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CSuite Insight by Equilar
June 2014

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.

The Washington Post
June 22, 2014

Washington CEO Pay Rose 7% Last Year as Compensation Benefited from Stock Gains

Total pay for Washington’s highest-earning executives rose nearly 7 percent last year as compensation packages benefited from healthy gains in share prices. Analysts say the benefit of a roaring stock market has been two-fold for Washington leaders. Executives are increasingly being judged on the performance of their company’s share price (as opposed to metrics such as revenue or income, which were often used in the past), and they are receiving more of their compensation in stocks and options.

“Performance-share plans are on the rise,” said Jannice Koors, managing director at Pearl Meyer & Partners, a New York-based executive compensation consulting firm. “As companies have good years, you start to see some really big numbers.”

The Charlotte Observer
June 13, 2014

Median Perks Package Down, But Jets, Cars and Lavish Payouts Still Abound

Boards of North Carolina companies provided their CEOs with perks ranging from jet travel and car allowances to supplemental retirement plan contributions and physicals. Even so, the median perks package fell 22 percent last year, to $83,333.

Some companies have cut back on perks such as club dues, said Mark Rosen, a Charlotte-based compensation consultant with Pearl Meyer & Partners. “If you go back a few years, you’ll see a lot more golf club memberships,” he said. “It’s just harder to justify why we should be subsidizing that for someone who makes a decent living.”

Other perks, such as physical exams for executives, make sense, Rosen said. “We want to make sure the executives are taking care of themselves,” he said.

The Wall Street Journal
June 5, 2014

Investors Close Golden Parachutes
Nonbinding Votes Seek to Limit Stock Rewards for Executives After Mergers

Golden parachutes are falling out of favor amid investor and regulatory scrutiny of rising executive pay, especially perks that aren't tied to a company's performance. Since 2011, shareholders have had a say in how much executives are paid, including golden-parachute payments. "Say on pay" votes are now required by the Securities and Exchange Commission, and while they aren't binding, boards are under pressure from regulators and shareholder-advisory firms to consider investor views when crafting executive-pay packages.

As a result, "we're certainly seeing a more conservative approach by companies" to change-of-control payments, said Dan Wetzel, a managing director at consulting firm Pearl Meyer & Partners.

Cash severance payments, which once commonly exceeded three times an executive's annual salary and bonus, have been trimmed. Other perks have all but disappeared. One such example are gross-ups, which obligate a company to pay the high taxes levied on corporate perks, in effect letting the executive take home the full amount. Just seven of the 50 largest U.S. companies allowed tax gross-ups in 2012, down from 21 companies in 2006, according to Pearl Meyer & Partners. Mr. Wetzel said the number is likely lower now.

June 2, 2014

A Bonus Onus: Peek at Peers

Long-term incentives are the largest component of a typical executive compensation package, and by mid-2013, total shareholder return (TSR) was the most prevalent performance metric for long-term incentives at the 250 largest U.S. companies. However, when reviewing the structure of long-term incentive plans for senior executives, both business cycle and the manner in which a selected peer group company makes its money are also important considerations.

“Absolute goals are still far more common, but relative goals are gaining in popularity,” said Peter Lupo, managing director at pay consultants Pearl Meyer & Partners. But the review shouldn’t end there, Lupo said. Companies also need to review their competitors. Historically, compensation committees have looked at companies similar in size based on revenue. But Lupo said two other criteria are more important: business model and cycle.

Business cycle is particularly important for a company whose cycle involves peaks and valleys. If it peaks when companies in its peer group are in valleys, then its performance comparisons would be skewed. A company also wants to make sure the firms in its peer group make money the same way as it does, otherwise they could perform differently.

San Francisco Business Times
May 15, 2014

At the WomenCorporateDirectors Global Conference - Here’s a Concept for Corporate Boards: Pay CEOs Fairly and Save Yourselves from Controversy

Beyond branding, the biggest concern facing board members is how to determine executive compensation  — a procedure that is often skewed when committees set salaries based on incorrect or poor benchmarks. There are a lot of outside influences involved in the process, including everything from the input of advisory firms and institutional investors to regulatory actions and even activist shareholder activities, noted Melissa Means, a managing director at Pearl Meyer & Partners.

The compensation packages at other companies also come into play, she said. “There is a lot of pushback on selecting the right peer company to compare yourself to, but boards need to remember that is just a piece of information,” said Means.

Means argued that boards need to realize that just because a peer company may pay its CEO $500 million, that shouldn’t automatically become the magic number for their own CEO. Instead, she emphasized that boards need to gauge factors such as how a company has performed relative to its peers. 

May 5, 2014

Boards Boost Director Pay Disclosure as ISS Raises Scrutiny

“I think in some cases where compensation committees are sensitive to proxy advisory firms and are benchmarking executive pay to median and board pay to median, it’s a simple disclosure and addresses a question that might arise later on,” explains Peter Lupo, managing director and head of the New York office at Pearl Meyer & Partners.

Financial Times
April 6, 2014

Bosses' One Way Bet

"If we start to have a bull run you are going to see the bonus numbers expanding," said Simon Patterson of Patterson Associates, part of the American pay consultancy Pearl Meyer & Partners. "I'm skeptical that the ratio of executive pay, compared to the ordinary worker, is going to come down."

The Washington Post
March 26, 2014

Dismantling CEOs’ Golden Parachutes

Companies that give executives extra money to cover excise taxes they might be hit with from their golden parachutes (known as a tax "gross-up") are becoming an endangered species. Executive pay consultants Pearl Meyer & Partners recently found that among the 50 largest public companies in the Fortune 500, the prevalence of tax gross-ups has fallen from 41 percent in 2006 to just 14 percent at the end of 2012.

The cash portion of many severance packages - which is typically two to three times an executive's average combined salary and bonus - appears to be declining, too. Fewer boards are choosing multiples of three or more when setting these rewards. "From an optics perspective, companies have reconsidered whether they need to offer" such big multiples, says Dan Wetzel, an executive pay consultant with Pearl Meyer. "Some have really pulled back from that."

March 10, 2014

The Insiders or the Outsiders?

Executive compensation consultancy Pearl Meyer & Partners surveyed 153 Fortune 100 companies and nonprofits in 2011. Of those that had changed CEOs within five years, 32 percent said key internal candidates left the firm to work for another organization or retired after being passed over.  Another 31 percent said they adjusted the pay or position of those internal candidates so they would stay.

Compliance Week
February 19, 2014

More Companies Taking Extreme Measures to Tie Pay to Performance

What proxy advisory firms expect when it comes to pay-for-performance doesn't always align with what companies should be doing. For example, investors prefer to see relative total shareholder return (TSR) in long-term incentive programs. “As a result, relative TSR has soared in prevalence as a long-term incentive metric,” says Steven Van Putten, a managing director with Pearl Meyer & Partners.

According to Van Putten, TSR is “not really an incentive metric; it's more of an accountability metric, because TSR really is an outcome of the company's execution of its business strategy and how investors perceive that,” says Van Putten. “TSR is not something an executive can necessarily influence, or control, through their actions.” 

Also, a well-designed executive incentive program shouldn't necessarily be built on the basis of what other companies are doing, or what proxy advisory groups prefer, says Van Putten. Rather, it should “align with, and support, a company's business and leadership strategy,” he says.

February 18, 2014

Boards Clean Up Director Pay Packages

According to research conducted by Pearl Meyer & Partners for the National Association of Corporate Directors’ forthcoming 2013–2014 Director Pay Study, the prevalence of companies that pay directors for service on board committees among the largest 200 public companies has been declining for the past two years…

Jan Koors, managing director and head of the Chicago office at Pearl Meyer & Partners, says pay plans that have been sheared of meeting fees and committee member retainers look similar to pay plans before the Sarbanes-Oxley Act was adopted. Before 2002, board members were all paid the same amount of money in the form of a cash retainer, meeting fees and an equity component.

After Sarbanes-Oxley heaped work on audit committees, boards boosted pay for audit committee chairs and members because of the increased time and work involved. Then, after the financial crisis resulted in additional scrutiny on executive compensation and Dodd-Frank subsequently called for mandatory say-on-pay votes, compensation committee chairs and members got a raise.  

But now, some boards have rethought that philosophy and have determined that they’re done with different tiers of pay for directors based on committee service, explains Koors. “The point is, you get to a philosophy that says, we think everybody’s pulling equal weight and doing equal work and will be equally liable for the decisions we collectively make, and we don’t need committee fees and meeting fees,” Koors says.  

Bloomberg BNA
February 14, 2014

Top 50 Companies Ditching Tax Gross-Ups in Compensation Agreements, Speakers Say

Margaret H. Black, a managing director in the Los Angeles office of Pearl Meyer & Partners LLC, said during the [firm’s] Feb. 12 Webcast that excise tax gross-ups “have been the poster child of problematic pay practices in the press and also with institutional shareholders.”

Daniel M. Wetzel, a Pearl Meyer & Partners managing director and head of the consulting firm’s Los Angeles and San Francisco offices, said that in the “more performance-focused, post-gross-up environment,” there have been significant changes in the way boards and management design and communicate executive compensation programs.  Although tax gross-up provisions are contingent programs that only occur during a change-in-control, they involve significant dollars and have tax implications, depending on plan design, he said.  Wetzel said change-in-control is less likely among the top 50, so that their programs may be more conservative and the pay mix may differ from that of other companies.  Nevertheless, the top 50 companies are trendsetters in compensation design and their programs are worth studying, he said.

“We have dual Internal Revenue Code regulations, Sections 280G and 4999, which are technically extremely complex, and the outcome of that is the value provided to executives can be significantly different than what was intended by the board when the program was initiated,” Wetzel said, referring to tax code sections on golden parachute payments.

Wetzel said that companies should consider how often they will review change-in-control provisions, how they will be implemented, and what flexibility the company has to make changes when it is “in the throes of a real deal.”

February 3, 2014

“Say on Parachute” Requires Early Board Attention

“It’s a best practice for companies to understand where they stand on the golden parachute issue, so they don’t get themselves boxed into making last-minute adjustments,” says Margaret Black, a managing director at Pearl Meyer & Partners, who co-authored a recent white paper on the votes with fellow managing director Dan Wetzel.

…According to their research, which goes through October 31, median support for the mergers themselves was near-unanimous: roughly 99%. Where approval for the deal was less overwhelming, approval for the parachutes tended to be lower, too. And shareholders were more likely to abstain from the parachute votes than from the merger votes. 

The parachute vote result partly reflects how well the board has conveyed the value of change-in-control payouts to shareholders, Wetzel says. “From a director’s standpoint, it’s ‘Are we spending an adequate amount of time communicating incentives effectively to shareholders?’” he explains.

According to Pearl Meyer & Partners, Coventry Health Care and Warner Chilcott disclosed the lowest support in parachute votes, with just 35% approving. (Coventry was acquired by Aetna, and Warner Chilcott was acquired by Actavis.) Coventry’s now-former compensation committee chair, Dale Randall, declined to comment, while Warner Chilcott’s now-former comp chair, Stephen Murray, was unavailable for comment prior to deadline. 

When it comes to directors and parachute votes, says Pearl Meyer & Partners’ Black, “They should have some level of concern, but it probably shouldn’t be keeping them up at night.” 



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