At its last annual meeting of stockholders, Guidewire Software, Inc. only received support for its named executive officer compensation from just over 57% of the votes cast on its Say-on-Pay proposal. As we know, under the policies of the major proxy advisory firms, receipt of less than 80% support (Glass Lewis) and 70% support (ISS) triggers a qualitative review (taking into consideration as variety of factors) of the following year’s Compensation Discussion and Analysis for the compensation committee’s responsiveness to this level of opposition. That’s been a long-standing ISS policy and, as you may recall, Glass Lewis formalized its expectations in this area prior to the 2020 proxy season.
Guidewire Software filed its definitive proxy statement for its 2021 Annual Meeting of Stockholders earlier this month, and I was curious to see how the company addressed its Say-on-Pay vote and any accompanying stockholder outreach efforts. As you would expect, the company devotes a fairly significant section of it current Compensation Discussion and Analysis to describing its stockholder outreach campaign and the subsequent actions taken by the compensation committee (at page 35):
At our December 15, 2020 annual meeting, we held a non-binding, advisory vote on the compensation of our Named Executive Officers (a “Say-on-Pay” vote), which received the support of approximately 57% of the votes cast. This was significantly lower than the support of approximately 98% of the votes cast in the previous year. To better understand this vote result and solicit stockholder feedback, we undertook a stockholder outreach campaign during fiscal year 2021 around the time of our annual stockholder meeting and again at the beginning of fiscal year 2022. We reached out to our 11 largest institutional stockholders and key investors, with aggregate holdings of approximately 54% of our outstanding shares (as of June 30, 2021), to discuss our executive compensation program and practices, solicit feedback and ensure that our Board and management have insight into the issues that are most important to our stockholders so that we can better understand our stockholders’ perspectives. While not all stockholders have accepted our invitation to engage as of October 7, 2021, we have held these calls with over half of these stockholders. Our calls were led by our Chief Administrative Officer & General Counsel and our Vice President of Investors Relations, and included the Chairpersons of our Compensation Committee and Nominating and Corporate Governance Committee.
During these discussions and among many viewpoints shared, our stockholders acknowledged that while the total compensation package made to our CEO, Mr. Rosenbaum, in connection with his hiring in fiscal year 2020 was significant, they generally recognized the necessity of such package to attract an executive of Mr. Rosenbaum’s caliber and talent. In addition, feedback from our stockholders included that the Company and the Compensation Committee had already taken meaningful steps in fiscal year 2021 to address their concerns regarding CEO compensation levels by lowering our CEO’s total compensation so that going forward, it is in line with that of an existing CEO in a comparable peer company. In general, the stockholders that we spoke with expressed support for our compensation programs in light of our cloud transition and our ESG initiatives.
Some stockholders also expressed a desire for more transparent disclosure around the compensation for our Named Executive Officers, as well as continued focus on the alignment of pay for performance for our compensation arrangements. While some stockholders expressed a preference for a reduction in stock compensation expense, others noted that they would prefer Named Executive Officers, in particular, to have and hold more equity in the Company.
As a result of these stockholder discussions and the Compensation Committee’s regular annual review process, the Compensation Committee determined to take certain actions to address the stockholder concerns above. Specifically, the actions taken by the Compensation Committee included:
a. Aligning our CEO’s compensation with Company performance in fiscal year 2021. As a newly hired CEO in fiscal year 2020, Mr. Rosenbaum’s total compensation package was structured to be in line with that of a new CEO, taking in account his extensive experience in various senior leadership positions in the technology industry, the competitive market for similar positions at other comparable companies based on a review of compensation peer group and related survey data, and his compensation arrangements at his prior position, including compensation that he would have forfeited at his prior employer when he joined us. However, for fiscal year 2021, Mr. Rosenbaum’s total compensation package was structured to be in line with that of an existing CEO, taking into account a review of our compensation peer group, the advice of Radford, as well as Mr. Rosenbaum’s performance during fiscal year 2020. As a result, Mr. Rosenbaum’s base salary and bonus target opportunity were not changed for fiscal year 2021 and the size of his equity grants decreased by 64%.
b. Providing more transparent disclosure regarding the compensation of our Named Executive Officers, especially that of our CEO.
c. Re-structuring our performance-based RSU program to more heavily weight long-term performance, with 50% based on company performance in fiscal year 2023, and 50% based on company performance in fiscal year 2021. Previously, the three-year performance targets constituted less than half of the long-term performance-based equity award.
d. Modifying our equity mix to eliminate TSR RSUs and replace them with performance-based RSUs based on ARR metrics, which we determined was a more appropriate metric to focus and drive our cloud transition.
e. Strengthening our corporate governance and alignment of pay with performance by increasing our stock ownership requirement for non-employee directors and executive officers;
f. Enhancing corporate governance by adopting an equity award grant policy;
g. Adding an ESG component to our bonus program for implementation in fiscal year 2022; and
h. Continuing leadership development for succession planning purposes.
We are committed to continuing our ongoing engagement with our stockholders on matters of executive compensation and corporate governance. As our stockholders’ views and market practices on executive compensation evolve, the Compensation Committee will continue to evaluate and, when needed, make changes to our executive compensation program, ensuring that the program continues to reflect our pay-for-performance compensation philosophy and objectives.
As we value the opinions of our stockholders, our Board of Directors and the Compensation Committee will continue to consider the feedback received throughout the year, including when making compensation decisions for our executive officers in the future. In addition, consistent with the recommendation of our Board of Directors and the preference of our stockholders as reflected in the non-binding, advisory vote on the frequency of future Say-on-Pay votes held at our December 15, 2020 annual meeting, we intend to continue holding an annual Say-on-Pay vote.
To me, this disclosure touches all of the right points, from describing the details of the outreach campaign (including the participants on the company’s side – which included directors) to providing a concise summary of the positive feedback received by, as well as the concerns shared with, the company. Of the eight actions listed by the company, I note that one item involved adding an ESG component to the annual bonus plan (which is something that many companies are considering). Although it’s not completely clear, it looks as if that is being included in its fiscal 2022 annual bonus plan. It’s also difficult to tell whether this decision was at the recommendation of stockholders or upon the initiative of management. But it’s clearly one more instance where ESG is working its way into incentive compensation plans.
-Mark Borges, CompensationStandards.com November 18, 2021
