As companies expand their geographic footprints and as the world becomes smaller through new technologies and global mobility, there are similarities and trends in many of the issues facing employers with respect to executive compensation matters. It is not an uncommon phenomenon that the United States will follow the approaches adopted by other countries and that other countries will adopt some US approaches in dealing with issues that are common in each jurisdiction, subject, of course, to the constraints of applicable local law and cultural differences. The following overview discusses some global issues facing employers and the manner in which the issues are being addressed – demonstrating that global employers learn from each other and adapt that learning to their own jurisdictions and way of doing business.
Focus on compensation disclosures and shareholder return
Each year, there is always a focus on what changes will be required with respect to public disclosures of executive and director compensation. This process is typically driven by institutional shareholders (and applicable regulators) in the main, and holds true across the globe. For 2019, the focus on corporate governance and driving shareholder returns continues to be paramount. This is also true outside the United States where non-US regulators and shareholders are focusing on increased disclosure of executive compensation matters and long-term value creation. For example, a UK corporate governance code will apply to reporting periods starting from 1 January 2019 and focuses on board-of-director effectiveness (results driven), not just strict compliance.
Some US activists are also focusing their endeavours outside the United States in an effort to influence corporate governance issues in other jurisdictions. Accordingly, we expect that many of the US issues relating to corporate governance, both as to executive compensation and to other matters that affect shareholder value (such as environmental issues, gender diversity and corporate culture), to start receiving significantly more attention in jurisdictions outside the United States. As in the United States, shareholders are more likely to support an activist’s position if corporate governance has historically been poor or if there has been poor oversight of executive compensation matters, in all cases resulting in perceived underperformance of shareholder returns.
Enforceability of restrictive covenants in executive plans and agreements has been a topic of discussion for years in the United States and across the globe. The most problematic restrictive covenants, of course, are non-compete covenants because such covenants are seen in almost every jurisdiction as a restraint on trade. Traditionally, non-competes were more difficult to enforce outside the United States than in situations, in particular, where no consideration was being given for the period of the non-compete. In the United States, with the exception of certain states (most notably, California), there was previously a willingness to enforce such covenants if they were reasonable in length of time, scope (ie, the interest of the employer that is to be protected) and geographic coverage. Some states had statutes relating to the covenants but, in most cases, the statutes codified the preceding requirements. On the margins, there were always issues about whether certain groups could be covered (eg, attorneys and physicians) and whether a specific state had any unique requirements that had to be included in order to enhance enforceability.
Recently in the United States there has been a deviation from the old ‘norm’. with many states enacting laws relating to restrictive covenants, that reflects a movement towards many more restrictions on such covenants than was previously the case. In this regard, the United States is moving, albeit slowly, to a view that is more consistent with the general non-US view. Even in states where legislation has not been enacted, legislation is under consideration. Companies need to be aware of the changing landscape since, in some cases, failure to comply with the new laws can result in penalties being imposed on the employer.
Caution also applies with respect to non-solicitation (or ‘no poaching’) provisions relating to employees or customers. The US Department of Justice has for some time taken the position that no poaching agreements between employers will be challenged as a violation of the antitrust laws unless there is separate legitimate business reason for them. Many states have followed this lead and are considering restrictions on those types of provisions in agreements between an employer and its employees.
The conclusion that can be drawn from the recent activity in this area is that employers will need to pay very close attention to the changing laws. It is no longer business as usual.
In the past two years, the #MeToo movement has gone global; millions of women in the United States and numerous other countries have volubly registered their protest at behaviour too long ignored (and in some cases tacitly condoned) in industry and government. Politicians and celebrities in many countries have toppled, senior executives have lost their jobs, and a few of the foregoing have gone to prison. The movement is referred to as #YoTambién in Spain and Latin America, #BalanceTonPorc in France, #QuellaVoltaChe in Italy, #AnaKaman in the Arabic world, #WithYou in Japan, and #DontTellMeHowtoDress in Thailand. The movement has not been uniform; in some parts of the globe, ingrained cultural norms have stalled its progress. Even in those countries in which it has taken hold, success has to some extent been uneven in holding harassers accountable, with backlash in some quarters. Nevertheless, the movement has unquestionably changed social perception of sexual harassment in many countries, and the ramifications for corporate culture and governance and for executive hiring and compensation have been manifold. Class actions and derivative suits have been filed against companies such as Alphabet, Inc (Google’s parent), 21st Century Fox, Signet Jewelers, Wynn Resorts and Nike, involving allegations of sexual harassment by executives. The exposure these lawsuits pose goes beyond damages in litigation; the perception that a company tolerates sexual harassment may significantly damage its reputation, angering shareholders, affecting its success with consumers in the marketplace and impairing its ability to recruit talented employees, particularly in the millennial generation. Consequently, corporations and their advisers are pursuing steps in a number of areas to reduce the risk posed by rogue executives. Boards are being advised to take a more active role in the review and implementation of company policies regarding harassment; most corporations have implemented training on respect-in-the-workplace for employees at all levels, including C-Suite executives, with an emphasis on identifying and ending sexual harassment; newly hired executives are sometimes asked for representations in writing that they have not engaged in prior acts of sexual harassment, or been sued for alleged sexual harassment; compensation for executives is increasingly subject to clawback for violation of company policy on sexual harassment; and ‘cause’ definitions in employment contracts are now often broadened to include sexual harassment, providing a specific basis for termination (and forfeiture of incentive compensation) in the event of such behaviour.
The global gender pay gap
It seems so simple: equal pay for equal work. Yet sadly the gender pay gap is a global reality that the World Economic Forum predicts will take 202 years to close. According to Glassdoor’s report ‘Progress on the Gender Pay Gap: 2019’ (Chamberlain, Zhao and Stansell at www.glassdoor.com/employers/blog/employers-gender-pay-gap-2019), ‘[t]he gender pay gap persists in the United States and around the world. Men earn more than women on average in all eight countries we studied, even after applying statistical controls for worker and job characteristics to ensure an apples-to-apples comparison.’ The report also confirmed that the pay gap widens as workers age. Studies by executive networking firm ExecThread indicate that the pay disparity extends to the highest levels in the C-Suite.
Nevertheless, Glassdoor reports that in the eight countries that were the subject of its report progress is slowly being made, possibly on account of the strong economy (in the United States) and the increased number of women entering male-dominated fields. In our view, other contributing factors may be a variety of lawsuits, legislative initiatives and shareholder activism.
There have been a legion of lawsuits alleging gender discrimination against corporations and law firms, such as Google, Nike, Uber and Jones Day, as well as against government entities. In the United States, the Equal Pay Act has prohibited sex-based wage discrimination since its enactment in 1963, but the case law is inconsistent on whether the Act permits an employer to take into account a new employee’s prior salary history in setting compensation. In Aileen Rizo v Jim Yovino, Fresno County Superintendent of Schools, No. 16-15372 (9th Cir 9 April 2018) the Ninth Circuit Court of Appeals ruled en banc that permitting employers to justify pay disparities between men and women based on their prior salary histories ‘is wholly inconsistent with the Act’ and ‘would perpetuate rather than eliminate the pervasive discrimination at which the Act was aimed.’ Id at page 13. The decision was vacated and remanded to the Ninth Circuit by the Supreme Court in 2019 on account of the fact that one of the judges who voted on the decision died prior to the issuance of the opinion. We can expect that plaintiffs will continue to pursue this case.
In the meantime, in the United States, many states have enacted legislation that includes various forms of pay protections (eg, prohibiting salary history questions on applications and in interviews, prohibitions on refusals to interview or hire an individual who does not share salary history, penalties for violation of the foregoing, and protection of co-workers who share salary information). At the US federal level, the Paycheck Fairness Act was introduced in the House of Representatives in January 2019. It would require equal pay for individuals in similarly situated jobs (except for bona fide job-related differentials), limit the use of salary histories, and protect co-workers who share compensation information.
Outside the United States, legislation and regulations requiring disclosure of salary information are other tools used to address the gender pay gap. The United Kingdom was an early adopter of regulations that require employers with more than 250 employees to disclose differences in salaries and bonuses paid to their male and female employees. Other countries that have followed suit with various pay-disclosure or pay-protection requirements include Germany, Iceland and France.
Finally, in recent years, activist shareholders have focused heavily on diversity and inclusion issues, including gender pay equity. Shareholder proposals have sought the release of wage gap information (perhaps on the theory that transparency will foster change), and in the past year have tended to seek median pay gap information. In the United States, the Securities and Exchange Commission has refused to issue ‘no action’ letters to companies who wished to exclude wage gap proposals from their annual shareholder proxy statements. These proposals have generally been voted down by shareholders, although some companies in the past (and Citigroup in 2019) have voluntarily disclosed pay gap information. Assuming that proposals of these types continue, and that societal pressure for gender equity (along with a host of other diversity and inclusion goals) grows, management of companies concerned with reputation in the market (with shareholders, consumers and employees) will perhaps exert greater effort with respect to the promotion and pay of women employees so that release of compensation information will be a benign event.