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The Wall Street Journal
August 22, 2015
Ann Bucked Trend By Failing Deal-Parachute Vote
Ascena Retail Group Inc. on Friday completed its takeover of fellow clothier Ann in a cash-and-stock deal, announced in May. Ann shareholders on Wednesday overwhelmingly approved the deal, but sent its management off with a thumbs down to their lavish exit bonuses.
Robb Giammatteo, Ascena’s finance chief, said it evaluated the deal with the parachute payments in mind, and determined the merger would add significantly to earnings, especially given $150 million in expected cost savings between the combined companies.
“Say on Golden Parachute” votes aren’t binding, so the only way to stop payment is to vote down the deal, which rarely happens.
“There’s less concern about failing” parachute votes, according to Margaret Black, a Managing Director with compensation consultant Pearl Meyer & Partners. While “nobody likes to fail,” companies are keenly aware of the litigation risk that comes with deal-making.
August 8, 2015
Disclosure of CEO pay ratios could stoke healthcare industry tensions
A new rule that will shed light on the rising wealth gap between America's CEOs and average workers could put some healthcare companies with large numbers of low-wage employees in the public's crosshairs. The Securities and Exchange Commission said last week that it is moving forward with new compensation disclosure requirements under the 2010 Dodd-Frank financial reform law which will force publicly traded corporations to report the ratio of their CEOs' compensation to their median employee pay.
“Once you take into account those different levels of service outside of the acute-care setting, it could make the (pay) ratio even steeper,” said Steve Sullivan, Principal, at executive compensation firm Pearl Meyer & Partners.
Healthcare company boards also contend they need to offer large pay packages to lure top talent in a challenging and complicated industry. Investors may ultimately overlook a high pay ratio if they are still getting large returns. “As long as shareholders feel like the organization is performing and the individuals in place are sustaining that, the market will pay what the market will bear,” Sullivan said.
The Wall Street Journal
August 7, 2015
Avoiding Pitfalls of SEC Pay-Ratio Rule
Publicly listed companies will have a few years before they need to report the gap between the pay for their chief executive and that of their median employee, but smart businesses will begin now to craft a strategy to avoid the pitfalls that will come from making this disclosure.
While many companies are fearful of the time and cost of complying with the rule approved this week by the U.S. Securities and Exchange Commission, the bigger risk may come from having to communicate to employees—especially those making below the median employee—about how their pay is calculated and why they get paid what they get for the job they do, said Sharon Podstupka, a Principal at Pearl Meyer & Partners. “We can’t lose sight of the spotlight this rule is going to put on median pay and those who are closer to the median than the CEO’s pay and the attention they will pay to it,” Podstupka said during a webinar on Thursday.
Because companies won’t have to disclose the pay ratio until 2018, Ms. Podstupka said companies need to use the time between now and disclosure to “plot out your internal communications strategy, get people educated about how your company sets pay.” This includes being more transparent about what employees are told about how base salaries are set, how incentive plans and bonus pools are funded and getting human resources and managers well trained “to give the workforce comfort their pay is being set in a fair way. This is the first step and the best offense,” Podstupka added.
Who is Responsible for Risk? Risk Management Has Climbed to the Top of the Boardroom Priority List.
Since 2009, regulators in the United States, the United Kingdom and Europe have brought in new rules to curb excessive remuneration in financial services and avoid situations where executives are incentivized to make short-term decisions in pursuit of a bonus.
“In financial services there used to be a blank canvas as to how much you could pay someone, but the regulatory framework has changed and mechanisms are now in place to defer and constrain remuneration,” says Simon Patterson, Managing Director at Pearl Meyer & Partners.
Too much focus on restraining executive pay can also introduce a whole new set of risks. “It does not help any stakeholder if a company is uncompetitive and misses out on recruiting the best people. There needs to be a trade-off between being whiter than white and remaining competitive,” Patterson says, arguing that looking at headline pay alone is unhelpful. Companies and investors should instead focus on how much value executives are delivering for shareholders relative to their remuneration.
Patterson believes that focusing too much on what others are doing rather than a business’s own specific needs can be the root cause of ineffective risk management: “Setting your remuneration and risk strategy against what another company is doing is like trying to drive a car from the passenger seat,” he says.
Surveys Find Higher Pay, More Cash for CEOs
Compensation rose again for chief executive officers at the highest rate in four years and reached new heights, according to several studies. The trend has been to link executive pay to performance and, in May, the SEC proposed rules that mandate specific proxy statement disclosures on the link between pay and performance. Among other things, it proposes that pay will be reported separately for the CEO and include performance of the company’s cumulative total shareholder return and peer TSR.
Many companies use TSR as a metric, but relative TSR is not ideal, according to Peter A. Lupo, Managing Director and Head of the New York office of Pearl Meyer & Partners. ‘‘TSR is a measure of performance over a very long time. There are many instances where TSR is misleading or lacking,’’ he said.
Peer groups are another thorny issue, according to Lupo. ‘‘In theory, it makes perfect sense. In reality, it works well when you have peers with similar operating models,’’ Lupo said. However, few companies have 10 to 20 similar peers, which can create false results, he said.
Report on Salary Surveys
Long-term incentives for executives have evolved into effectively mid-term incentives, reducing the overall focus of executives on the long-term success of companies, compensation specialists said May 19 at WorldatWork’s 2015 Total Rewards Conference in Minneapolis. When it comes to executive pay, compensation professionals should forget about the norm and instead focus on what is best for the company’s overall strategy.
Businesses tend to keep to the middle of what is considered acceptable by constructing executive pay packages that are similar to others for fear of criticism from shareholders, said David N. Swinford, President and Chief Executive Officer of Pearl Meyer & Partners. Sticking to a traditional executive pay plan may not be best for every company and could hinder success, Swinford said. Instead, companies should ‘‘dare to be different’’ and examine what is critical for the business, what type of person they need to succeed and how to pay that executive, Swinford added.
Boston Business Journal
June 26, 2015
The Nine Highest-Paid Life Science Executives in 2015
The state’s life science firms have a heavy representation on this year’s list of the highest-paid executives. While that’s not new, the presence of so many biotech firms and medical device firms on that list this year is a change from recent years.
Much of the reason, according to Susan Stemper, Managing Director at compensation consulting firm Pearl Meyer & Partners, is the fast-rising value of equity awards used to incentivize executives in the field of drug discovery - as the value of stock in biotech firms has risen, so too has the value of those awards.
June 11, 2015
Biotech Boom Cranks Out Some of the Highest-Paid CEOs in America
The value of biotech executives’ compensation can rise and fall with clinical trial results, approvals from government agencies and bids from larger competitors. Management teams are usually terminated after biotech takeovers, and executives know they might be “selling themselves out of a job,” said Susan Stemper, Managing Director at Pearl Meyer & Partners. Termination following a change in control typically allows for executives to cash in their equity awards.
“It’s not so much about buying the talent,” Stemper said. “It’s about buying the programs, the products and the molecules.”
Risks in pipeline, plus share price volatility are important considerations in biotech executive compensation design. Share prices can experience big swings as investors with “imperfect” knowledge bet on biotechnology companies, Stemper said.
“It’s hero one day, goat the next,” Stemper said. “Some great news on pipeline possibility, the market goes wild and you’re trading at $300 a share. Suddenly, some not so great news coming out of trial, and the price drops remarkably.”
Treasury & Risk
June 11, 2015
Preparing to Disclose Pay for Performance
The Securities and Exchange Commission has proposed rules to implement the Dodd-Frank Act’s requirement that companies disclose how the pay of their top executives compares with the company’s performance, setting off another compliance effort for public companies.
Because of say-on-pay votes and proxy advisors’ assessments of companies’ compensation packages, many companies have started to provide a discussion of the relationship between executive pay and company performance in the proxy, according to Deborah Lifshey, a Managing Director at Pearl Meyer & Partners. “It’s not in any one specific format, but over the years this discussion has blossomed and it’s really quite good for most companies.”
The SEC’s proposal would “rein in” that discussion and Lifshey is concerned that the proposed disclosure rules are “one-size-fits-all” and will make it hard for companies to show “their true pay for performance theme.”
Additionally, Lifshey notes the SEC’s use of total shareholder return in the pay for performance disclosure might lead some companies to switch to using TSR more heavily, or even exclusively, in their compensation programs, in place of other metrics. “We think TSR is an important measure and aligns short-term with returns to shareholders, but it shouldn’t be the only measure,” Lifshey said.
Pearl Meyer & Partners recommends that companies use “realizable pay”—which values equity grants at the end of the pay period, rather than the grant date—instead of the SEC’s “actual pay,” and show a three-year aggregate of all compensation along with a three-year cumulative total shareholder return, Lifshey said.
The firm has also suggested that companies be allowed to incorporate into the proposed table other metrics that they regard as important to their performance, and tag those numbers (in XBRL) just as they’re tagging total shareholder return, Lifshey said. “While you can still have the information in the supplemental disclosure, we think it can get lost there.”
June 8, 2015
How to Come Back From Say-on-Pay Failure
Failing a say-on-pay vote is relatively rare. However, if a company does receive a failed say-on-pay vote there are three main areas boards will focus on, according to Terry Newth, Managing Director at Pearl Meyer & Partners. Those are: shareholder engagement, proxy advisory engagement and identifying program changes.
“The engagement piece, both with the proxy advisors and the shareholders, is an important aspect because the whole concept of say on pay is a blunt instrument, and companies don’t necessarily understand why their programs didn’t receive support,” Newth says. “Boards would identify any concerns shareholders or proxy advisors have with their pay programs, and then discuss those as a committee, or perhaps broader than that, and understand whether those are compelling enough to make changes to the program.”
After such changes have been made, the company usually revamps its disclosure to ensure that shareholders understand how the board addressed the concerns. Sharon Podstupka, Principal at Pearl Meyer, says there usually is a recognition that something has to change in how the story is told.
“As we have seen the narrative evolve, especially with those that have a challenging vote result, the expectation from proxy advisors and the institutional investors is that it is easy to find and clear to understand what the outreach efforts look like, and how companies are responding to feedback. It is not about what they heard and how they responded to changes, but what they heard and if they didn’t make changes, the rationale for why,” Podstupka says.
To Best Align Pay Incentives-Strategy, Consultants Suggest Three-Step Protocol
In designing compensation programs, companies should ensure their incentive structures reinforce, rather than undermine, their business strategies. Incentives are a prime opportunity to indicate to employees why the company is choosing to pursue long-term investments over short-term profits or vice versa.
Said Jim Heim, Managing Director of Pearl Meyer & Partners, “If you do this right, you can actually find yourself in this positive feedback loop where, because employees better understand what they’re trying to accomplish, they’re actually able to accomplish it.”
However, although business strategy usually is pegged to financial indicators, there may be times—such as industry disruptions—when companies must undertake decisions that sacrifice immediate financial results, said Theo Sharp, also a Managing Director with Pearl Meyer.
Because business is in a constant state of flux, companies must periodically assess not only their strategic imperatives, but also their financial imperatives such as generating enough cash to pay their workforce and to fund investments.
Said Sharp, “We suggest that compensation committees go through an exercise like this every year when they’re designing their incentives to be sure that something hasn’t shifted slightly one way or the other that will cause them to move up or down the scale.”
Bloomberg BNA, Workforce Strategies—Dodd-Frank: The Current State of Executive Compensation Compliance
Dodd Frank Puts Spotlight on Executive Compensation
What is the true impetus for legal and regulatory changes around the practice and disclosure of executive compensation? The overriding themes for publicly held companies updating their best practice approach to executive compensation are transparency to shareholders and accountability for the executives themselves, consultants versed in the field agree.
However, Managing Director for Pearl Meyer & Partners, Deborah Lifshey was somewhat critical of ISS and Glass Lewis’s ‘‘one-size-fits-all approach.’’ She explained that these proxy advisory services ‘‘issue recommendations on what are good or bad compensation practices—points they consider to be good or bad practices—and recommend to shareholders whether they should vote for or against the company’s compensation program. Boards of directors and compensation committees feel compelled to check all the boxes when the practices they lay out are not necessarily the best, and could result, in the worst case, in management leaving for the private sector.’’
April 25, 2015
Top-paid Healthcare CEOs See Pay Grow
Total compensation for some of the highest-paid CEOs in the healthcare industry increased faster than their companies' profits last year, a Modern Healthcare analysis of the first firms to report executive pay found.
Increasingly, companies use performance—rather than simply length of time since the grant of stock or options—to determine whether executives can cash in on these awards. Performance measures are applied not only to one-time awards, but more commonly to vesting annual equity payouts as well, said Steven Sullivan, Vice President at Pearl Meyer & Partners, a compensation consulting firm. “Performance shares are kind of everywhere.”