With activist investors more active than ever and government regulations an increasing presence in the C-suite, companies, their Boards and the investment community need to be aware of a number of key issues that impact executive compensation today.
So far this year, concerns around executive compensation from Institutional Shareholder Services (ISS) have decreased slightly in all areas: compensation communication and effectiveness, change in control (CIC) arrangements, non-performance-based pay elements and peer group benchmarking.
However, the Say-on-Pay rule, under which shareholders have the right to vote on the remuneration of executives, remains a hot-button issue. The most commonly cited concerns behind Say-on-Pay votes include pay for performance, problematic pay practices and Board responsiveness.
The central issue for most investor opposition continues to be concerns over perceived pay-for-performance misalignment. These perceptions are garnered from lack of performance-based equity, discretionary awards, inappropriate benchmarking and non-rigorous incentive programs, although this trend has decreased so far in 2014.
Shareholder Resolutions on the Rise
AST Phoenix Advisors witnessed a significant increase in compensation-related shareholder proposals in 2013, and this trend is continuing so far this year, with an increased variance in proposals. The most popular proposals seek to force companies to prohibit accelerated vesting of awards in CIC provisions, followed by proposals to encourage stock retention/holding periods and to limit executive compensation to 99 or 100 times median employee compensation.
Other proposals call for adoption of an “appropriate” benchmark for compensation, to limit or prohibit peer benchmarking and to submit a severance agreement (CIC) to shareholder vote. Expect a continued focus on companies with less than 70 percent support on Say-on-Pay, with voting on directors an issue for “repeat offenders.”
Compensation Governance Trends
The following are a number of key trends in compensation governance, incorporating data from Compensation Advisory Partners:
- The vast majority of executive stock ownership guidelines (92 percent) apply to named executive officers (NEOs) and are most often (80 percent) calculated as a multiple of base salary, while the remainder disclose a guideline as a fixed number of shares.
- Stock retention guidelines more commonly apply to NEOs (46 percent); only about a quarter (27 percent) apply below the NEO level.
- Clawback, hedging and pledging policies:
- 93 percent of companies disclose clawback provisions in their proxy statement
- 86 percent of companies disclose anti-hedging policies
- 59 percent of companies disclose pledging policies
- Typical Clawback Features: Most clawback provisions apply to all NEOs; few companies disclose provisions that extend to the broader employee population. Previously awarded annual and long-term incentive grants are typically subject to clawback provisions, although some companies also include future grants. Of the 20 companies that disclosed a specific length of time to recoup compensation, the most common time frame is one year (50 percent), with a range of one to three years.
Severance Pay Under Fire
Severance pay has also come under increased scrutiny, driven in part by the media and increased M&A activity. One area in particular that has seen increased focus in the last year is accelerated vesting of awards in CIC provisions. Traditionally, if a CEO has $10 million in awards, for example, in a CIC situation, those awards would accelerate and vest immediately. If that CEO knows he or she stands to gain that much money, this may be deemed by some to encourage the CEO to take unnecessary risks that may not be in the best interest of the company. For this reason, investors increasingly want to see a ban on accelerated vesting or the addition of a double-trigger, with a push for pro forma, time-based awards.
Proposed in September 2013, the CEO Pay Ratio Rule promises to be a lightning rod issue in the coming year and into the U.S. presidential election in 2016. It will require the annual disclosure of:
- The median annual total compensation of all employees other than the principal executive officer (the “PEO”)
- The annual total compensation of the PEO
- The ratio of the two amounts.
As an example, Bloomberg estimated the following ratios among the S&P 500 using industry averages:
|Total CEO Compensation
|Total Average Worker Comp.
|J.C. Penney Co.
|1,795 to 1
|CONSOL Energy Inc.
|269 to 1
|Agilent Technologies Inc.
|173 to 1
Source: Bloomberg, 4/30/13
This view into how much a CEO earns compared to the average worker at the same company is eye-opening, controversial and sure to make headlines in the coming months.
John Siemann is Executive Vice President of AST Phoenix Advisors, AST’s proxy solicitation and corporate governance advisory affiliate that provides corporate governance and solicitation advisory services.