The Advisors' Blog

Although early returns from the pay versus performance disclosures show that – at many companies – there is alignment between executive compensation outcomes and shareholder interests, a new Pay Governance study cautions that “compensation actually paid” is not a perfect tool for measuring the correlation between pay & performance. That validates what many folks expected.

Pay Governance looked at how CAP stacked up to “total compensation” from the Summary Compensation Table and the concept of “realizable pay” that is often used internally as a factor in determining compensation amounts, but may not be publicly disclosed. Here are the key takeaways:

– There is no perfect solution for evaluating pay for performance.

– Summary Compensation Table (SCT) compensation values are not useful when measuring pay for performance but serve a valuable corporate governance purpose, primarily by showing Board/Compensation Committee intent when providing various compensation programs.

– The new CAP disclosure provides a better understanding of pay for performance than SCT compensation, but the results can be distorted by the inclusion of certain mandated items such as equity awards granted prior to the performance measurement period.

– Realizable Pay generally provides a more rigorous approach to matching the time period for compensation with the performance underlying such awards.

The Pay Governance team suggests that Realizable Pay can provide Compensation Committees with more robust insights when evaluating pay for performance than tools based on the SCT or PVP methodologies and should be a consideration in addressing this important corporate governance issue. They note:

While only 10% of S&P 500 companies expressly disclosed the use of some type of RP model to evaluate compensation outcomes with company performance, it is likely many more are using RP as part of their annual Compensation Committee process but do not disclose its use in public filings. And still others may decide to explore such RP analyses to eliminate many of the distortions included in the SCT and PVP/CAP disclosures when evaluating the alignment of pay and performance.

My personal hope is that if investors and proxy advisors begin to incorporate pay versus performance data into their models, they will not reduce it to a one-size-fits-all measurement tool. Correlations can vary based on the stage of the company.

Make sure to mark your calendars for our webcast – “Pay Vs. Performance: Lessons From Season 1” – which is coming up on Tuesday, June 13th from 2-3pm Eastern Time. Join Weil’s Howard Dicker, Freshfields’ Nicole Foster, Aon’s Daniel Kapinos, and Mercer’s Carol Silverman for practical insights into Year 1 challenges & trends, and predictions for longer-term impacts of this new disclosure framework.

And, there is still time to catch the early-bird rate for our fall “Proxy Disclosure & 20th Annual Executive Compensation” Conferences – where we will be diving into what to do for Pay vs. Performance as you face Year 2 of the new requirement. Register online or email sales@ccrcorp.com. Here are the agendas for the 3-day event! The early bird rate expires today, so register now!

– Liz Dunshee