in the regular course of business or as a response to specific business conditions and with a predetermined
objective. The so-called “mega-grant”, an outsized award to one individual sometimes valued at over $100
million is sometimes but not always provided as a front-loaded award. We believe shareholders should generally
be wary of this approach, and we accordingly weigh these grants with particular scrutiny.
While the use of front-loaded awards is intended to lock-in executive service and incentives, the same rigidity
also raises the risk of effectively tying the hands of the compensation committee. As compared with a more
responsive annual granting schedule program, front-loaded awards may preclude improvements or changes to
reflect evolving business strategies or to respond to other unforeseen factors. Additionally, if structured poorly,
early vesting of such awards may reduce or eliminate the retentive power at great cost to shareholders. The
considerable emphasis on a single grant can place intense pressures on every facet of its design, amplifying any
potential perverse incentives and creating greater room for unintended consequences. In particular, provisions
around changes of control or separations of service must ensure that executives do not receive excessive
payouts that do not reflect shareholder experience or company performance.
We consider a company’s rationale for granting awards under this structure and also expect any front-loaded
awards to include a firm commitment not to grant additional awards for a defined period, as is commonly
associated with this practice. Even when such a commitment is provided, unexpected circumstances may lead
the board to make additional payments or awards for retention purposes, or to incentivize management
towards more realistic goals or a revised strategy. If a company breaks its commitment not to grant further
awards, we may recommend against the pay program unless a convincing rationale is provided. In situations
where the front-loaded award was meant to cover a certain portion of the regular long-term incentive grant for
each year during the covered period, our analysis of the value of the remaining portion of the regular long-term
incentives granted during the period covered by the award will account for the annualized value of the front-
loaded portion, and we expect no supplemental grant be awarded during the vesting period of the front-loaded
portion.
The multiyear nature of these awards generally lends itself to significantly higher compensation figures in the
year of grant than might otherwise be expected. In our qualitative analysis of the grants of front-loaded awards
to executives, Glass Lewis considers the quantum of the award on an annualized basis and may compare this
result to the prior practice and peer data, among other benchmarks. Additionally, for awards that are granted in
the form of equity, Glass Lewis may consider the total potential dilutive effect of such award on shareholders.
Linking Executive Pay to Environmental and Social Criteria
Glass Lewis believes that explicit environmental and/or social (E&S) criteria in executive incentive plans, when
used appropriately, can serve to provide both executives and shareholders a clear line of sight into a company’s
ESG strategy, ambitions, and targets. Although we are strongly supportive of companies’ incorporation of
material E&S risks and opportunities in their long-term strategic planning, we believe that the inclusion of E&S
metrics in compensation programs should be predicated on each company’s unique circumstances. In order to
establish a meaningful link between pay and performance, companies must consider factors including their
industry, size, risk profile, maturity, performance, financial condition, and any other relevant internal or external
factors.