As we begin to prepare for the upcoming proxy season, I find myself reflecting the evolution of the Executive Summary to the Compensation Discussion and Analysis and how, although not required, it’s become a standard feature of almost every CD&A. While the content of the Executive Summary can (and does) vary among companies, most of them include a section summarizing the key compensation actions and decisions for the last completed fiscal year, often including detailed information on cash compensation paid and equity awards granted to the company’s named executive officers.
For some companies, such as newly-public companies, the design features of the current executive compensation program can be just as important to disclose as the amounts received by the NEOs. I was reminded of this while taking a look at the recently-filed definitive proxy statement of Sonos, Inc. The company completed its initial public offering in the fall of 2018 and, like most newly-public companies, has been transitioning its executive compensation arrangements from those of a privately-held to a public reporting company over the past year. Accordingly, in the Executive Summary to its Compensation Discussion and Analysis, it focuses largely on the design of, rather than the actions taken under, its executive compensation program:
Fiscal 2019 was our first full year as a publicly-traded company, and many of our compensation decisions for the last year reflect our transition from private to public ownership. Prior to going public, Sonos’ historical compensation philosophy was to provide relatively low cash compensation (both base salaries and bonuses) and use equity incentives, primarily in the form of stock options, as the primary form of compensation. However, in order to continue to attract high quality executives and employees, we recognized that we needed to be more competitive on cash compensation going forward, and we also shifted to granting RSUs rather than options as our primary form of annual equity incentive to better align with market practices.
Highlights of key changes made as part of our transition include:
Salary increases – in early Fiscal 2019, we made changes for many of our executives and other employees to bring salaries more in line with competitive pay levels and to more accurately reflect their respective duties and responsibilities.
Increased annual incentive target opportunities – similarly, we increased the target annual incentives for each of our executive officers to 25% from 15%. While still lower than market, this was seen as a first step toward better alignment with peers and with the respective duties and responsibilities of executive officers of a public company.
A more formalized approach to funding annual incentives – the bonus funding in Fiscal 2019 was formulaically determined based on a matrix of revenue growth and GAAP operating income margin. Although we made substantial progress on our operating model in Fiscal 2019, both revenue growth and operating profits were below target for Fiscal 2019, resulting in annual incentive funding at 75.4% of target.
Shifted to restricted stock units with time-based vesting – given our historical reliance on stock options, our executives had relatively little in-the-money unvested equity as of our IPO. As a result, the compensation committee (the “Committee”) determined that it was appropriate to use RSUs as the primary vehicle for equity awards for Fiscal 2019 (except for new hire awards and the CEO’s grant, which included a mix of RSUs and options) in order to provide greater retention incentives, create more direct alignment with stockholders, and be more consistent with peers.
Special CEO equity award – we also determined to make a special “staking” award for our CEO following the IPO in order to create significant incentives to align the CEO’s interests directly with the interests of our stockholders. Given historical grant practices and timing, Mr. Spence effectively had very little in-the-money equity that had not already fully vested as of our IPO. The Committee decided to double his target equity award for Fiscal 2019 (from $5M to $10M) in order to ensure that Mr. Spence would continue to have strong incentives to drive stockholder value. All of the additional grant (half of his total award for Fiscal 2019) was made in the form of stock options, vesting 50% in November 2021 and 50% in November 2022, to create a stronger alignment between pay and performance.
This can be a useful lead-in to the discussion and analysis of individual compensation elements elsewhere in the CD&A, especially if the design changes to the program are taking place over more than one year (which is often the case). I note that here the company has also incorporated selected details about its fiscal 2019 compensation decisions and outcomes into the discussion, which makes it easier for a reader to get a high-level overview of the compensation actions taken without having to look elsewhere in the CD&A for that information.
-Mark Borges, CompensationStandards.com January 20, 2020
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