– Broc Romanek, CompensationStandards.com
In this study, Susanna Gallani of Harvard Business School proposes two reasons why CEO compensation packages often look so similar to one another:
– Interlocking directorates: many directors are board members at a number of public companies – and she found evidence that companies with directors in common have similar compensation packages.
– Compensation consultants: strong commonalities among pay programs at companies that shared compensation consultants – and whether compensation consultants should be held to similar accountability standards as auditors, noting that on many proxy statements the name of the consulting firm does not appear.
– Broc Romanek, CompensationStandards.com
Here’s an excerpt from this Financial Times article, which has some interesting charts:
The Corporate Jet Files, an analysis of 1,000 securities filings by the Financial Times, has found that a significant number of corporations are still footing the bill for their executives to take personal flights on corporate jets, sometimes accompanied by family and friends. Many of the companies contacted by the FT cited security concerns as a reason for demanding that executives use corporate jets even for personal travel.
The FT’s findings show that a small group of companies — roughly 10 per cent of the S&P 500 — account for about two-thirds of total spending on personal use of corporate aircraft. The league tables of the biggest spenders are dominated by groups where the founder or a family exerts significant control.
– Broc Romanek, CompensationStandards.com
Allan Sloane has written this Pro Publica piece entitled “The Executive Pay Cap That Backfired” that covers the well-worn topic of the unintended impact of Section 162(m). The following excerpt from this Cooley blog summarizes the piece:
To analyze the impact of Section 162(m), ProPublica and The Washington Post commissioned a study that looked at the history of executive compensation for the top 50 members of the S&P 500, excluding 10 companies (some of which were big, high-tech companies) that were not reporting in 1992 (the year prior to adoption of 162(m)). In 1992, only 35% of the covered executives were paid more than $1 million of income of the type subject to deductibility limits, compared with 95% in 2014. Given inflation, the article suggests, that’s not a big surprise.
What was a surprise was the following data from the study: “From 1992 to 2014, compensation per executive in the limited-deductibility categories rose more rapidly — by about 650 percent, to $8.2 million from $1.1 million — than compensation in categories such as stock options and incentive pay that aren’t subject to deductibility limits. The latter rose by about 350 percent, to $4.4 million from $970,000.” (Emphasis added.) That is, compensation that was subject to the tax limitation rose almost twice as fast as compensation excluded from the limitation.
I still believe my own explanation from 10 years ago – “An Open Letter to All Journalists” – does a better job of covering all the different factors that have led to skyrocketing pay. There are a myriad of factors, such as the 1992 change in the SEC’s rules that led to more fulsome disclosure – that in turn led to benchmarking databases and the slippery slope upward…
– Broc Romanek, CompensationStandards.com
Here’s the intro from this Cooley blog:
Most employers in North America don’t think so, according to CFO.com, reporting on a new survey by the compensation consulting firm, Willis Towers Watson. The survey, conducted in the last quarter of 2015, was directed at 150 large and midsize U.S. and Canadian employers. The survey reached a somewhat stunning conclusion — that only 20% of those employers surveyed “find merit pay to be effective at driving higher levels of individual performance at their organization and only 32% said their merit pay program is effective at differentiating pay based on individual performance.”
Wait, isn’t pay for performance the centerpiece, the focal point, the very heart and key goal of today’s compensation programs, especially executive compensation? Haven’t employers fully embraced pay-for-performance, often at the behest of proxy advisory firms and institutional investors? According to WTW’s global practice leader for rewards, notwithstanding all the time and money invested by employers “in their traditional pay-for-performance programs, primarily annual merit pay increases and annual incentives,…[u]nfortunately, these reward programs are falling short in the eyes of many employers. It appears that organizations are either trapped in a business-as-usual approach or suffer from a me-too mentality when it comes to their programs.” WTW also reports that “employers give their short-term annual incentive programs low marks. Only half say these programs are effective at boosting individual performance levels, and even fewer (47%) say annual incentives effectively differentiate pay based on how well employees perform.”
– Broc Romanek, CompensationStandards.com
Here’s an excerpt from this interesting article from Semler Brossy:
An alternative to this approach is something called a “Combination Price-Vested Equity” (CPVE) vehicle. This vehicle is a full-value share that acts like a stock option; however, it also directly incorporates operational goals by requiring a minimum threshold level of financial performance (e.g., return on capital, operating margin, earnings per share) to gain access to the share price accelerators. CPVEs enable compensation committees to appropriately balance three key factors in today’s executive compensation environment: i) performance orientation, ii) executive retention, and iii) sustainability, all within a single vehicle.
CPVEs are a grant of performance-based restricted stock which incorporate two performance requirements over a period of four years. The primary metric is a financial measure that requires the organization to meet a minimum level of performance over a four-year period. If the primary financial requirement is not met, then no shares are earned. However, once the hurdle is achieved, executives have the opportunity to benefit from share price appreciation.
– Broc Romanek, CompensationStandards.com
Here’s this study by Jim Reda of Arthur J. Gallagher & Co. that has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages and the evolving features of short-term and long-term incentive plans (STIs and LTIs), the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design.
– Broc Romanek, CompensationStandards.com
Here’s the latest survey results on perks practices that are quite lengthy (compare to the same survey a decade ago) – and come with a big fat disclaimer that they do not necessarily reflect what the actual law is (and don’t forget to take our new “Quick Survey on Auditing Standard #18: D&O Questionnaires“):
A. Company Airplane Use
1. Spousal/family member tag-along on corporate plane where executive is flying for business reasons (assume no incremental cost of tag-along):
– Definitely a perk – 52%
– Leaning toward a perk – 20%
– Leaning toward not a perk -14%
– Definitely not a perk – 15%
2. Spousal/family member tag-along on corporate plane where executive is flying for personal reasons (assume no incremental cost of tag-along):
– Definitely a perk – 87%
– Leaning toward a perk – 5%
– Leaning toward not a perk – 2%
– Definitely not a perk – 6%
3. Executive use of corporate plane for outside board meetings (i.e., director of another company):
– Definitely a perk – 60%
– Leaning toward a perk – 20%
– Leaning toward not a perk – 14%
– Definitely not a perk – 7%
4. Outside director’s use of corporate plane to attend company’s board meeting (i.e., picking up directors for meetings):
– Definitely a perk – 7%
– Leaning toward a perk – 5%
– Leaning toward not a perk – 25%
– Definitely not a perk – 64%
5. Executive use of corporate plane to attend a meeting of the board/trustees of a charitable organization:
– Definitely a perk – 59%
– Leaning toward a perk – 22%
– Leaning toward not a perk – 16%
– Definitely not a perk – 3%
B. Other Spousal/Family Member Issues
1. Travel costs associated with spouse attendance with directors at annual board retreat/meeting where all spouses are invited:
– Definitely a perk – 43%
– Leaning toward a perk – 24%
– Leaning toward not a perk – 21%
– Definitely not a perk – 12%
2. Travel costs associated with spouse attendance with directors at a board meeting where spouses are welcome, but not formally invited, and only a few spouses attend:
– Definitely a perk – 70%
– Leaning toward a perk – 21%
– Leaning toward not a perk – 6%
– Definitely not a perk – 4%
3. Spousal golf and other extra services, such as day travel or spa services, for when the board is in a formal meeting:
– Definitely a perk – 85%
– Leaning toward a perk – 9%
– Leaning toward not a perk – 4%
– Definitely not a perk – 2%
C. Mixed Business & Personal Use
1. Country club membership paid by company that is not used exclusively for business purposes, if the membership is used a few times by the executive or a family member for personal reasons:
– Entire amount of country club expenses is a perk – 22%
– Allocate incremental cost of those few personal uses as a perk – 52%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk – 24%
– Not a perk – 3%
2. Luxury box paid by company that is not used exclusively for business purposes, if the box is used a few times by the executive or a family member for personal reasons:
– Entire amount of ownership expenses is a perk – 6%
– Allocate incremental cost as a perk (eg. cost of refreshments) – 50%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk (eg. by dividing number of events box is paid for in order to allocate the cost on a per event basis) – 36%
– Not a perk – 7%
3. Membership in airline club paid by company that provide facilities at airports, if the club is also used by executive during personal travel:
– Entire amount of club expenses is a perk – 11%
– Allocate incremental cost as a perk (eg. cost of refreshments) – 40%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk (eg. valuation based on percentage of personal use) – 17%
– Not a perk – 32%
4. Relocation expenses for existing executive that the company has required to relocate:
– Definitely a perk – 25%
– Leaning toward a perk – 11%
– Leaning toward not a perk – 9%
– Definitely not a perk – 55%
5. Relocation expenses for newly hired executive, extended to induce the executive to accept an employment offer:
– Definitely a perk – 35%
– Leaning toward a perk – 29%
– Leaning toward not a perk – 24%
– Definitely not a perk – 12%
6. CEO’s assistant (whose compensation is paid for entirely by company) who spends 60% of his time taking care of personal tasks (such as maintaining the CEO’s personal calendar, paying personal bills, etc.) and the other 40% is work-related:
– Definitely a perk – 35%
– Leaning toward a perk – 29%
– Leaning toward not a perk – 24%
– Definitely not a perk – 12%
7. Would your answers change to the above questions if the executive paid the full incremental cost to the company?
– Yes to most – 60%
– Yes to a few – 19%
– Maybe for a few – 10%
– No – 11%