The realm of executive and director pay is a tumultuous one. Whether preparing for the impending CEO Pay Ratio or anticipating the regulatory changes ahead, it can be challenging (and time-consuming) for boards and compensation committees to stay up to date on evolving trends and pay practices.
On November 10, Equilar’s Compensation Committee Forum (hosted in San Francisco at the Nasdaq Entrepreneurial Center) provided an efficient tour of the compensation landscape. The day’s agenda covered everything from peer group design to regulatory predictions following this week’s election outcome. Speakers included corporate board members, compensation experts, proxy advisors, and even a former SEC Commissioner. Below, we recap major insights and points of discussion for the day.
1. What regulatory updates or changes should compensation committees be aware of, particularly in light of the election results?
- Further Resources: Looking Ahead to 2017: What Compensation Committees Need to Know
- Further Resources: CEO Pay Ratio: The Great Challenges Boards Will Face
- Further Resources: Legal Issues: The Biggest Mistake Boards Are Making
A full repeal of Dodd-Frank is unlikely.
Following health care, the Dodd-Frank Act will likely be an important action item on the presidential agenda. While a full repeal is possible, amendments to Dodd-Frank’s core provisions are far more likely. The impending CEO Pay Ratio is one of the more malleable Dodd-Frank regulations; panelists were torn on whether a repeal or a revision was more likely. One possibility is that the SEC could take a step back and reissue or limit the pay ratio rule on a U.S. basis only.
Companies continue to prepare for the 2018 pay ratio release.
Yet, the event is expected to be more of an HR or communications issue than an executive compensation issue. According to the panel, employees will likely gloss over the CEO salary and instead focus on the median salary—particularly on how they stack up to their peers, both internally and at competing organizations. This is expected to create major communications challenges internally.
Recent Delaware court cases remind compensation committees to focus on process.
The panel also highlighted a recent Delaware court case involving the costly hiring and firing of a Yahoo’s COO. The takeaway? In structuring executive pay, boards must (1) anticipate potential conflicts of interests, (2) be mindful of their board documents, and (3) allow adequate time for the compensation committee to deliberate (i.e., avoid rubber-stamping CEO decisions).
2. What important guidelines should compensation committees consider as they structure their peer groups?
Focus on the criteria, not the individual companies.
When it comes to defining peer groups, it’s tempting for the board to compare individual companies to one another and assess the similarities. Yet, the compensation committee must limit itself to defining the criteria, then let the peer group fall into place. Of course, selecting criteria for the peer group is arguably a compensation committee’s greatest challenge in today’s executive pay environment. According to Equilar data, business sector is the most common criteria for benchmarking peers, with revenue ranking second (78% and 65% of S&P 500 boards use these criteria respectively).
Consider having more than one peer group.
A common theme throughout the panel discussion was the idea of having two peer groups—one for pay levels and one for performance design. One panelist explained how his company’s performance-based peer group was guided by criteria like geography and talent pool. Whether this is an emerging trend is yet to be seen, as currently only 11% of S&P 500 companies in 2015 indicated benchmarking based on more than one peer group.
3. What should boards keep in mind about executive compensation disclosure?
- Further Resources: 3 Trends Affecting Today’s Compensation Committees
- Further Resources: 5 Tenets of Structuring the Proxy Statement for Shareholder Engagement
The strategy must drive the plan.
Companies are getting better at this, said one major institutional investor on the panel. At the highest level, companies must structure the disclosure of executive pay by first explaining their strategy and then showing how the compensation plan has been built around the strategy.
Start anew each year with the CD&A.
The CD&A is too often a boilerplate summary that swaps out the numbers from year to year. Boards and compensation committees should start with a fresh piece of paper each year. Why did the board choose the equity vehicles that it did? Why is it appropriate for the company in its current life cycle?
Performance metrics and Say on Pay were among the other hot topics of the day. Discussions ranged from panels and one-on-one interviews to small round-table conversations.