The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

March 8, 2018

Pay-for-Performance: What It’s Not

– Broc Romanek

I’ve been running an executive pay conference for over 15 years now – and I’ve always been loathe to program about “pay-for-performance” because I don’t quite understand it. I’ve always been a hard worker – so I’m the type who gives “my all” in exchange for a salary. That’s all the incentive I really need.

But I certainly can be dis-incentivized. And if that happens, my reaction is to find a new job. And the memo that the United Airlines CEO recently sent to employees – described in this article – would fall into the category of things that dis-incentivized me.

First, there is the tone of the memo – aptly described in the article as tone-deaf. And then there is the subject of the memo: taking away quarterly performance bonuses from many employees (who expected them in the regular course as they hit certain benchmarks) – and instead pooling together that money to give much larger bonuses to those that win a lottery of the bonus money. To capture the essence of that, I’ll use this excerpt from the article:

It’s a curious logic, one that says: “How do we get them to improve? How about taking away their bonus?” To be followed by “heh. heh. heh.”

Can you imagine what the United CEO would say if his compensation was subject to a random drawing. I guess we’ll never know because employee backlash already led to the company shelving this horrible idea…

March 7, 2018

Gender Pay Equity: Ontario’s Proposal

– Broc Romanek

As noted in the summary provided in this Torys memo, Ontario has joined the UK (see these memos) in trying to tackle gender pay equity:

On March 6, Ontario introduced “Then Now Next: Ontario’s Strategy for Women’s Economic Empowerment,” which includes a proposed “pay transparency” bill. The strategy sets out a three-year plan to increase gender equity, and makes recommendations for removing the gender wage gap in the province. If passed, the legislation—which is not currently publicly available—will have significant implications for employers in Ontario, and Ontario will become the first province in Canada to legislate pay transparency.

February 28, 2018

A 10-Year Review of CEO PSU Plan Payout Histories

– Broc Romanek

Here’s the teaser for this Pay Governance memo:

PSUs at many companies have now been in place for ≥10 years, which provides an opportunity to thoroughly review the historical trend in PSU payouts in order to assess critical questions regarding program success:

1. What has been the historical payout trend in PSU awards over the 10 most recently completed performance cycles (2005-2014 grants)?

2. How did the payouts for PSU awards that included relative total shareholder return (TSR) metrics compare to that of plans based entirely on operating financial results?

3. Were PSU payout trends aligned with company TSR performance over the 3-year performance period?

February 27, 2018

Length of Pay Disclosures? Growth, But Not Much

Here’s an excerpt from this Equilar blog:

As companies attempt to explain how mandatory disclosures of executive compensation align with corporate strategy and philosophy, the average word count of the CD&A section of Equilar 100 proxy statements grew to 9,490 words in 2017. The average increased every year between 2013 and 2017, up a total of 3.7% in that timeframe.

Despite growth on average, word count for the longest CD&A in this study actually decreased in each year since 2015, down from 18,706 to 17,911 words in 2017 (belonging to Prudential Financial in the most recent year). Berkshire Hathaway annually turned in the minimum word count for its CD&A, falling below 500 words in 2017 for the first time during the study period. Notably, the second-shortest CD&A in 2017—Amazon’s—totaled 2,623 words.

The information that companies are including in these compensation filings also varies. Nearly half (46.0%) of Equilar 100 companies included some type of graph depicting a pay calculation that differs from what is required in the summary compensation table (SCT) of the proxy, such as realized or realizable pay. Furthermore, 20.0% of companies included a graph that depicted executive pay in relation to company performance.

While the alternative pay graph and company performance pay graph are not insignificant in terms of prevalence, both reached their peak usage in 2015, at 49.0% and 23.5%, respectively. The SEC proposed a rule in 2015 that would require companies to publish a graph showing realized pay vs. total shareholder return in relation to their disclosed peer companies. The proposal was never made into a rule, and the prevalence of such disclosures has declined since, albeit slightly.

February 23, 2018

Pay-for-Good Culture? (Isn’t That Part of the Job?)

– Broc Romanek

This Pearl Meyer article by David Swinford is the best thing out there about compensation tied to culture. A lot of nice charts. And I do think that boards should oversee a company’s culture – to the extent they realistically can given their very part-time involvement. But I also think that management should be creating a good culture without needing extra incentive to do so.

Take leadership development. For a CEO, the task of creating a successful & viable deep base of managers is critical to the overall success of the company. My bet is the best way to get CEOs to focus on that is to not incentivize them to do other things. Rather than incentivize them to focus on this primary & straight-forward task. Sometimes I think we overthink pay arrangements and make them way more complex than they need to be…