Here’s an excerpt from this note by Willis Towers Watson’s Bill Kalten & Steve Seelig:
A clawback policy addresses what to do after the fact. Helping ensure that a company has done everything it can structurally to discourage actions or events that would cause reputational harm is paramount, although some of those actions are beyond the scope of pay programs. Within the compensation realm, it appears that virtually all public companies already perform some degree of risk review. It might be a good idea to revisit this review process to reassure the compensation committee that reputational risks are unlikely to be exacerbated by pay structures.
This raises the question of whether a review of the mechanics of the pay program and its risk-mitigation features, such as mandatory deferrals, is sufficient. These reviews need to go deeper than a mere “check the box” exercise — real attention should be paid to likely behavioral responses to a given pay structure.
The details of how this might be accomplished and how deep within the organization this inquiry should go will vary for each company. The essence of this review, however, must focus on asking managers to identify the potential unintended consequences of their pay structures, which should turn out to be knowable if the right people are asked.
While a company can’t anticipate and prevent all possible misbehavior, a thorough review focusing on likely responses to specific incentive structures — such as finding that a particular metric and payout curve could provide incentives for overly aggressive growth — should provide additional insights into the organization’s culture and perhaps reduce the motivations that prompt unwanted behavior.
This ClearBridge Compensation Group memo presents an analysis of the goals set by 100 companies for their annual & long-term incentive plans, including how goals are set vs. prior year results – and how companies set the range around target (from threshold to maximum)…
This memo by John Ellerman of Pay Governance is the latest to predict what the near future will be for executive pay in the wake of the coming changes wrought by the new Presidential Administration…
Here’s the abstract for this study by Professor Michael Doran:
This article sets out the case for repealing the $1 million tax cap on executive pay. The cap is easily avoided and, when not avoided, widely ignored. Since enactment in 1993, the cap has had little effect in reducing executive pay or in linking pay to performance. Even worse, the cap increases corporate tax liabilities – liabilities that likely burden workers and investors. In effect, the cap punishes rank-and-file employees and shareholders for pay deals made by directors and executives. The article demonstrates why prominent reform proposals would be ineffective and counterproductive.
It then devises a novel reform approach – a confiscatory tax on excessive executive pay – that would limit executive pay without burdening workers or investors. But the article rejects the confiscatory tax because of the serious distortions that it would cause for business-organization and labor-supply decisions. Ultimately, the superior policy position is to repeal the cap. Concerns about income inequality are better addressed through robust progressive tax rates, and concerns about corporate governance are better addressed through non-tax mechanisms, such as reform of the business-judgment rule and expansion of director liability.
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The rise in both the prevalence and prominence of long-term performance plans has been one of the most significant trends in executive compensation over the past 15 years. At the time of the dot-com market collapse (March 2000 to October 2002) and the demise of several prominent U.S. companies (e.g., the Enron scandal revealed in October 2001), long-term performance plans were only used by a relatively small portion of large U.S. public companies.
Today, more than 80% of S&P 500 companies use a variety of LTI performance plans, including performance shares, performance units, performance-vested restricted stock and/or units, and long-term cash-based incentives. More striking than the growth in prevalence of long-term performance plans is the increased prominence of performance plans in the mix of LTIs provided by companies. Long-term performance plans now represent approximately 52% of CEO total LTI compensation opportunities.
The increased prevalence and prominence of long-term performance plans have come primarily at the expense of stock options. Corporate America began using stock options in executive pay packages in the 1950s, with use peaking during the late 1990s tech boom and bull market for stocks. Today, even though stock options are granted to 54% of S&P 500 CEOs, they typically represent only 18% of CEO total LTI award value.
In a 2013 survey of compensation committee members co-sponsored by the NYSE, Conference Board and Pay Governance, the top 3 “challenges” that committees stated they were facing involved incentive pay & performance goal setting. Specific challenges noted in the survey included:
1. Determining appropriate incentive pay levels – 62%
2. Balancing P4P with retention – 57%
3. Ensuring the rigorous nature of incentive plans – 57%
See this memo by Pay Governance about possible ways to tackle these challenges…
Mark Van Clieaf & Stephen O’Byrne have done an analysis of say-on-pay voting at 213 funds that shows startling differences in “voting quality.” The top quartile is 4x better than the bottom quartile – and the top decile is 16x better than the bottom decile.
This is a little technical. Their measure of voting quality is the sum of (1) alignment (r-sq) of SOP vote support with pay equity and (2) percent “no” for companies with 100%+ pay premiums. We calculate a custom measure of pay equity for each fund using 300+ votes to capture the fund’s weighting of external pay equity based on relative TSR, external pay equity based on relative ROIC and internal pay equity.
Their analysis shows that big funds don’t have higher voting quality – and asset owners, on average, are no better than asset managers…
“Funds” includes mutual funds, state pension funds and entities like Canada Pension Plan Investment Board. The voting data is from Proxy Insight – I’m not sure how they get all the data…
Here’s the teaser for this Pay Governance memo by Ira Kay, Blaine Martin & Clement Ma:
After 5 years of SOP votes, it is now possible to review the pre- and post-SOP statistical impact on CEO compensation. With sufficient historical data post-SOP, we answer 2 fundamental questions regarding this legislation’s consequences:
1. Did the amount of S&P 500 CEO pay decline since SOP (2011)?
2. Does the CEO labor market structure have a more compressed compensation range post-SOP?
Back in early February, the SEC’s Acting Chair – Mike Piwowar issued a statement directing the Corp Fin Staff to revisit the pay ratio rule & requested public comment about any challenges in complying with the rule. Comments were due within 45 days – so the deadline has now passed.
Here’s the list of comments received so far. Beyond a short form letter in favor of the rule (that was received over 3k times), there are several hundred comment letters. Most of these are short letters from individuals, also expressing an interest in keeping the rule. Overall, this new request for comment has resulted in a response that is a mere fraction of the 287k comment letters that the SEC received on it’s rule proposal.
Let’s dig down into these new comment letters. Only a handful of these letters are from companies explaining the challenges. But there are a few, like these: