (PDF) On December 18, 2018, the SEC announced it had finalized the hedging rules required by the Dodd-Frank Act. This Client Alert discusses the new rules and the timing of their application.
Click HERE to download the Client Alert (PDF) On November 19, 2018, ISS released its policy updates for the 2019 proxy season. Then on November 21, 2018, ISS issued a set of preliminary FAQs on Compensation Policies for 2019. These policy updates and FAQs will apply to shareholder meetings on and after February 1, 2019.
This Client Alert examines the compensation-related changes to ISS policies for 2019 as well as the preliminary Compensation FAQs. Click Here to Download the PDF of this Client Alert. In November 2017, S&P Dow Jones Indices and MSCI Inc. announced revisions to the Global Industry Classification System (GICS) to be effective after the close of business on September 28, 2018. The most significant of the changes to GICS was to the Telecommunication Services sector, which has been renamed and broadened in its scope.
We updated the summary statistics of the 2018 Relative TSR Client Briefing reflect the updated GICS classification. Communication Services companies show overall RTSR prevalence of 41%. See the link below for the updated statistics. 2018 Relative TSR Statistics—GICS Structure Updates This Client Briefing looks at the ISS policy regarding "excessive" non-employee director (NED) compensation. In a set of FAQs, ISS indicated that historically it has considered NED compensation at the top 5% of all comparable pay to be "excessive." Under the ISS policy, which ISS first started applying in 2018, if ISS finds a recurring pattern of excessive NED compensation magnitude in two or more years without a compelling rationale, ISS may recommend against those directors responsible for approving/setting NED compensation.
The Client Briefing provides the median and 95th percentiles for the S&P 500 and Russell 3000 (excluding the S&P 500) groups, in the aggregate and by industry. Companies can use these as a rough guideline to gauge whether they run any risk under the ISS "excessive" NED compensation policy. Click here to download the Client Briefing (PDF) In this Client Briefing, Exequity explores the usage of relative total shareholder return (RTSR) within long-term incentive plans across S&P 500 companies using data from 2018 filings. We examine overall prevalence of RTSR, differences in usage between industry sectors, and key design elements of these plans.
Click here to download the Client Briefing (PDF) On August 21, 2018, the Internal Revenue Service (IRS) and the Department of the Treasury issued guidance on the recent amendments to Section 162(m) of the Internal Revenue Code that were made by the Tax Cuts and Jobs Act of 2017. This Client Alert summarizes this guidance which primarily addressed the grandfather rule for compensation payable under written binding contracts in effect November 2, 2017, as well as how covered employees will be identified under the amendments. The Client Alert also includes a flow chart to help determine if, and to what extent, the grandfather rule is available.
Click here to download the Client Alert (PDF) If your company's Say-on-Pay (SOP) vote received low support (below 70% for ISS and below 80% for Glass Lewis), your company will need to respond appropriately in next year's proxy or face even lower support and, possibly, vote recommendations against directors.
This Client Briefing looks at what the proxy advisors want to see in your next proxy if your company received low support on its SOP vote, outlines a typical response plan, and suggests ways to ensure your company is viewed as being responsive to the low SOP vote in next year's proxy. Finally, summary statistics for Russell 3000 companies from 2012—2018 are provided, which detail the average and median SOP vote support levels, a breakout of the SOP vote support levels (including the SOP failures rates), and ISS vote recommendations for and against SOP proposals. Download Client Briefing (PDF) After much anticipation, CEO Pay Ratio data began appearing in proxy statements this year. With the new trove of disclosures available, it’s natural for observers of executive compensation to search for trends in the data, despite seemingly universal agreement that few, if any, meaningful insights may be found. What insights are to be gleaned? What conclusions may be drawn? What does it say about pay? The purpose of this Client Briefing is to provide guidance on what the data says—and what it doesn’t.
Download Client Briefing (PDF) This Client Briefing looks at pay ratios for 2016. The ratios were calculated using: (1) compensation data for the CEO as reported in 2017 proxy statements, and (2) the U.S. Department of Labor's Bureau of Labor Statistics (BLS) information on weekly earnings for the 4th quarter of 2016, annualized ($43,992).
The Client Briefing reports median 2016 CEO annual total compensation by index and industry, allowing companies to use their own estimates of median employee total compensation for their industry to calculate a more relevant estimated ratio. Note: The CEO Pay Ratios contained in this Client Briefing were calculated using the BLS median annual compensation for a U.S. worker of $43,992 for 2016. As a result, the ratios may not reflect the ratios that will be disclosed in 2018 proxy statements for (1) companies with median employee annual total compensation significantly above or below the BLS amount, and (2) companies with a large global employee workforce such that their median employee is not based in the U.S. Download Client Briefing (PDF) On December 14, 2017, ISS issued several important updated documents concerning its policies and methodologies for the upcoming 2018 Proxy Season:
In early January 2018, ISS released an interview with its Head of U.S. Compensation Research, David Kokell, that provided insight into how ISS will assess potential changes in compensation practices as a result of the enactment of The Tax Cuts and Jobs Act of 2017. Exequity's Client Alert reviews the changes in ISS policy and methodology for the 2018 Proxy Season that are highlighted in these materials. Download Client Alert (PDF) |
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