We attended Equilar’s Compensation Committee Forum this week in New York City. Co-hosted by Nasdaq, the event proved to be an efficient tour of the executive compensation landscape with a day of back-to-back panels and peer exchanges. Below, we share eight quick takeaways from the day’s discussions:
CEO Pay Ratio
What the new administration decides to do with the CEO pay ratio—or with Dodd Frank in general—has yet to be seen. But Equilar’s Compensation Committee Forum provided a few insights and tips:
1. States are taking steps to adopt their own legislation.
Although only in the early stages, some states are drafting their own legislation around the CEO pay ratio. Massachusetts, Illinois, and other states have proposed surtax penalties on companies whose pay ratio exceeds a given amount (e.g., 100 to 1). The cities of San Francisco and Portland, Oregon are also enacting similar penalties. State-level legislation would certainly complicate the landscape for businesses operating across various state lines, and therefore it’s something to keep an eye on.
2. Companies should continue to prepare.
Education surrounding the pay ratio should start this fall, said the Center on Executive Compensation’s Tim Bartl. Both internally and externally, companies should educate employees and investors about what’s down the pike, and more importantly: What does it all mean?
3. The PR nightmare could be recurring.
When asked about the backlash that could follow pay ratio disclosure, Charles Grace (with Meridian Compensation Partners) brought up an interesting point:
I think there could be a recurring issue when a company’s pay ratio changes from year to year, but not for reasons related to CEO pay or other compensation decisions. Maybe there is a shift in the median employee as a result of moving certain operations to a foreign country, which could lead to an increase in the pay ratio. Will anyone pay attention to the real reason why the pay ratio is changing, or will they just focus on the increase itself?
Regardless, boards should begin to think about how their CEO pay ratio will fit into the compensation story that they’re already telling.
Throughout the day, panelists gave several great tips related to improving disclosure. By now, everyone knows that you’ve got to “tell your pay story.” But how can your board tell it better?
4. There’s still room for improved storytelling.
Boards are now doing a pretty good job explaining the who and what when it comes to compensation disclosure; now they need to improve on the why, said Randy Powers (Manager of Compensation, Benefits & Policies at ExxonMobil). When strategy drives the pay structure, the “why” is inherent—boards just need to do a better job at communicating it with shareholders. Disclosure must continue to be more simple, straightforward, and visual. Our blog titled Trends Affecting Today’s Compensation Committees echoes many of the high points from the panel discussions.
5. “A failed say on pay vote is not a terminal illness.”
These were the wise words from the Head of ISS Analytics John Roe. A failed say on pay vote does not mean that all is lost; rather, that boards may have some changes to make.
The CD&A should take the form of: “Here’s what we’re doing better this year, and here’s what we can continue to do better next year.
Investors and proxy advisors are generally receptive when the board has identified the problem and already outlined steps towards the solution. In other cases, the only tweak boards may need to make is to their disclosure (not the pay program itself). Transparency and clarity are paramount.
6. Smart boards are considering other avenues.
Two to three weeks before the annual meeting, ExxonMobil hosts a webcast about its compensation plan. Compensation team members outline all aspects of ExxonMobil’s pay program and explain how the company’s strategy guided the pay structure. Even the shareholders who couldn’t catch the webcast live are able to go back and listen to the board’s explanation. The webcast has proven to be a powerful communication tool for the company and a great example of why boards should consider other formats for shareholder engagement—particularly with something as complex as the executive compensation program.
Industry, Revenue, and Talent are the top three peer group selection criteria among S&P 500 companies, according to Equilar’s latest Peer Group Composition and Benchmarking report. Our recent blog sums up the nuances of peer group criteria and reviews how boards should be communicating their selection process in the proxy. However, a new discussion cropped up during this forum: Should we even have peer groups at all?
7. Competitive benchmarking endangers the entire corporate pay structure, some argue.
Peer groups allow boards to benchmark executive pay with that of other companies, whether similar in industry, size, talent, etc. Compensation levels are then set at the 50th, 75th, 90th percentile (etc.); however, these pay levels are based on the flawed assumption that executive talent is easily transferable between companies (among others). In turn, the inflated CEO pay market can negatively affect the incentive structure throughout the corporate hierarchy (refer to this resource for a thorough explanation). A divided panel debated these issues; on the other end of the spectrum, Phoebe Wood explained how peer groups equip her boards with invaluable data:
I can’t imagine not using the data that’s available to us. We’re able to assemble different peer groups and assess how the numbers would play out. It helps us to approach the compensation challenge from several different angles and identify biases along the way.
Talent & Succession Planning
Nasdaq’s Bryan Smith (Chief Human Resource Officer & SVP) gave a fascinating explanation of the company’s strategy and progression towards appointing its new CEO Adena Friedman. The process of selecting, attracting, and grooming Friedman for the position was a five-year progression—one of patience and careful planning—that was orchestrated by the board and management team. What factors underpinned such a smooth succession process?
8. Compensation committees should be guiding talent management & succession planning.
If your compensation committee is only thinking about CEO pay, then you’ve fallen victim to short-termist thinking. There are many advantages when companies can develop members of their executive team internally. That development, however, starts many years prior and requires appropriate training, exposure, and incentives along the way. Nasdaq’s scope of pay, for example, includes all section 16 officers. “Those discussions every year inform a lot of our discussions as a management team to ensure that we’re moving those individuals in the direction the board is envisioning,” said Smith.