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January 12, 2015
ISS Offers Guidance on Equity Plan Approach
Boards are being advised to assess how their equity plans stack up against ISS’s new approach to evaluating them, but some consultants have said the latest document does not provide enough clarification. In December, ISS released its FAQs on the new scorecard approach, which will come into effect for meetings on or after February 1, 2015. The scorecard puts aside pass/fail tests and will consider a range of positive and negative factors. It will still result in negative recommendations for plan proposals that have, in ISS’s words, “egregious characteristics (such as authority to re-price stock options without shareholder approval).”
Deborah Lifshey, Managing Director at compensation consultancy Pearl Meyer & Partners, says the fact that this is no longer a pass/fail test based on plan cost is a good thing. “It is great that there are mitigating factors, if your plan has a lot of good governance and your past practices are deemed to be good governance in the eyes of ISS. It’s good to know that the plan could pass even if the plan cost is a bit more than the industry norm,” Lifshey adds.
However, the new, nuanced approach leaves gray areas for boards.
“We were hoping to have more concrete and quantifiable information so we could help our clients figure out the range scores,” Lifshey says. “But what we actually got was this very high-level, elusive document that talks about the three buckets and how things are weighted generally. And we know that we need to get a score of 53 out of a hundred, but we don’t know precise values within each question.”
She says this may force boards to purchase ISS’s model to see how their equity plans will fare.
“I think after a year of doing this we will see enough ISS feedback to better understand how certain questions are valued.”
January 8, 2015
The Rise and Rise of the CD&A
In the five years since public companies were first required to create and publish a Compensation Discussion and Analysis (CD&A), this section has quickly become the rock star of disclosure documents. While some public companies continue to struggle with how to craft a meaningful CD&A, this disclosure section has improved dramatically in a relatively short period of time.
Sharon Podstupka, Vice President, Pearl Meyer & Partners, notes that while the best CD&As typically come from Fortune 100 companies, others are making vast improvements, too. ‘The challenge of say on pay, starting back in 2010, pushed many companies to think creatively about their CD&As,’ Podstupka says. ‘And the laser focus on executive pay has become so hot over the last two years that it’s made the CD&A a source of interest not just for investors but also for the media and the public at large.’
Almost everyone concurs that while design is important, what matters most is the message being expressed. Some design elements come down to personal preference. Podstupka, for instance, thinks ‘words are more important than the look and feel of a document, but there definitely is a link.’ In terms of design, she favors crisp headers and content that flows appropriately.
While some companies have upped their CD&A game in response to an approaching say-on-pay vote, many are trying to improve simply because they don’t want to lag behind their peers.
Podstupka points out that the CD&A will need to continue to evolve once rules about CEO-to-median-employee pay ratio disclosures are finalized. She believes these new rules will compel companies to tell their stories in even more individualized ways. ‘Soon, having a boilerplate CD&A might be a practice of the past,’ Podstupka concludes. ‘And I think that’s a very good thing.’
January 5, 2015
Comp Committees Gun for Better Pay Metrics
Putting metrics in place that align executives’ interests to the long-term performance of the business and shareholder value is an increasing priority. The influence of shareholder activism and ISS’s new scorecard approach to equity plans is expected to be a hot topic in this year’s proxy season.
In a recent NACD webcast on aligning compensation with strategy, Steven Van Putten, managing director at Pearl Meyer & Partners and head of the firm’s Boston office, said that compensation programs have to evolve to meet the ever-changing external environment and business strategy. Van Putten said that if a compensation program does not evolve to meet the business strategy, it may undermine strategy because incentives may be in place that could encourage outcomes, behaviors and actions that are inconsistent with the business strategy.
Van Putten adds that companies that have good pay-strategy alignment use a balance of financial result metrics, such as total shareholder return, and metrics that take into account strategic drivers in the business, such as innovation and customer satisfaction.
November 24, 2014
Compliance and Communication Needed In Compensation Disclosure, Speakers Say
A good CD&A should “strike the perfect balance between compliance and communication,” according to panelists from Pearl Meyer & Partners who spoke Nov. 18 at the National Association of Corporate Directors webinar Compliance & Communication: The Dynamic Duo of Disclosure.
Compensation disclosure is a “constantly evolving topic,” partly driven by a change from “an audience of largely regulators looking at these proxies, to an audience of investors, shareholders and the media,” said Deborah Lifshey, a Managing Director at Pearl Meyer & Partners.
The various audiences for disclosure affect the way CD&As are drafted. Say-on-pay results “send signals about the way boards are making decisions about pay,” said Sharon Podstupka, a Vice President at Pearl Meyer & Partners. This provides pressure to do a really good job developing the CD&A. Podstupka said “boilerplate language simply isn't effective anymore and takes the drafting process to a whole new level.”
Based on a study conducted by Pearl Meyer & Partners surveying 157 public companies, in 2015, 29 percent of companies surveyed plan to add a description of their shareholder engagement actions, over 35 percent of companies surveyed plan to do a better job of explaining how they arrived at their pay decisions by including some kind of alternative to the summary compensation table and 38 percent of companies surveyed plan to add graphical descriptions to enhance the understanding of their disclosures.
November 4, 2014
ISS Moving to Score Cards for Equity Plan Evaluations
Institutional Shareholder Services has proposed substantial changes to its voting policies for the 2015 proxy season that will give institutional investors greater flexibility in the way they evaluate companies’ equity plan proposals. The new policies provide for more nuances with the implementation of a “scorecard” approach that gives weight to various factors beyond plan cost.
“Whether these changes are better for companies really depends,” says Deborah Lifshey, a managing director at independent compensation consultancy Pearl Meyer & Partners. It’s important that companies and their boards understand how proxy advisory firms evaluate equity plan proposals if they want to win say-on-pay votes during the coming proxy season.
In a comment letter to ISS, Pearl Meyer & Partners is recommending that plan cost continue to be “the most heavily weighted factor, as it provides a company the opportunity to set their share request in the most predictable way. At the end of the day investors care more about dilution than ISS-unfavorable plan features or grant practices.”
The PM&P letter further urges ISS “not to apply a one-size-fits-all mentality in reviewing plan features and grant practices. We are hopeful that ISS will clearly provide carve-outs in certain situations and not penalize companies for failure to comply with one-size-fits-all maxims.”
Lifshey recommends that companies review the list of features that ISS considers best practice, and decide from there which ones they may want to add to their equity plans, or what potentially negative practices they may want to eliminate.
PM&P on CEO Pay Ratio Disclosure
November 3, 2014
Directors Give Pay Ratio Rule Thumbs-Down
Directors overwhelmingly believe the pay ratio rule will have a negative impact, with more than a third believing it will be a boon for gadflies and corporate agitators, according to an Agenda reader survey.
Proposed as part of the Dodd-Frank reforms, the rule will require public companies to determine and disclose the median pay of all their employees and in turn the ratio of the median to the annual pay of the chief executive.
Two thirds of respondents said the rule would have a negative impact, with predictions of its being intrusive, meaningless and a waste of time and money.
Sharon Podstupka, vice president at Pearl Meyer, says the survey results are “very consistent with the rumbles we are hearing in the market.” Podstupka says boards need to figure out how they are talking to the workforce about their global business strategy and the interplay between that strategy and the compensation structure.
“So [it is] helping people globally — whether it is on a regional basis or not — understand how pay is set across the globe,” Podstupka adds. “In the research we have done, one of the things most companies don’t spend a whole lot of time doing outside of the proxy is educating their workforce about how they set relative pay in respect to their peers.”
October 24, 2014
Companies Must ‘Tell a Story' With Pay Ratio Disclosures
The pay ratio rule is not something that directors will be able to ignore, said Sharon Podstupka, a Vice President at Pearl Meyer & Partners.
According to Podstupka, it is important for companies to show how their pay ratios were calculated and why their pay is fair and reasonable. The important thing is that the company “tell a story” and “tell that story well,” she said.
Pay ratio disclosures might take up a lot of space in proxy statements, and it is important for a company to understand that their proxy is not just an external communication tool to shareholders, but also an internal communication tool, according to Podstupka.
October 17, 2014
Pay Ratio Disclosure "Explosive" Issue for Employees
The long-awaited pay ratio disclosure rule could be an “explosive” issue for employees when they discover how their pay compares with their colleagues’, not just with the CEO, board members were warned by panelists at the 2014 NACD Board Leadership Conference. At issue: while CEO compensation levels are generally well known at public companies, problems may arise when employees start to compare their pay to the median across the company.
Therefore, companies need to be prepared for questions over the pay structure when the pay ratio disclosures are made public, said Sharon Podstupka, vice president at Pearl Meyer & Partners, at the NACD event. Managers might also benefit from training in how to discuss compensation, she said.
“We know that trust is eroding,” said Podstupka. “Fifty percent of the workforce does not believe they are being paid fairly compared to internal peers. That’s a product of not enough transparency about how that works.”
Boards were advised to head off a potential backlash from disgruntled workers by being clear and candid about how companywide compensation fits in with the organization’s overall strategy.
September 9, 2014
WHY YOUR JOB TITLE MEANS A LOT MORE THAN YOU THINK
What’s in a name? Plenty if it’s the name of the position you hold at your company.
Recent research indicates that your job title can affect everything from your level of mental exhaustion to your identity.
Each year, Pearl Meyer & Partners, a compensation consultancy based in New York City, publishes a study of job titling practices. In 2014, they found that 80% of companies surveyed use job titles to accurately reflect the corporate hierarchy and more than 92% use them to define an employee’s role. However, only 37% use them to attract prospective employees.
Jason Dionne, senior survey account manager with Pearl Meyer [& Partners], says their data found that nearly 30% of firms have job-titling practices that can vary from one department to another. While the importance of uniformity will vary depending on the company, Dionne says it’s best to be somewhat consistent, especially if you will seek to retain talent.
“Once they have this title, people may wonder ‘Sally now has that job title. Is she being promoted? Did she just do a really good job?’ You don’t want to have something that’s going to create any kind of confusion or possibly any bad feelings,” Dionne says.
September 2, 2014
Exec Comp Uncertainty Rife, Bad for Business
Nearly half of executives (42.7%) feel there isn’t enough detail in the information they receive about incentive pay, according to a new study by the compensation consulting firm Pearl Meyer & Partners. Conversely, only 8% of directors say the same, and the gap in understanding could lead to missed targets and misplaced priorities.
“There’s a lot of attention around disclosures and proxies for say-on-pay reasons, but you don’t really hear much about the complexity of how you’re going to talk to your executives about the very same thing,” says Sharon Podstupka, vice president of executive compensation communication at Pearl Meyer [& Partners]
“We know that poor communication leaves things open to interpretation,” says Podstupka. “If executives responsible for driving results aren’t clear about what the goals are and what they can do to affect specific metrics, it’s highly likely that performance results over the long term are going to suffer because people aren’t focused on the right things.”
According to Podstupka, developing a communication strategy for incentive pay can help companies meet performance goals.
CSuite Insight by Equilar
As a Result of Increased Shareholder Engagements, Have You Seen Boards Change the Definition of Performance Metrics?
According to Mark Rosen, managing director at Pearl Meyer & Partners, there’s been a rise in the use of relative shareholder return (TSR) as a metric for aligning executive pay and performance driven by standards used by shareholder advisory firms. While useful, it is more of an outcome-based measure. By defaulting to relative TSR as an incentive measure, many companies miss the opportunity to employ incentive metrics that capture executives’ success in driving business strategies and leadership initiatives—key aspects of performance that are critical to the creation of long-term shareholder value.
We have encouraged companies to customize incentive designs to their specific business needs by retaining internal performance metrics (or introducing them if they were not used before), such as operating earnings, EBIDTA or return measures (ROIC/ROE), and using TSR as an additional performance measure or modifier. In such cases, actual incentive payouts under the plan might ultimately be adjusted upward or downward, respectively, based on whether relative TSR is above median, suggesting the targets were set too high, or below median, suggesting the targets were not sufficiently rigorous. Such an approach provides a broader and more sensitive perspective on aligning executive pay with performance.