Highlights from Meridian’s Corporate Governance and Incentive Design Survey

Meridian released the key findings from their 2022 survey focused on company practices and policies for board governance, compensation-related proxy disclosures and long-term incentive programs for the Meridian 200, a subset of the S&P 500. Highlights are provided below, but the full survey is well worth a read.

Common Board Practices

• Tenure. 47% of board members have served for five years with 28% serving for 10 or more years. This is a decrease in tenure of 5%, indicative of the focus on board refreshment. However, it is still uncommon to have mandatory term limits.
  
  
• Diversity. Nearly all companies disclose board diversity for their current board membership in their most recent proxy.
  
  
  • 98% report age, gender and/or ethnicity (10% increase from 2019)
    
    
  • 91% report ethnic diversity statistics (24% increase from last year)
    
    
  • Female representation outpaces ethnically diverse representation, with nearly one-third reporting less than 20% representation of ethnically diverse directors but only 4% reporting less than 20% representation of female directors.
     
• Compensation. Almost all (97%) Lead Directors receive additional retainer fees; 58% of these companies pay between $30,000-$50,000.
  
  
  • Organizations paying over $30,000 have increased 25 percentage points from 2019, which is likely an indication of increased levels of responsibility.
    
    
• Retirement. 78% disclose a mandatory retirement age policy for board directors. The age requirement is nearly always between 72-75 with 45% reporting age 75, which is an increase of 10% over the past 3 years.

 
Proxy Disclosure Practices

• Corporate Responsibility. As expected, companies are increasingly disclosing the internal tracking of long-term sustainability or climate change goals.
  
  
  • 83% currently disclose, up from 70% in 2021. 88% mention a Corporate Responsibility Report which typically highlights progress and achievements in sustainability, climate, and diversity and inclusion.
    
    
• Company Performance. The vast majority of companies (89%) report absolute financial results or stock price/TSR performance in the proxy, but reporting on relative performance is less common. Note that this is separate from any pay-for-performance disclosure – this item is related to the performance graphs many companies place up front in the proxy or CD&A.
  
  
  • 39% disclose relative company performance with 62% of those reporting on a broad industry index and 49% using the company’s compensation benchmarking peer group.
    
    
• Pay and Performance. 20% of the Meridian 200 include additional disclosures to communicate alignment between NEO pay and company performance.
  
  
  • Of those that include additional disclosures, 62% use Realized or Realizable Pay to define compensation.
    
    
  • 63% compare realized/realizable pay to target pay, 28% compare against the Summary Compensation Table and 21% compare against pay at other companies.

• Clawbacks. 99% of the Meridian 200 now disclose a recoupment policy, and a surprising number (53%) are “no-fault;” that is, they do not require fraud or misconduct to trigger a possible clawback.
  
  
  • 54% have a trigger for ethical misconduct without the requirement of financial restatement. This could include violations of company policies and other criminal or illegal misconduct.
    
    
  • 20% have a trigger for reputational risk and 25% for a violation of a restrictive covenant.

Annual Incentive Plan Design

• Earnings Metrics. Earnings based measures continue to be the most widely used metric in annual plans with 83% of companies include some type of earnings metric.
  
  
  • Operating Income (53%), Revenue (51%), Cash Flow (38%) and EPS (25%) are the most prevalent, but this can vary depending on industry.
    
    
• Operational and Individual Metrics. The use of these metrics has gradually increased year-over-year with 57% of companies incorporating operational/strategic corporate goals (up from 55% in 2021). This is driven from the inclusion of ESG metrics.
  
  
  • It is less prevalent to use weighted individual performance goals (18%) or individual modifiers (25%) 

Long-Term Incentive Plan Design

• Vehicle Use & Mix for NEOs. 55% of companies use two LTI vehicles, 38% use three or more and 7% use only one vehicle. Performance-Based Shares/Units are predominant with 97% reporting usage. Restricted stock/units are also common (73%) followed by Stock Options/SARs (54%).
  
  
  • The vast majority of companies use the same mix for the CEO and other NEOS (82%)
    
    
  • Since 2012, performance-based vehicles represent at lease 50% of the LTI value; 61% for CEOs and 59% for other NEOs this year.
    
    
• Metrics. Relative Total Shareholder Return (TSR) is the most prevalent metric used by 76% of companies and used either as a discrete weighted metric or performance modifier.
  
  
  • 90% of organizations combine the Relative TSR with one additional metric.
    
    
  • Comparison groups vary with 33% using a general market index, 31% comparing against a performance peer group (usually a variation of the compensation benchmarking peer group) and 26% assess against an industry specific index.