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Executive Compensation Summit: A Look into the Crystal Ball
June 22, 2016
At the Equilar
Executive Compensation Summit in Boston this week, panelists and attendees discussed key topics
surrounding executive pay at length—recurring themes such as pay for performance, CEO pay ratio,
increased length and depth of proxy disclosures were often on the agenda. Many of these issues coming
to the forefront now will continue to have an effect on corporate governance in the coming years,
especially as institutional shareholders focus on how pay and performance impacts the long-term value
of their investments.
Looking ahead into the 2017 proxy season and beyond, executive compensation professionals all agree
on one thing: Nothing is black and white in what they do. While news headlines about outstanding CEO
pay grab attention and seem relatively straightforward, there are solid arguments on both sides of the
issue of what comprises an appropriate amount of pay.
Executive Pay Enters New Era
On the one hand, companies are doing a lot right, dealing with a challenging economic environment in
some industries and adjusting their pay and performance alignment accordingly. In particular, companies
have taken huge strides to improve communications through their proxy statements. One compensation
consultant noted that companies are starting to understand that the proxy statement needs to talk to
investors, not only other lawyers.
For example, 2015 was not a strong performance year for companies in various industries, and they were
tasked with the challenge of talking about performance goals declining, rates of growth declining and
making sure they’re making forward-looking changes. As pay continues being tied more and more into
performance, explaining how pay structure is responding to external forces outside executives’ control
will be a continuing trend, as opposed to keeping the status quo.
In other words, we’re seeing a lot fewer disclosures that are just the raw numbers. In the past, one
panelist joked, we didn’t know how the figures got there—the white smoke would emerge from the chimney,
the Pope would emerge and say there’s $5 million in CEO pay plus bonus. Voila.
Showing Pay for Performance Doesn’t Mean Play It Safe
On the other hand, while companies are getting it right in terms of doing away with problematic pay
practices, the future is a little uncertain. What shareholders are asking for, they’re receiving, and
there is a good understanding back and forth. For instance, things like change-in-control packages that
trigger just because of sale or acquisition, or perks viewed as gratuitous like tax reimbursements, have
been pretty much eliminated. There have been fewer than 25 companies to fail Say on Pay so far this year,
and there is high shareholder support for a vast majority of compensation programs. However, because
issuers have become so attuned to what they perceive to be the demands of shareholders and proxy advisors,
the risk is becoming uniform and homogenized across the board.
One panelist said that the most notable and even concerning trend is the general move toward conformity
in pay design and delivery. There is an increasingly narrow distribution in pay levels reflecting
individual, company, team performance, etc. A lot of time there’s a close range between the 25th
and 75th percentile. Furthermore, a sort of “me too” pay design focused exclusively on metrics
like relative total shareholder return (rTSR) and earnings per share (EPS) has emerged. There’s nothing
wrong with those metrics inherently, but they reflect the institutional shareholders, proxy advisors, media
et. al. providing input, and they can be a missed opportunity to create packages that reflect a company’s
unique qualities.
This topic, particularly around TSR, was one of the recurring themes throughout the Summit, especially as
the SEC may or may not get closer to
finalizing a rule on pay versus
performance using TSR as the uniform performance metric. A well-designed incentive program includes both
lead and lag metrics. Indeed, things like TSR and revenue work well because they represent the ability
to execute on existing products. But for example, in the biotech and pharmaceutical industries, performance
has a lot to do with pipeline and how that serves company strategies. As a result, companies need to show
they are motivating and rewarding that pipeline performance.
The key message is not to put pay designs on autopilot. You don’t want to change executive pay packages
as the wind blows every year, but they should be reviewed regularly. It’s difficult to rally an executive
around the program if it’s changing all the time, but you also run the risk of losing motivational value
if pay isn’t designed to meet the needs and strategic goals of management.
Three Things to Keep in Mind in 2017 And Beyond
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Compensation Communication. Whether it’s between management and the board, or HR and
consultants, creating compensation plans has become more complex and detailed, and to ensure
issuing companies have input on their own pay story is as important as ever.
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Peer Group Construction. The concept of creating an “aspirational” peer group to set
pay goals—not pay levels—is emerging. Though companies are going to benchmark pay awards based
on their peer groups, looking for opportunities to deviate and think outside the box with a
view on long-term value creation can be an incredibly beneficial exercise.
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Shareholder Engagement. This may seem like a no-brainer given all the focus on this
concept, but it’s absolutely crucial. A panelist invoked the shareholder proposal at eBay on
gender pay equality, which
received 8% support one year. The exact same proposal came back the next year, and received
51% support. In other words, the tenor of shareholder opinion can change frequently, and thus
companies need to stay engaged on a regular basis.
Stay tuned to the Equilar blog for more dispatches from the annual Executive Compensation Summit.
For more information about Equilar’s events and educational forums, please visit
www.equilar.com/equilar-events.
For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content &
Marketing Communications at dmarcec@equilar.com.