Recently, Glass Lewis released the details of its proxy voting policy updates for 2018. Its policy updates are generally not controversial, though one has the potential to raise the bar on company responsiveness.
While Glass Lewis made several updates to its 2018 policy guidelines for the U.S. and Canada, only three were related to compensation: board responsiveness, clarifications of its pay-for-performance evaluation, and an affirmation of how the forthcoming CEO pay ratio disclosure will be considered.
BOARD RESPONSIVENESS (U.S. AND CANADA)
Glass Lewis has revised its threshold at which it believes the board should demonstrate responsiveness to shareholders’ concerns, “particularly in the case of a compensation or director election proposal.” Starting in 2018, Glass Lewis will scrutinize board responsiveness to a negative shareholder vote any time 20% or more of shareholders vote against a management-sponsored proposal or vote in favor of a shareholder proposal.
Implications – With Glass Lewis lowering its threshold from 25% to 20%, more companies that receive low levels of support on say-on-pay (and other proposals) will be scrutinized. For instance, if the proposed change was in place in 2017, another 3% of companies would have received Glass Lewis scrutiny for say-on-pay votes. While some companies already provide detailed disclosure in their Compensation Discussion and Analysis (CD&A) and/or proxy regardless of the level of support received for say-on-pay, Glass Lewis’ change further highlights the importance that companies (particularly those experiencing moderate shareholder dissent) regularly engage with institutional investors and disclose robust summaries of their engagement efforts and subsequent actions taken in their CD&As.
PAY-FOR-PERFORMANCE EVALUATION (U.S. AND CANADA)
The mechanics of the Glass Lewis quantitative pay-for-performance model will not change and will continue to evaluate the link between pay for top five proxy executives and five performance metrics. The 2018 update clarifies its approach to measuring the level of alignment, particularly that a “C” grade represents alignment between pay and performance in its methodology.
Glass Lewis will continue to use a letter-grading system, with companies receiving grades of “A”, “B”, “C”, “D”, or “F”. However, Glass Lewis’ grades differ from the traditional school letter system (i.e., the letter “C” in the Glass Lewis grade system does not indicate a significant lapse). Rather, each Glass Lewis grade indicates the following:
||Glass Lewis Observation
|| Pay significantly less than peers, while outperforming
|| Pay relatively less than peers, with slightly higher performance
|| General alignment between relative pay and performance
|| A disconnect resulting from high pay and low performance
|| A significant disconnect resulting from significantly high pay and low performance
Implications – This clarification is helpful, as the meaning of each grade is often unclear to many organizations. We advocate caution when interpreting the Glass Lewis grading as it is just one element of its analysis. The accompanying qualitative review should also be considered and companies anticipating scrutiny should ensure their CD&A provides clear disclosure as well as adequate context for shareholders and proxy advisors to consider.
CEO PAY RATIO (U.S.)
Beginning in 2018, most public U.S. companies will be required to disclose the ratio of total annual compensation between the CEO and the median employee. Glass Lewis has confirmed these data will be collected and displayed as data points in its proxy reports, however it also noted that while the pay ratio has the potential to provide additional insight when assessing a company’s pay practices, it will not be a factor when determining voting recommendations in 2018.
Implications – While CEO pay ratio data will be included in Glass Lewis’ proxy reports, it still remains to be seen how companies, investors and other third parties ultimately use these data.
The 2018 Glass Lewis policy documents for the U.S. and Canada can be found here. For our recent summary of ISS’ 2018 policy updates, please see our article “ISS 2018 policy changes reflect market feedback and draft policy expectations,” Executive Compensation Bulletin, November 17, 2017.
Ryan Beger is a Senior Consultant in Willis Towers Watson’s Chicago office and Torie Nilsen is a Consultant in Arlington. Both are members of the firm’s governance advisory practice. Email firstname.lastname@example.org