The Advisors' Blog

Watson Wyatt just completed our second annual proxy survey – here is the related press release – and discovered more U.S. companies have disclosed the specific goals used in their executive compensation plans in their 2008 proxies than in 2007, although roughly one-third still do not provide this information. We found that more than two-thirds (68 percent) of the 75 large, publicly traded companies studied disclosed the actual goals on which they based rewards under their 2007 annual incentive plans, up from 54 percent that disclosed goals last year.

Additionally, 57 percent included the goals for long-term incentive plans, compared with 45 percent one year ago. Of those that did not disclose actual goals, only 19 percent stated affirmatively that disclosing them would result in competitive harm.

We have found this to be a positive step and one that will make it easier for shareholder to determine if pay programs are rewarding executives for maximizing shareholder value. It appears the SEC’s goal is permit shareholders to figure out if goals are too easy or too hard and if executives are focused on the right things. Having the specific financial goals disclosed – for example, earnings per share growth of 10 percent – is one way shareholders can make a reasonable determination if their company follows its pay-for-performance philosophy.”

Despite the progress in goal disclosure, we also found that slightly more than half (56 percent) of CDAs provided a detailed description of how total pay earned during 2007 tied to company performance. Even fewer (36 percent) provided an analysis of how well the company performed versus its industry peers. The SEC had requested companies provide this type of analysis in the proxies for 2008. We recall John White’s statement from last year’s Proxy Disclosure Conference, “Stated simply – Where’s the analysis?”

Our view has been that most companies have a positive pay-for-performance story to share, yet our survey found very few who have taken the opportunity to tell it. We only found 4 percent of proxies included an executive summary that describes how the company did versus peers, how pay was reflective of company performances and how pay compared to that of peers.

We were please to see companies taking steps to reduce some of the less shareholder-friendly or non-core elements of compensation such as executive pensions and severance. Only one of the 11 percent of companies who changed executive pensions increase benefits for the executives, with the others having frozen accruals or reducing benefits for new hires. And all 24 percent of companies that made changes to their severance or change-in-control programs reduced the potential payments to executives.

We think this approach of revisiting the appropriateness of existing severance and change-in-control provisions helps them put more emphasis on maintaining core pay programs that are well aligned with corporate performance.

– Steven Seelig