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November 16, 2015
Boards Urged to Prioritize CEO-NEO Pay Ratio
Boards are encouraged to pay close attention to the ratio between CEO compensation and that of other named executives, as experts say this is a more meaningful measurement of good compensation practice than the SEC-mandated pay ratio rule.
Aalap Shah, Managing Director at Pearl Meyer, says the CEO-NEO pay ratio is very important to compensation committees, and is often discussed when setting pay packages. However, Shah says, “comp committees do want some differentiation; not everyone should be paid the same…You are not going to have an organization where everyone is a high performer.”
Pearl Meyer compared CEO and CFO pay, as the CFO is typically the highest-paid executive after the chief executive. It found that for companies with revenues of $500 million to $1 billion, the median ratio was 2.5:1. Meanwhile, for larger companies with revenues between $1 billion and $2.5 billion, the ratio was 2.7:1.
“We found that although some think that may be high, the CEO compensation tends to have a greater emphasis on long-term, performance metrics,” Shah says. “The pay is more at risk.”
Bloomberg BNA, Report on Salary Surveys™
Study Finds TSR Doesn’t Drive Company Performance
The use of total shareholder return (TSR) as a metric in long-term incentive plans has not been effective in improving company performance, according to an analysis by Pearl Meyer and Cornell University’s ILR School’s Institute for Compensation Studies.
Pearl Meyer and Cornell studied S&P 500 companies’ use of TSR in LTI plans over a 10-year period and whether it had an impact on the firms’ performance. The research found that there appeared to be an unclear link between TSR and business results.
“The assumption about TSR is that linking stock performance to executive compensation would lead to improved performance because, in part, it would align incentive awards with shareholder interests,” said David Swinford, President and CEO of Pearl Meyer.
Instead, the Pearl Meyer and Cornell research found little to suggest that including TSR in a LTI plan led to improved financial performance.
Institutional Shareholder Service and other proxy firms use TSR because it’s something that the shareholder can use to compare firms, Swinford said. TSR would seem to be a good metric to use over the long term. “Everyone agrees the purpose of the business is to make profit for the owners,” Swinford said.
There is nothing that could easily replace TSR, according to Swinford. “There isn’t a single good measure or pair of measures that would be a good metric for all companies. There are different drivers of value creation,” Swinford said.
Using a metric other than TSR would require some communication skills of a company, according to Swinford. If an organization decides to use another measure other than TSR, then it should have good reason to do so, he said. “It’s incumbent on every company to explain to shareholders why they are pursuing the strategy they pursue,” he said.
“Every investor wants to know what the long term strategy is and how to get there,” Swinford said.
Re: locate Magazine
Tighter legislation, corporate governance and public scrutiny are putting international and executive pay benefits under the spotlight as never before. Legislative developments, such as April 2015’s changes to the treatment of share options for internationally mobile employees, has remuneration professionals innovating to deal with arguably less tangible, but equally important issues.
While international pay and benefits play a key part in attracting and retaining a more diverse expatriate population, there is also demand for more robust corporate governance and responsibility, stronger links to return on investment, and fairness.
Simon Patterson, Managing Director of executive compensation consulting firm Pearl Meyer, London, and a speaker on the realities of pay governance remarks, “One of the most important trends in remuneration governance today is the sharing of best-practice ideas between countries and cultures. Some countries may be focused on transparency, while others are less so, but most countries think about the linkage of performance to corporate strategy in the same manner.”
Greater scrutiny of executive pay and governance, with the rising interest in more flexible pay options is also pulling payment from performance into greater focus. “In a complex world, executives must continuously find and execute investment opportunities that will earn more than the cost of the capital required,” Patterson notes, while dealing “with a hugely competitive business environment.”
October 5, 2015
Pay Ratio Rule Opens Can of Worms for HR
Boards and management teams are being advised to communicate their compensation philosophy clearly — for both executives and employees — before their pay ratio is disclosed in 2018, as it could have a negative effect on workplace morale.
Although calculating the rule could be cumbersome for some companies, experts say the biggest impact of the rule may be on employees, who will now be able to compare their pay to that of the median employee. This may prompt some compensation committees to begin assessing the pay of rank-and-file employees.
One way to combat this, experts say, is to communicate with employees about their pay and the ratio. “A company would be well served to start being more transparent and start communicating that they are working on the calculation and what the preliminary numbers are,” says Aalap Shah, Managing Director at Pearl Meyer.
The new disclosure may disturb the relationships between different groups of employees and the question becomes whether or not comp committees are going to feel the need to extend their reach into this workforce area.
Shah says this is unlikely. “The committees usually step back from that because they want to advise and shepherd management, not do management’s job. It may drive some committee members to ask for that information … but some are asking for that anyway regardless of the pay ratio,” Shah says.
Wall Street Journal
September 29, 2015
TSR a Growing Pay Metric, May not Be Useful: Study Finds
Executive compensation is increasingly pegged to shareholder returns as corporate boards look to align pay packages with business success. Problem is; there’s little to indicate company performance improves as a result.
More than 48% of S&P 500 companies tied compensation to total shareholder return – stock performance plus reinvested dividends – in 2013, according to a study by Cornell University and Pearl Meyer, an executive-compensation consultant. That’s up from less than 17% in 2004.
The proliferation of TSR as a compensation metric is likely tied to governance advisors, according to Peter Lupo, a Managing Director with Pearl Meyer. Those advisors typically evaluate pay packages based on TSR, which overlooks other criteria like return on invested capital.
While “TSR is a wonderful tool to understand the long-term effectiveness of linking pay and performance,” Mr. Lupo said, it is not particularly helpful in short-term compensation decisions. Many firms, for instance, use three-year-TSR performance, but it’s common for three-year TSR to often be a lagging or leading indicator of future performance.
“There is no magic metric,” to appropriate compensation practices, as it varies widely between companies and industries, Mr. Lupo said. To determine the best benchmarks, Lupo told boards and investors “to do your homework” in order to know which measures are indicative of the best performance of a company, relative both to its peers and the broader market.
September 28, 2015
TSR in Comp Has Little Benefit for Investors, Research Claims
Research released today shows that the use of total shareholder return as a metric for incentive programs does not lead to improved company performance.
The study by Cornell University ILR School’s Institute for Compensation Studies, in collaboration with consultancy Pearl Meyer, found that there was not strong evidence that using TSR in a long-term incentive program had a positive influence on one-, three- or five-year TSR, return on equity or earnings per share.
David Swinford, President at Pearl Meyer, says that he is not surprised by the results that the use of TSR as an incentive metric was not associated with better performance. “[TSR] is good at aligning the executive’s total rewards with the returns of the shareholders, but it really doesn’t have value as an incentive tool,” he says.
Compensation committees do have to focus on alignment, Swinford says, “but there is so much guidance around the use of TSR… It is much harder to figure out what are the right measures to select for long-term performance and it is harder to establish the appropriate goals for the management team. So at the end of the day, many start defaulting back to what is more well known.” Swinford continues, “They know if they use TSR they will have better alignment over the long term and are going to have less external criticism.”
Swinford says that if companies have a strong sense of what it is going to take to drive future value creation and they know what levers to pull, those should be prioritized in executive comp plans.
The Cornell research was the first academic effort to address the topic of TSR as a metric.
September 2, 2015
These Retailers Make Bank CEO Pay Look Modest
Retail executives with hefty pay packages and plenty of low-wage employees could end up looking worse than bank leaders when the rule requiring companies to report the gap between their chief executive officer and their median worker goes into effect.
The pay-ratio rule, adopted by the U.S. Securities and Exchange Commission last month, has been championed by supporters as a way of highlighting the growing wage gap between executives and rank-and-file employees. It could increase scrutiny of executives at companies with large U.S.-based workforces earning near the minimum wage, shifting attention away from managers at investment banks and hedge funds.
“Any kind of company with a large seasonal or temporary workforce or college kids with lower pay, like retailers, might be concerned with the ratio,” said Deborah Lifshey, Managing Director at Pearl Meyer & Partners, a New York-based executive-compensation consulting firm.
The Executive Pay Minefield: Balancing the Needs of Shareholders and Regulators is Fraught with Challenges
Bank CEOs made more in total compensation in 2014 than in any year since the beginning of the financial crisis, but striking the right balance between the often-conflicting demands of regulators and shareholders has never been more challenging.
The composition of that pay has changed quite a bit. Perquisites are way down, and big-money deferred-pay schemes, including supplemental executive retirement plans, are out of favor. Provisions that allow companies to “claw back” bonuses from previous years if long-term goals aren’t met are hot. Long-term performance is more in vogue than ever—one thing that is accepted by both shareholders and regulatory agencies—with performance shares and restricted stock more liked than stock options. Performance-based shares are only awarded if performance metrics such as profitability and asset quality are met. Restricted stock is awarded as a grant, but only vests after conditions are met or after a certain time period.
“Investors want base salary to cover the duties of the position, but think the rest should be at-risk, so the executive only receives an award when shareholders do well,” explains Laura Hay, managing director at Pearl Meyer.
“If you want to use compensation as a competitive advantage to drive value, it has to be tied to the business strategy and culture of the organization,” Hay says.
National Public Radio
August 28, 2015
Comparing The Top Boss's Pay To Yours
Companies have long had to disclose what their CEOs make, but soon, for the first time, large companies will have to disclose how salaries at the top compare to their median compensation level for employees worldwide. It's a rule the Securities and Exchange Commission adopted as required by the Dodd-Frank financial law.
The idea was to give shareholders of companies more context for how executives are paid, but experts say this rule could lead to some unintended consequences.
Deborah Lifshey, Managing Director at Pearl Meyer, says most client companies are concerned about their workers' reactions when they find out how they fare relative to their peers.
"They're not really concerned about what the pay ratio actually is," Lifshey says. "They're more concerned about what will happen, how the media will react, what it will do with this data" — and how employees will react if they find out that they're paid less than the median for their company, or that a rival firm's median pay is higher.
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.