– Broc Romanek
It can be tricky to build – and maintain – a solid executive pay peer group (or groups). ISS looks at industry profile, size & market cap – but that doesn’t always yield a representative group. This recent Equilar memo gets into the details of current trends and offers some ideas for comp committees. Here’s a teaser:
Companies most often disclosed similar industry classifications as criteria for peer group inclusion, with 442 companies in the Equilar 500—an index of the 500 largest U.S. public companies by revenue—naming this as a deciding factor in peer assessment. Revenue followed as the second-most popular peer group criteria, with talent being another common factor.
“Over the past few years, we have seen peer group development often include an increased focus on operating characteristics of a company, such as profit margin or percent foreign revenue, in addition to standard size screens such as revenue or market capitalization,” said Margaret Engel and Matt Vnuk of Compensation Advisory Partners.
Over the years, I have blogged quite a bit about using peer groups to set executive pay. Check out our “Peer Group Practice Area” and “Benchmarking” Practice Area for more resources…
– Broc Romanek
Here’s the annual review of say-on-pay for the “Bay Area Tech 120” from Compensia…
– Broc Romanek
Here’s the ending from this Forbes article:
Coming back to the polling results, it is not clear what a fair or just CEO:Median Worker Pay ratio actually is, or what people think it should be. Ordinary workers are more concerned with putting food on the table for their families and being treated fairly relative to their coworkers. When it comes to CEO pay, however, we think the real moral of the story is not only that the numbers be disclosed, but that we consider them in the context of fair treatment and shared value.
High CEO pay may be perfectly fine in situations where companies are doing well financially and all workers are sharing in that. Or where workers themselves feel fairly compensated and make more than a living wage. Where the red flags exist are where too many people do not make a living wage, where CEOs are taking too much of the pie at the expense of workers, or where there is some other obvious injustice or imbalance. Boards of Directors setting executive compensation packages would do well to keep this in mind. Going forward, we’ll continue to track CEO pay ratios, and hope that companies will disclose these numbers, providing transparency on the issues Americans care most about, whether they’re required to or not.
– Broc Romanek
The tax reform bill passed early Saturday morning by the Senate contain a number of last-minute amendments which continue to leave key equity compensation rules in flux. Representatives from both chambers of Congress are now reconciling differences between the Senate & House bills. The memos at the top of this list show where things stand on the Alternative Minimum Tax (AMT) and Section 162(m) transition rules…
The November-December issue of “The Corporate Executive” has just been sent to the printers – and it focuses on the Section 162(m) disclosure issues facing companies now…
– Broc Romanek
Here’s the intro from this article by Semler Brossy’s Seymour Burchman and Barry Sullivan:
Despite conflicting messages about climate change from U.S. government leaders, sustainability is getting more and more attention at American companies. Shareholders are ratcheting up their demands on environmental and social issues. Consumers are registering their concerns about how companies make their products. And talented Millennial employees are voting with their feet by leaving laggard companies behind. Meanwhile, new technologies are making it easier for sustainability investments to pay off in the middle to long term.
A similar phenomenon happened in the 1980s, when quality became a significant issue for manufacturers. Many of them responded by including quality metrics in their compensation incentives. These moves helped to focus executive attention and ensure that quality initiatives actually got carried out. Over the next decade, quality levels improved substantially. It’s time for companies to start doing the same thing for sustainability.
As any compensation consultant will tell you, comp plans can address only so many metrics. Most plans have fewer than six: one or two financial metrics, such as sales growth or earnings per share, and two or three nonfinancial metrics, in areas such as quality or innovation. Having any more than that risks diluting executive focus. So for a compensation committee to justify a new metric, it needs to have a strong business case.
– Broc Romanek
Tune in tomorrow for the webcast — “Your Upcoming Pay Ratio Disclosures” – to hear Compensia’s Mark Borges, Gibson Dunn’s Ron Mueller, Wilson Sonsini’s Dave Thomas and Cooley’s Amy Wood discuss all the latest about how to comply with the new pay ratio rule.
– Broc Romanek
Here’s the intro from this blog by Cooley’s Cydney Posner:
Not really, according to this study by academics from the University of Pennsylvania Law, Rutgers Business and Berkeley Law Schools to be published in the Harvard Business Law Review. Say-on-pay was initiated under a Dodd-Frank mandate adopted against the backdrop of the 2008 financial crisis, largely in reaction to the public’s railing against the levels of compensation paid to some corporate executives despite poor performance by their companies, especially where those firms were viewed as contributors to the crisis itself.
Say-on-pay was expected to help rein in excessive levels of compensation and, even though the vote was advisory only, ascribe some level of accountability to boards and compensation committees that set executive compensation levels. So far, however, say-on-pay votes have served largely as confirmations of board decisions regarding executive compensation and not, in most cases, as the kind of rock-throwing exercises that many companies had feared and some governance activists had hoped. The study reported that, since 2011, the average annual percentage of say-on-pay votes in favor has exceeded 90%, while “the percentage of issuers with a failed say-on-pay vote has never exceeded 3% and, in 2016, that number dropped to just 1.7%.” The study examined what the few failed (or low) votes really meant.
Tune in next Tuesday, December 5th for the webcast — “Your Upcoming Pay Ratio Disclosures” – to hear Compensia’s Mark Borges, Gibson Dunn’s Ron Mueller, Wilson Sonsini’s Dave Thomas and Cooley’s Amy Wood discuss all the latest about how to comply with the new pay ratio rule.
– Broc Romanek
This blog by Margaret O’Hanlon provides some nice thoughts about how to handle the looming pay ratio conversation with employees and others. Here’s an excerpt:
So what good CAN you make of it? Well, your blueprint can address what employees DO after the announcement, which you are much more likely to have some influence on than their strong impulsive reactions. When it comes to imagining what employees could do that would be more constructive than feeling without thinking, my mental picture includes employees who:
– Don’t immediately verbally overreact to the numbers
– Are willing to listen to the rationale for the numbers with an open mind, even though they are skeptical (or more)
– Are able to spend a limited time mulling over with their colleagues what they have heard
– Won’t go on social media to comment on the announcement
Margaret’s second blog on this topic is even better than her first. Here’s an excerpt from that:
Use end-of-the-year focal review and merit pay communications. Articulate, repeat and reinforce what you do to make sure employee pay is competitive, how your practices are fair and how employee salaries are only one part of your company’s whole reward package. If you have made changes based on employee input, be sure to point this out,too. Evidence of a solid relationship based on responsiveness to employee needs will go a long way towards defusing employee disdain for select policies and practices — as long as employees would agree that you’ve been responsive.
Use people not technology. Distancing the message from the personal will leave your company open to employee claims that leadership is ducking responsibility. Identify a spokesperson to present the details of the CEO Pay Ratio, back it up with email or intranet information, but be sure that your communication strategy gives employees a chance to discuss their reaction with someone that they can open up to.
Train your managers. Whether or not you choose to use them as a primary communication channel, they will be. Every bit of research going back decades indicates that managers are employees’ preferred and trusted information source. Be sure they are able to handle employee questions well and that they are not afraid to talk about the findings in a group. If they have employees whose salaries fall near the median, odds are they will receive tough, candid questions that they will need to handle well.
Tune in next Tuesday, December 5th for the webcast — “Your Upcoming Pay Ratio Disclosures” – to hear Compensia’s Mark Borges, Gibson Dunn’s Ron Mueller, Wilson Sonsini’s Dave Thomas and Cooley’s Amy Wood discuss all the latest about how to comply with the new pay ratio rule.
– Broc Romanek
With our next pay ratio webcast coming up soon – next Tuesday, December 5th – thought I would remind you that we continue to post memos from various folks about what to do now in our “Pay Ratio” Practice Area.
It’s Done: 2018 Executive Compensation Disclosure Treatise: We just wrapped up Lynn, Borges & Romanek’s “2018 Executive Compensation Disclosure Treatise” — and it’s been printed. This edition has a major update to the key chapter on the new SEC’s pay ratio rules (now 120 pages long!) & more – this includes the latest pay ratio guidance from the SEC in September. All of the chapters have been posted in our “Treatise Portal” on CompensationStandards.com.
How to Order a Hard-Copy: Remember that a hard copy of the 2018 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1650-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.
– Broc Romanek
Here’s the intro from this note by Board Advisory’s Paul McConnell:
Much has been written about NFL Commissioner Roger Goodell’s contract extension and Dallas Cowboys President Jerry Jones’ objections to the amount he can earn and the lack of rigorous performance criteria. While Jerry might be right, I think the bigger issue is a classic example of misalignment between owners and the executive.
Owners earn a healthy annual return on their investment. But the serious money is made from the growth in the value of the franchise. The franchise value grows tax-free over time from enhanced TV contracts, merchandising, stadium deals, operating management and keeping the stadiums filled. When the franchise is sold, the gain is taxed at favorable long-term rates.
From press accounts, it appears that the contract being discussed is a collection of bonus arrangements designed to reward the Commissioner for improvements in the various metrics that drive the franchise value. One of the arguments is whether the performance goals are sufficiently difficult or if the bonuses are just disguised salary. This is a typical “managerial” approach to compensation – pay me for the things I can control and I’ll “manage the hell out of them”. Its not a contract compatible with the group of entrepreneurs that own the place. In a public company this would be like paying the CEO huge annual bonuses, but no stock.