September 23, 2019
Executive Pay: CII Policy Overhaul Says to “Get Back to Basics”
– Liz Dunshee
Here’s something I blogged last week on TheCorporateCounsel.net: I’ve blogged from time to time that people are starting to question whether “pay-for-performance” is all it’s cracked up to be – and now you can add CII to its list of skeptics. The Council of Institutional Investors has announced an overhaul to its “Executive Compensation Policy” to urge companies to dial back the complexity of their plans and use at least a five-year period to measure performance.
While the old policy called for executive pay to be driven predominately by performance and said that salary should be no more than $1 million, the new policy suggests that some companies may be able to do without annual metric-based incentives – and says this about fixed pay:
Fixed pay is a legitimate element of senior executive compensation. Compensation committees should carefully consider and determine the right risk balance for the particular company and executive. It can be appropriate to emphasize fixed pay (which essentially has no risk for the employee) as a significant pay element, particularly where it makes sense to disincentivize “bet the company” risk taking and promote stability. Fixed pay also has the advantage of being easy to understand and value, for the company, the executive and shareholders. That said, compensation committees should set pay considering risk-adjusted value, and so, to the extent that fixed pay is a relatively large element, compensation committees need to moderate pay levels in comparison with what would be awarded with contingent, variable pay.
The new policy also broadens its approach to clawbacks – adding to the list of appropriate recovery events “personal misconduct or ethical issues that cause, or could cause, material reputational harm to the company and its shareholders.”
While some of these changes may be driven by the repeal of 162(m) (there’s no longer a tax advantage to keeping salaries low), CII hasn’t been shy about its concerns about murky pay-for-performance disclosure. And based on its reaction to the BRT’s recent emphasis on “stakeholders,” there may be some heartburn about ESG metrics that are starting to pop up in incentive plans…