The Advisors' Blog

– Liz Dunshee

This Pay Governance memo examines the relationship between “problematic” pay practices – as identified by ISS (pg. 22) and Glass Lewis (pg. 26) – and three-year performance. Key takeaways include:

– Companies that maintain pay practices viewed as “problematic” by proxy advisory firms (e.g. excise tax gross-­ups, lower target annual incentive goals without a corresponding reduction in target pay, and target payout for median TSR performance) tend to underperform companies that do not maintain these “problematic” pay practices.

– Companies that maintain legacy excise tax gross­‐up protections for NEOs, a common irritant for many investors, do not appear to underperform those companies that have eliminated excise tax gross-­ups.

– Companies that have lowered annual incentive goals year-­over­‐year without a corresponding reduction in target incentive opportunity tend to underperform on three-­year TSR compared to companies with flat or increased incentive goals year-­over-year. Because the lower TSR performance negatively affects pay, we continued to see pay-for-performance alignment in these companies.

– Companies that set rigorous relative TSR goals (i.e., above‐median performance required for target payout) tend to outperform companies that maintain traditional relative TSR performance-payout structures (target payout provided for median performance) based on three­‐year TSR results.