February 1, 2016
Since Dodd-Frank and Say-on-Pay were implemented more than five years ago, companies, proxy advisors and shareholders have focused on pay for performance as a measure of effective executive compensation programs. The logic suggests that if executives deliver superior and measurable performance, they also deserve a premium on take-home pay. The converse also applies, and executives driving strategy at an underperforming company bear the brunt of negative performance in their pay packages. Ultimately, strong incentives should push executives to meet company goals and bolster shareholder value.
Companies not only consider pay for performance in the context of proxy advisor guidelines but also in shareholder outreach efforts. Nearly one-third of S&P 500 companies use their annual proxy statement to increase the transparency of shareholder engagement initiatives, which frequently include discussions of executive compensation. Moreover, the most common reason for a poor Say-on-Pay result is a perceived pay for performance disconnect.
According to a recent Equilar study, 17% of the S&P 100 included a pay-for-performance graph in their latest proxy—typically comparing the target company’s performance and executive compensation levels relative to its peer group. However, since pay-for-performance graphs display high-level outcomes, they can leave unaddressed challenges in designing pay programs that meticulously align executive pay and company performance.
By aligning payouts with predefined performance goals, well-designed incentive plans serve to both motivate executive behavior and align their pay with performance output. Some companies choose to not only outline the structure of incentive pay in text, but in visually detailed charts as well. In its 2015 proxy, HCP ( filed 3/17/15, p. 34) highlighted the payout curve for its long-term incentive plan. Utilizing total shareholder return relative (rTSR) to a defined healthcare index, the company must achieve the 25th percentile rank for executives to realize the minimum payout, or 50% of their target award. As HCP’s rTSR rises, executives receive higher and higher payouts until they max out at twice the target award around the 80th rTSR percentile. By displaying the long-term incentive payout curve in graphical form, HCP enables its shareholders to quickly understand the expectations for rTSR communicated to executives and how a performance outcome results in payout.
Though an overall focus on pay for performance is paramount to achieving sound pay practices and strong Say-on-Pay support, clarifying the means to achieve that end allows a depth of understanding beyond typical pay-for-performance analysis. As companies continue to balance the transparency required by government regulation with discretionary disclosures, clarity surrounding incentive award design will continue to merit attention.
The Shareholder Engagement portal within Equilar Insight provides a suite of resources for companies to benchmark pay for performance and prepare for what’s to come.
For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at firstname.lastname@example.org. Matthew Goforth, research and content specialist, was the author of this article.