ISS, an influential shareholder advisory firm, has recommended “withhold” votes for the three Discovery directors up for reelection at the April annual meeting “due to poor stewardship” in compensation.
It cited longstanding concerns over pay at the company that most recently include a “problematic” severance arrangement and a $200 million stock option grant in CEO David Zaslav’s latest employment agreement. “Based on an evaluation of estimated cost, plan features, and grant practices, support for the equity plan proposal is not warranted,” ISS said.
Zaslav’s total pay package came to more than $246 million for 2021, inflated by the option grants in the new contract awarded last year that extends him through 2027. But ISS took issue with most elements of his compensation.
ISS is a proxy advisory firm — proxies being documents companies send shareholders each year laying out executive compensation, board members up for election and other company proposals up for vote at the annual meeting. Discovery’s is set for April 8. (It held a special shareholder meeting earlier this month to vote on its upcoming merger with WarnerMedia.)
ISS analyses public data, scores companies on various metrics and make recommendations. On a scale of one to 10, it rated Discovery’s board structure, compensation, shareholder rights and audit & risk oversight all tens, the highest risk. On compensation, ISS calculated that the three-year average of Zaslav’s total pay was $125.4 million, or 6.7 times the median of his CEO peer group. His cumulative three-year total pay was $376.2 million.
As Discovery’s proxy noted, the grant of stock options isn’t cash in hand. They come in tranches and require the share price to hit certain metrics over seven years before they’re in the money. The first tranche has an exercise price of $35.65. That was the price when Zaslav’s new employment agreement was approved last year. The stock has slumped since and trading lower today at about $26.
Discovery is not holding a so-called “say-on-pay” vote at this meeting so shareholders can’t weigh in directly on executive compensation. That’s why ISS is recommending shareholders dissent by not voting to reelect directors Kenneth Lowe, Daniel Sanchez and Paul Gould. It’s a bit moot since Gould is the only one of the three named to the new board of the new Warner Bros. Discovery once the merger is completed, likely sometime next month. Discovery has six designated board members and AT&T seven.
ISS also took issue with the severance provisions in Zaslav’s new contract that make him eligible for cash severance if he resigns, with or without good reason, within a certain period after a change in control. “Walk-away provisions that give the executive the ability to unilaterally discontinue employment and receive severance put the compensation committee at a disadvantage in subsequent negotiations. Modified single-trigger severance arrangements are not the market norm and are a problematic pay practice,” ISS said.
The contract also calls for automatic accelerated vesting of equity awards upon a change-in-control. “Such single-trigger vesting may result in an economic windfall to the executive without an accompanying termination of employment,” ISS said.
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