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Setting Incentive Plan Goals: Embrace Uncertainty!

November 5, 2015

By Annette Leckie, Meridian Compensation Partners

The Holy Grail in executive compensation is to achieve strong alignment between pay and performance. In the quest to achieve this alignment, management teams and board members strive to design the perfect incentive structures, using the most appropriate performance measures for their industry and individual company circumstances. However, even the most effectively designed incentive can’t overcome inappropriate goals and payout curves.

In today’s economy, there are many headwinds to setting motivating, yet stretch performance goals. The pace of change in many industries has been growing dramatically. Companies face growing economic uncertainty on a global basis. M&A has been an increasing component of many corporate strategies. Add these to the traditional challenges around cyclicality, as well as foreign exchange or commodity price fluctuations, and you have a perfect storm of uncertainty.

When Total Shareholder Return Isn't the Answer

October 30, 2015

By David Swinford, Pearl Meyer

Over the course of several years, we have had an increasing number of discussions with boards on the use of Total Shareholder Return (TSR) as a dominant metric in public companies' long-term incentive (LTI) plans.

To say that TSR is a trending measure in these plans is an understatement. Multiple sources put the number at around 50%, up from 17% since 2004. It seems there is a generalized perception that because TSR is a well-understood benchmark, meets the expectations of major proxy advisors, and aligns to investor interest, it is an appropriate and possibly even ideal performance measure.

Why the CEO Pay Ratio Misses the Mark

September 2, 2015

Deborah Lifshey, Pearl Meyer

“Does it matter that a company is a 400:1 in its CEO pay ratio versus to a 20:1 or 10:1?”

Not really.

I was asked the question in a recent interview for the NPR program The Takeaway. Host John Hockenberry and I discussed the ins and outs, the common arguments, and the assumptions for the new SEC disclosure rule as he appropriately tried to make sense of it for his audience. But therein lies the problem – this disclosure requirement simply doesn’t make sense and it’s unlikely to have the impact intended by the legislators who put it in place.

Agree on the “How”; “How Much” Will Solve Itself

March 2, 2015

Mark Gressle and Paul McConnell, Board Advisory LLC

The typical discussion regarding executive pay among boards, investors, proxy advisers, and management has tended to be on how much to pay. Pay comparisons relate total compensation to both peer companies as well as total shareholder returns. While the “how much” analysis is helpful in assessing relative pay levels, the more critical discussion is how to pay. The “how” discussion describes the way management participates in value created for shareholders. The upshot of this discussion is that if there is agreement on how to pay among key stakeholders, then how much to pay is determined by actual performance over time.

ISS Releases 2015 Policy Update: First Look At The Equity Plan Scorecard

November 19, 2014

From Steven Hall & Partners

ISS recently released its FINAL POLICY GUIDELINES FOR THE 2015 PROXY SEASON. As announced in the draft rules published last month, ISS is adopting an Equity Plan Scorecard model ("EPSC") that considers a range of positive and negative factors, rather than a series of "pass" or "fail" tests, to evaluate equity incentive plan proposals. The total EPSC score will generally determine whether ISS recommends for or against the proposal. The updated guidelines will be effective for all companies with annual meetings on or after February 1, 2015.

The updated policy will evaluate a broader range of factors that investors may consider when determining whether an equity plan serves their long-term interests. EPSC factors fall into three categories: Plan Cost, Grant Practices, and Plan Features. Individual company scorecards and factor weightings will be developed for index groups based on a company's membership in one of the following groups: S&P 500, Russell 3000 (excluding S&P 500), Non-Russell 3000 and IPOs. While detailed information on the factor categories has not been released at this time, the overall EPSC category weightings and factors reviewed are provided below. We expect more detailed information to be provided in December when ISS releases its Compensation FAQ.

Compensation for U.S. Corporate Directors Increased in 2013

October 6, 2014

From Towers Watson

Total pay for outside directors at the nation’s largest corporations increased by 6% in 2013, fueled by higher stock-based compensation, according to a new analysis by global professional services company Towers Watson (NYSE, NASDAQ: TW). The study also found that cash compensation remained flat for the first time since 2007, when proxy disclosure rules were enacted requiring companies to report actual values received by directors in summary compensation tables.

According to Towers Watson’s ANNUAL ANALYSIS OF DIRECTOR COMPENSATION at Fortune 500 companies, median total direct compensation for directors climbed 6% last year, to nearly $240,000, up from $227,000 in 2012. The increase is double the 3% increase in director total compensation in 2012. Total compensation includes cash pay, and annual or recurring stock awards. The analysis found that the median value of cash compensation remained flat last year at $100,000, while compensation from annual and recurring stock awards increased 4%, to $130,500, the largest increase since 2011. More than half (56%) of directors’ pay in 2013 was delivered through stock compensation, up slightly from 55% in 2012.

Dodd-Frank’s Pay Versus Performance Disclosure Requirement: What We Can Expect in Rule Timing and Content

September 19, 2014

By Bob Romancheck and Tony Meyer, Meridian Compensation Partners

On September 18, 2013, over three years after the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") was enacted, the Securities and Exchange Commission ("SEC") completed one of four executive compensation-related requirements by releasing a proposed rule on Chief Executive Officer ("CEO") pay compared to median employee pay levels, the so-called CEO pay ratio disclosure. The three remaining executive compensation-related areas have not yet been addressed by the SEC. Therefore, investors can expect additional rules will be proposed by the SEC sooner or later, under these Dodd-Frank laws.

Specifically, Sections 953 through 955 of Dodd-Frank direct the SEC to develop rules requiring companies listed on national exchanges to: (a) adopt recoupment policies that provide for the recovery of any “excess” incentive-based compensation the arises due to a financial restatement and to provide proxy statement disclosure of such policies (i.e., clawbacks); (b) provide proxy statement disclosures of hedging policies; and (c) provide executive pay versus performance disclosures. Though the alignment of executive compensation and performance has been a mantra of shareholders and proxy advisory firms over the past several years, of the four disclosures required by Dodd-Frank, the required pay and performance disclosure has seemingly received the least amount of public commentary through blog postings or articles. However, this lack of public discussion may be due, in part, to the vague language of Section 953(a).

Are You Paying for Performance or Paying for Results?

September 19, 2014

By Mark Gressle and Jeff McCutcheon, Board Advisory LLC

Paying for performance is assumed to be the objective of most pay plans. A quick read of a handful of proxy statements will likely find the phrase prominently used. The Dodd-Frank act expressly instructs the SEC to require companies to describe their pay-for-performance program. However, we find many of these programs simply pay for results.

Let us explain. Paying for performance infers that the reward is somehow linked to actual contribution, whether as individuals or as a team. It requires some level of cause and effect. In the context of a management long-term incentive arrangement (LTI), this might be achieved by linking the number of shares vesting to achievement of a key strategic objective, like successful diversification into a new business or developing a pipeline of new products to sustain a higher gross margin.

Incentive Design for Compensation Committee Members

September 19, 2014

Matt Ward and Paul McConnell, Board Advisory LLC

Board members bring a wealth of talent and experience to the companies they serve, but often have no practical exposure to the basic building blocks of effective compensation design. Before committee members jump into aligning incentives with company strategy, discussing best practices, or considering accounting and tax implications, it can be very beneficial to review the concepts typically used by compensation professionals in incentive design.

In our experience over the past 30 years, we have seen countless successes and failures of incentive arrangements. As our experiences accumulated, we found that a distinct pattern emerged, which we have long since distilled into the four pillars shared below.

Back to the Future: SEC Proxy Disclosure Reform (Again)

September 19, 2014

From Meridian Compensation Partners

In a speech at the 41st Annual Securities Regulation Institute on January 27, 2014, Securities and Exchange Commission (“SEC”) Chair Mary Jo White stated that the SEC is reconsidering proxy disclosure requirements and is seeking comments from the public.

Specifically, Chair White stated that "we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them." If this statement instills a sense of déjà vu, do not be alarmed. In fact, the SEC has periodically proposed changes to proxy disclosure requirements since the first rules went into effect in 1938.

2014 Proxy Season Review: Good Marks For Most U.S. Companies, But No Room for Complacency

September 19, 2014

From Towers Watson

Say-on-pay results from 2014 annual meetings reveal that, after four years of mandatory say on pay, most U.S. companies are achieving consistently strong shareholder support for their executive pay programs. While that may not be surprising following a year in which both the S&P 500 and Russell 3000 logged annual returns over 30%, focusing on market performance as the sole cause of the support short-changes the improved dialogue and engagement among companies and their shareholders since enactment of Dodd-Frank’s say-on-pay mandate.

With about three-quarters of the Russell 3000 reporting annual meeting voting results as of June 30 (the cut-off date for our review), average support for 2014 say-on-pay resolutions is 90% of the votes cast, with just 2% of companies failing say on pay this year. Both measures are unchanged from results for all of 2013. Seventy-three percent of companies reported support from shareholders above 90% in 2014, a figure that has steadily increased from 70% in 2011, the first year of mandatory say on pay. Discretionary bonus awards and a perceived lack of rigorous performance hurdles were cited most frequently as the issues raising concerns in this area.

Executive Compensation: A 2013 Opinion Survey of Compensation Committee Members

November 5, 2014

From Corporate Board Member and Pay Governance

NYSE Governance Services, Corporate Board Member and Pay Governance LLC collaborated in the fall of 2013 to survey the opinions of compensation committee members at U.S. publicly traded companies to tap into their views regarding the state of executive pay. Specifically, the survey sought to ascertain what compensation committee members believe about compensation policies and design; the effects on corporate governance of compensation policies and compliance regulations; the alignment of executive pay and shareholders’ interests; the effectiveness of proxy disclosure; and the impact on say on pay votes of proxy advisors. In addition, the research investigated what actions companies have taken, or anticipate taking, as a result of any say on pay challenges. The following report highlights the key findings and summary analysis from this study, which comprises 323 compensation committee member survey responses.

The survey demonstrated a number of positive developments and emerging trends. It shows that compensation programs at U.S. publicly traded companies continue to become more aligned with shareholders’ interests in the wake of the implementation of Dodd-Frank regulations. Despite arguments to the contrary posed by some proxy advisory firms, some institutional investors, and shareholder activists, most compensation committee members believe that the vast majority of shareholders support their executive pay programs and thus have shown their support via positive say on pay votes over the last three years. This affirms that compensation committees and boards are setting up pay plans that are successfully aligned with shareholders’ interests. The following are a few key findings that further support this view.