The Advisors' Blog

– Stephen O’Byrne, Shareholder Value Advisors

I’ve developed an executive pay model that might be useful to directors and human resource professionals. I’ve used the 18 years of history in the Execucomp database to develop a model of future three year shareholder return as a function of four key pay variables (pay level, pay leverage, pay equity and stock ownership) and a set of company variables. The model can be used to quantify the excess return attributable to the four key pay variables and to make value enhancing trade-offs between the four factors. 55% of the company-years have a positive predicted excess return and 45% of the company-years have a predicted three year excess return of at least 3% (positive or negative). The formula for the predicted excess return is shown on p. 18 of this presentation.

I’ve also proposed to the SEC a “pay-versus-performance” analysis that you might find interesting. The analysis uses data on relative pay and relative performance to calculate three quantitative measures investors can use to assess a company’s pay program: a measure of incentive strength (pay leverage), a measure of incentive efficiency (the correlation of relative pay and relative performance) and a measure of compensation cost (relative pay at industry average performance). My comment letter shows the analysis for Wal-Mart, Pfizer and Bank of America to demonstrate that the analysis can be done with publicly available data.