The Advisors' Blog

This Pay Governance alert discusses the disconnect between company disclosures addressing pay-for-performance and the shifting approaches of proxy advisors and institutional investors. Companies continue to use varied approaches to describe pay-for-performance alignment, and the confusion created by PvP meant that these required disclosures didn’t fill the gap created by this lack of comparability.

Most companies describe the rationale for their performance measures, and in some cases the rigor of their performance targets, but provide limited disclosure demonstrating how pay outcomes align with performance. Some companies use realized or realizable pay analyses and supporting charts to illustrate alignment with shareholder outcomes, while others focus on “take-home” pay as evidence of alignment. These varying disclosure methods make it difficult to readily assess pay-for-performance alignment across companies.

Institutional investors and proxy advisors similarly have varied approaches to pay analysis. But the memo suggests there is a push towards a greater use of outcome-based measures:

The proxy advisors’ pay-for-performance models up until now have generally relied on SCT compensation, which reflects the grant date value of long-term incentives, rather than outcome-based compensation, which reflects the actual number of shares earned and the updated stock price.

One of the proxy advisory firms has added two outcome-based tests to its pay-for-performance model this year to supplement its SCT compensation tests . . . Vanguard has incorporated outcome-based measures in evaluating pay-for-performance in its proxy voting guidelines, and it is likely that other institutional investors are also relying on similar approaches to inform their voting decisions.

The memo suggests that companies that don’t already might want to start proactively supplementing the required PvP disclosures with realizable pay.

As proxy advisors begin to supplement traditional models with outcome‑based tests and large institutional investors increasingly rely on proprietary pay‑for‑performance methodologies, boards would be well served to proactively adopt and disclose more robust, outcome‑oriented analyses. Supplementing required PVP disclosure with clear, contextual explanations of CAP and realizable pay and visual demonstrations of alignment with shareholder outcomes can enhance credibility, improve investor understanding, and strengthen the overall pay‑for‑performance narrative.

– Meredith Ervine