The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Recently, a member asked “Have you had any experience or seen anything about Glass Lewis’s new pay for performance proprietary model? There doesn’t seem to be much in the way of transparency as to how it works so far?” I didn’t know the answer so I asked some of our Task Force members and this is essentially what I learned:

Glass-Lewis’s pay-for-performance model is their grading system (each company is assigned an A – F). It’s not new. They have been doing for this a while. As noted, there is little transparency on how the model works and Glass Lewis does that on purpose. We have to cross our fingers and hope for the best once the report is released. Typically, an expert (eg. proxy solicitor or compensation consultant versed in this area) can often sort of tell if a company might be in trouble, but it’s impossible to know the exact grade.

The way it works is if a company gets an “F,” the compensation committee will get a withhold/against recommendation. If a company gets a “D” for two years in a row, the compensation committee chair will get a withhold/against recommendation. However, with say-on-pay on ballot, they will take it out on SOP first and I have seen that in practice with a few late January 2011 meetings already.

The little we know about their model is that they break the grades down by %s. So over the course of the year, they will assign 10% As, 20% Bs, 40% Cs, 20% Ds, and 10% Fs. The peer companies are determined using some weighted formula:

1. Sector -based on 2 digit GICS
2. Sub-Industry -based on 8 digit GICS
3. Geographic location – based on zip code
4. Size of company – based on enterprise value

Total Compensation for them is:

1. Cash portion (salary, bonus, non-equity comp, other comp)
2. Equity portion of grants made during FY. Value options using a Black-Scholes with their own assumptions, value stock awards on face value on date of grant.

Another issue that is frustrating with the Glass Lewis model is how they calculate performance-based awards. So if you make a performance-based grant for a three year cycle and in year one you have to include the full amount in the Comp Table – that is what they will take despite the fact that those awards may not be earned out. So it’s completely distorted.

Tune in on Tuesday for the webcast – “The Proxy Solicitors Speak on Say-on-Pay” – to hear Art Crozier of Innisfree M&A, David Drake of Georgeson, Ed Hauder of ExeQuity and Reid Pearson of Alliance Advisors discuss solicitation and engagement strategies to help educate shareholders about a company’s compensation programs in light of mandatory say-on-pay.