June 18, 2012
A Simple Pay Plan That Provides Perfect Pay-for-Performance
– Stephen O’Byrne, Shareholder Value Advisors
I’ve done a revision of my paper on the ISS pay for performance model. Here is one aspect of it that you might find very interesting: I argue that ISS should give examples of pay programs that provide perfect pay for performance and then I show that a simple pay program with annual grants of performance stock will provide perfect pay for performance over a multi-year period if it has two critical features: (1) the target opportunity (or grant date stock value) is based on market pay adjusted for relative performance since the start of the multi-year period and (2) the stock vesting multiple is tied inversely to peer group performance since the date of grant. By modifying this perfect pay for performance program, companies can quantify the impact of program features that reduce pay for performance, e.g., paying market without regard to prior performance, having non-performance pay, using other vesting measures, etc.