The Advisors' Blog

This HLS blog post by Diligent Market Intelligence titled “Are CEO Pay Plans Too Samey?” inspired me to pick back up on one of the key themes of the SEC’s roundtable on executive compensation disclosure requirements — the homogenization of pay. CAP’s Matt Vnuk suggests in the blog: “Companies use standard designs to reduce criticism, which leads to better ‘say on pay’ results” though they may be better served to have more “tailored” designs.

This topic initially came up during the first panel at the roundtable when discussing whether proxy advisor policies influence executive compensation decision-making and whether the executive compensation disclosure requirements impact how investors and proxy advisors view pay packages. Some panelists at the roundtable — and the blog — touched on a number of ways that executive compensation design has become a bit “wash, rinse, repeat”:

– The use of modest base salaries, cash bonuses tied to financial metrics and the majority of compensation delivered in equity
– The widespread use of performance share awards
– The limited use of simple stock structures with long-term holding requirements
– The move away from stock options
– The widespread use of relative TSR as a performance metric
– The use of formulaic plans instead of discretionary
– Avoiding practices considered problematic or egregious by proxy advisors and investors

Issuer and investor participants seemed to agree that the move towards homogenized, super complex pay plans is not ideal, but no one was suggesting that today’s standard design be cast back into the volcanic fires of Mount Doom. Issuer participants stressed that having the flexibility to simplify equity programs would be welcome, but that a 180-degree change in the other direction, so that compensation committees do not feel that they have the option to use performance share units when appropriate, would also present challenges.

I can’t speak for the investor perspective, but I assume that some compensation-related “rules of thumb” are somewhat necessary to digest the sheer number of say-on-pay proposals that many asset managers vote on in a short few months of the year — given their diversified holdings and how compressed annual meeting season is in the US. A number of participants representing the issuer perspective endorsed a move toward more principles-based disclosure requirements — combined with tabular disclosures that more clearly convey target and realized compensation — that perhaps could improve the effectiveness of disclosures for investors where plan designs differ from the norm.

– Meredith Ervine