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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.
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.