At the Compensation Committee Forum in New York City, co-hosted by Equilar and Nasdaq, investors dug deep into the issues facing companies when it comes to executive compensation—both in terms of goal setting, pay for performance strategies and how those decisions are communicated to shareholders.
Companies are moving away from total shareholder return (TSR) as a central measure, so they are reconsidering how much weighting it should have. The question is centered on whether it should be 100%, 50% or as some sort of modifier. According to some analysts, the “holy trinity” of performance metrics would be return on invested capital (ROIC), earnings per share (EPS) and TSR.
Shareholders are requesting that companies must make disclosure simpler with energy focused on the summary overview that many companies now provide, specifically looking at how it integrates with the business model. If the company is successful, pay and performance alignment will be pretty straightforward to communicate (or shareholders won’t be all that concerned). However, in downturns there may be a problem. If the industry went down, and TSR went down, but your people performed better than the industry, what do you do? Even if a pay increase is justified by outperforming competitors, you have to take what happened to the shareholders into account.
High shareholder approval votes can lead to complacency, and when something unexpected does happen, investor relations can go south quickly. Some companies actually don’t want to be above 95% on Say on Pay approval, because that could lead to their boards and management getting lazy when it comes to engagement.
Clearly shareholder outreach and communication is considered necessary. But pay plans are not one-size-fits-all. As one panelist put it: “If you have a program you change every time the proxy advisors ask a question, not only do investors not understand it, the executives don’t understand it either. If you say ‘I don’t want to deal with this, I’ll add TSR. I don’t want to deal with this, I’ll add performance shares.’ Then no one knows how you got there and how it works.”
To that point, another attendee spoke from experience as a plan designer. “We rarely change the plan,” he said. “When you do it often, it confuses people on the inside, and often confuses investors. Having an enduring plan should be good in the long run. At the same time, there tends to be a more homogeneous approach to comp these days, and I’m not saying that’s a good thing.”
What’s next, then? Companies should feel empowered to stray from the straight and narrow, with the caveat that they must clearly communicate how and why they’re doing it, if they want their shareholders to support them.
“After Say on Pay was passed, all of corporate America has been on this steep learning curve, and it’s been reactive,” said one board member. “Hopefully it will shift to something more sustainable.”
John Borneman
Managing Director, Semler Brossy
Aubrey Bout
Managing Partner, Pay Governance
David Chun
Chief Executive Officer, Equilar, Inc.
TK Kerstetter
Host, Inside America’s Boardrooms
Doreen Lilienfeld
Partner, Shearman & Sterling
Kelly Malafis
Partner, Compensation Advisory Partners
Gregg Passin
Senior Partner & North America Executive Rewards Practice Leader, Mercer
Anne Ruddy
Former President & CEO, WorldatWork
Ron Schneider
Director, Governance Services, Donnelley Financial Solutions
Darla Stuckey
President & CEO, Society for Corporate Governance
Stacie Swanstrom
EVP of Corporate Solutions, Nasdaq
David Swinford
President & CEO, Pearl Meyer
Louis Taormina
Principal, FW Cook
Marc Ullman
Partner, Meridian Compensation Partners