In a 2013 survey of compensation committee members co-sponsored by the NYSE, Conference Board and Pay Governance, the top 3 “challenges” that committees stated they were facing involved incentive pay & performance goal setting. Specific challenges noted in the survey included:
1. Determining appropriate incentive pay levels – 62%
2. Balancing P4P with retention – 57%
3. Ensuring the rigorous nature of incentive plans – 57%
See this memo by Pay Governance about possible ways to tackle these challenges…
Mark Van Clieaf & Stephen O’Byrne have done an analysis of say-on-pay voting at 213 funds that shows startling differences in “voting quality.” The top quartile is 4x better than the bottom quartile – and the top decile is 16x better than the bottom decile.
This is a little technical. Their measure of voting quality is the sum of (1) alignment (r-sq) of SOP vote support with pay equity and (2) percent “no” for companies with 100%+ pay premiums. We calculate a custom measure of pay equity for each fund using 300+ votes to capture the fund’s weighting of external pay equity based on relative TSR, external pay equity based on relative ROIC and internal pay equity.
Their analysis shows that big funds don’t have higher voting quality – and asset owners, on average, are no better than asset managers…
“Funds” includes mutual funds, state pension funds and entities like Canada Pension Plan Investment Board. The voting data is from Proxy Insight – I’m not sure how they get all the data…
Here’s the teaser for this Pay Governance memo by Ira Kay, Blaine Martin & Clement Ma:
After 5 years of SOP votes, it is now possible to review the pre- and post-SOP statistical impact on CEO compensation. With sufficient historical data post-SOP, we answer 2 fundamental questions regarding this legislation’s consequences:
1. Did the amount of S&P 500 CEO pay decline since SOP (2011)?
2. Does the CEO labor market structure have a more compressed compensation range post-SOP?
Back in early February, the SEC’s Acting Chair – Mike Piwowar issued a statement directing the Corp Fin Staff to revisit the pay ratio rule & requested public comment about any challenges in complying with the rule. Comments were due within 45 days – so the deadline has now passed.
Here’s the list of comments received so far. Beyond a short form letter in favor of the rule (that was received over 3k times), there are several hundred comment letters. Most of these are short letters from individuals, also expressing an interest in keeping the rule. Overall, this new request for comment has resulted in a response that is a mere fraction of the 287k comment letters that the SEC received on it’s rule proposal.
Let’s dig down into these new comment letters. Only a handful of these letters are from companies explaining the challenges. But there are a few, like these:
A group of senators have written this letter to SEC Acting Chair Piwowar opposing any delay in the implementation of the pay ratio rules. The senators are “extremely troubled” by Commissioner Piwowar’s decision to seek additional comments on the rule, and his directive to the staff to reconsider the rule’s implementation, which we previously discussed.
The senators note that the statute requiring the rule was passed nearly seven years ago, and during the proposal stage the SEC received more than 270,000 letters, including many from investors in support of having the information as a way to assess companies’ approaches to executive compensation and human capital. The senators argue that the disclosure helps investors evaluate a CEO’s value creation, and facilitates “better checks and balances” against insiders “paying themselves runaway compensation.” The letter goes on to cite the oft-quoted statistic that CEO pay at large companies has risen 997% from 1978 to 2014 while the compensation of non-supervisory employees rose about 11%.
Twenty years ago, the Director pay model at a large corporation often had the following features:
– Directors were commonly eligible for certain benefits programs and pensions;
– Vesting schedules for equity awards were 3 or 4 years long, similar to those for executives;
– Equity awards were in the form of stock option grants (also used for executives), and Director awards were expressed as a number of shares rather than a grant value;
– Many companies did not differentiate pay for Committee service; and
– Lead Director roles and Director stock ownership guidelines were absent.
Early Bird Rates – Act by March 31st: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by March 31st to take advantage of the 30% discount.
I strongly believe that executive pay should be reformed. My own research demonstrates the substantial benefits to firms of treating their workers fairly. However, disclosure of pay ratios may have unintended consequences that actually end up hurting workers. A CEO wishing to improve the ratio may outsource low-paid jobs, hire more part-time than full-time workers, or invest in automation rather than labor. She may also raise workers’ salaries but slash other benefits; importantly, pay is only one dimension of what a firm provides. Research shows that, after salary reaches a (relatively low) level, workers value nonpecuniary factors more highly, such as on-the-job training, flexible working conditions, and opportunities for advancement. Indeed, a high pay ratio can indicate promotion opportunities, which motivates rather than demotivates workers. A snapshot measure of a worker’s current pay is a poor substitute for their career pay within the firm.
The pay ratio is also a misleading statistic because CEOs and workers operate in very different markets, so there is no reason for their pay to be linked — just as a solo singer’s pay bears no relation to a bassist’s pay. This consideration explains why CEO pay has risen much more than worker pay. As an analogy, baseball player Alex Rodriguez was not clearly more talented than Babe Ruth, but he was paid far more because baseball had become a much bigger, more global industry by the time he was playing. Even if the best player is only slightly better than the next-best player at that position, the slight difference can have a huge effect on the team’s fortunes and revenues.
I agree with some of what Alex says – but he also doesn’t understand that boards can take internal pay into consideration as just one factor in their decisionmaking. And instead of comparing pay ratios of different companies – a company should just be looking at its own pay ratio over an extended period (ie. decades).
In fact, one of the main reasons why a company should be doing this internal look is that comparing a CEO’s pay package to peers is one of the primary reasons how we got into this mess – peer group benchmarking where everyone got paid in the top quartile for years & years…