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Such “rebuttals” from companies that receive a thumbs-down on pay are becoming more common, said Tom Kelly, a managing director in the Charlotte office of compensation consulting firm Pearl Meyer & Partners.

Deborah Lifshey, a managing director in the New York office of Pearl Meyer & Partners, said 605 companies, or 70 percent, have passed their 2012 say-on-pay vote with more than 90 percent support, generally tracking the 2011 results for winners and losers. The losers--15 companies--represent only 2 percent of companies that have filed proxy statements as of May 11, Lifshey said. Looking for a common denominator among the companies that lost the say-on-pay vote in 2011 and 2012, Lifshey said, with the exception of Citigroup, none of them were noted by the media for outrageous pay practices or involved in the mortgage crisis, nor were there any discernible trends by industry or company size. The “common thread,” though, was that all except one failed to get ISS support, she said.

The “ISS vote counts, but it isn't last say” on whether companies will pass or fail their SOP, Lifshey said. Companies that failed in 2011 have come back in 2012 to win majority support for their executive pay programs, which shows that “there is time between voting to change what you are doing” and to change ISS's voting recommendation, Lifshey said. Among the losers in 2011 to change to winners in 2012 are Beazer Homes, Jacobs Engineering, and Cogent Communications.

Discussing what these companies did to garner shareholder support in 2012, Lifshey said by way of example that Beazer Homes listed everything it did to improve its executive pay program.

The percentage of companies that have women members on their boards also increases with company size, but gender diversity continues to be limited [according to the latest NACD Director Compensation Report].

While a majority of companies in all but the Micro category have at least one woman director, and the majority of the Large and Top 200 companies have at least two, few companies have more than two women serving on their boards. “There is a long way to go for gender diversity on boards,” says Jannice L. Koors, Managing Director at Pearl Meyer & Partners.

First, what sets this generation apart from their Gen-X and Baby Boomer forerunners? They expect constant stimulation at work, and they want constant feedback, says Jannice Koors, managing director at compensation consultancy Pearl Meyer & Partners. And don't forget that compensation committees aren't limited to just thinking about executive compensation, said Koors.

She encouraged board members to consider HR policies and the company, broadly. For example, many businesses are still clinging to holdover policies from the manufacturing age that are out of sync with today's changing workforce, she says. Those relics include rigid hours and requisite face time; formal annual review processes, in which companies spend "an inordinate" amount of time and resources telling workers "that they're average"' and hierarchical pay structures.

CFOs See Moderate Pay Gains in 2011 as Boards Focus on Aligning Compensation Packages More Closely with Company Results

Overall [CFO] compensation should be up 7% to 10% in 2012, predicts Steven Van Putten, managing director of Pearl Meyer & Partners, a New York-based compensation consulting firm. However, Van Putten expects gains to vary by industry. Sectors like manufacturing that are more linked to overall economic improvement will see pay increases at the higher end. There also should be more variation from company to company in volatile industries such as life sciences and technology.

Boards are more involved in evaluating performance goals and making sure metrics are aligned with shareholder value. And they’re using increasingly more rigorous goal-setting methods, not just comparing targets to those used by other companies in their industry, but often considering the impact specific situations would have on pay. “They’re doing stress tests,” says Van Putten. “They’re looking at, for instance, if performance were to go south, what impact that would have on bonus plans.”

Part of that effort involves continuing to eliminate such perks as tax gross-ups and overly generous severance packages. “If you go back a year or so, board action was around low-hanging fruit,” Van Putten says. “Those have been tossed out.”

"I think directors and boards are really working hard and they are changing things to meet the expectations that shareholders have, that advisers have, about how do we define performance and how are we going to pay for it, and we need to be able to explain that in plain English to our shareholders," said Randy Harrison, managing director with leading executive compensation consulting firm Pearl Meyer & Partners.

While financial reforms including the Dodd-Frank legislation that took effect in 2010 have helped shareholders better see how top executives are being paid, there still is often a difference between what companies report their CEOs are paid and what the CEO actually makes. For example, the total compensation for a CEO might be reported at $1 million. Of that, $300,000 is his salary, and another $100,000 is a cash bonus.

"The other $600,000 is stock that isn't going to be their money unless they meet some goals two or three years down the road. So that additional $600,000, they might get that, they might get nothing, they might get a little better," Mr. Harrison said.

Mr. Harrison said that's one of the biggest unaddressed challenges when looking at how pay is reported. "Looking to the future, what's going to change is there's going to be increased balance of reporting on 'This is the target of what we're trying to pay somebody, and this is what they got.’"

Citigroup’s [negative Say on Pay vote] result is unlikely to spur shareholders of other companies to turn sour on pay arrangements, says another consultant, Pearl Meyer & Partners managing director Peter Miterko.

Miterko suggests there may be fewer “no” votes. That’s because, he says, the tests that ISS is using this year to determine its recommendations are more sensible and easier to understand than last year’s. “I think a lot of companies have a better understanding of what they need to do now to get a ‘yes’ recommendation from ISS,” says Miterko.

The [Say on Pay} the races appear to be tightening in 2012, said Deborah Lifshey, a managing director at Pearl Meyer & Partners, an executive-compensation consulting firm in New York.

In addition to Citi's loss, she noted several others including at IGT and industrial products maker Actuant. In many cases, pay increases have outstripped market gains for investors, Lifshey said. This year, "people are more discontent with execs being paid when they are not being paid," she added.

Jannice Koors, a Managing Director of Pearl Meyer & Partners, was interviewed about key takeaways from the NACD’s 2011-2012 Director Compensation Report.

There are always these competing forces around. Directors are working harder and it’s tougher to get directors because they can sit on fewer boards at a time. On the flip side, you’ve got a moderating force on director compensation around the issue of the independence of directors. Do you get to a point where director compensation gets so high that it brings into question the independence of board members? So I think there are a couple of competing forces here: one that would tend to push director compensation up year over year, and one that is going to moderate those increases.

Large, low-priced stock grants risk giving executives "a windfall gain when really maybe all they did was ride the market back up," said Matt Turner, a managing director at compensation consultants Pearl Meyer & Partners. He said the 2009 experience should alert boards to the potential outcomes of generous grant award programs.

With profit margins getting slimmer, hiring banks may not have the resources or inclination to buy out large, unpaid, deferred compensation packages.

The result: The percentage of investment bankers voluntarily switching jobs this year will fall to 5% to 7%, predicts Shekhar Purohit, managing director at compensation consultancy Pearl Meyer & Partners LLC. That's down from about 10% in the years following the financial crisis and 20% in the mid-2000s.

In some cases, hiring banks are offering up-front cash bonus payments to buy out deferred compensation packages. However, they tend to discount these up-front signing bonuses by 10% to 20%, "based on what the deferred package is worth to the banker," says Purohit….

Purohit says an increasing number of bankers are considering consulting positions within the corporate advisory practices of large accounting firms. These businesses provide M&A advisory services similar to investment banks' with "less exposure and liability" due to their consulting fee models. The upside may not be as great as that offered by investment banking, where fees are based on the size of the deal, but there may be less of a downside when large deals are few.

“If anything, we see a trend away from one-time grants,” said Matt Turner, a Managing Director at Pearl Meyer & Partners. “One reason is concern about the diversity of the director’s holdings being tied up in a single grant. Second, there is increased concern about board pay being clean and transparent. We see compensation being a secondary issue in director recruiting, especially as an upfront bonus.”

The say-on-pay provision for publicly traded companies in the Dodd-Frank Act is forcing companies to better explain in proxy statements how they pay their executives. The reports and recommendations from shareholder rights’ groups such as ISS can’t be ignored—a no vote can mean bad press and shareholder lawsuits, said Susan O’Donnell, a managing director in Pearl Meyer & Partners’ Boston office.

Bankers working in Asian markets [in the years immediately] after the crisis were paid 10% to 15% higher bonuses than their U.S. counterparts, says Shekhar Purohit, managing director at compensation consultancy Pearl Meyer & Partners LLC.

Others have raised concerns that the peer group selected by compensation committees may not necessarily correlate with the peer group selected by ISS. Essentially, companies are forced to “guesstimate who their peers are, so trying to design a program to get ISS positive quantitative results is not fool proof,” says Deborah Lifshey, a managing director at independent compensation consultancy Pearl Meyer & Partners.

A poll conducted by independent compensation consultancy Pearl Meyer & Partners found 52 percent of respondents indicating a 2 percent to 4 percent salary increase for executives next year, and another 10 percent saying they anticipate a salary freeze or decrease in 2012.

The move toward moderate salary increases and tougher performance goals for execs really began nearly two years ago -- with good reason, says Jim Heim, managing director at Pearl Meyer & Partners.

"Progressively tougher goals for 2010 and 2011 made sense," Heim says, "given that the bulk of companies were showing year-over-year improvement on financial and operational measures."

But improved results are not necessarily the case heading into 2012 -- and an additional factor seems to be at play as well, Heim says. "Heightened scrutiny of executive-pay programs has made many companies hesitant to set a performance target that is below the prior year's performance," he says. "The rational approach in any given year is to set a performance target that's realistic given the company's specific challenges and opportunities for that year." Hopefully, he adds, "what we're not seeing is the implementation of irrationally tough target performance hurdles or additional opportunities for discretionary bonus awards that are not linked to financial or operational progress."

Heim adds that "institutional shareholders have advocated this shift across multiple industry sectors and company sizes," noting that "the largest companies are the ones under the most pressure to implement such programs, given the level of scrutiny their pay programs receive from investors."

This evolution is likely to continue -- and is likely to continue to create additional challenges for HR in the future, Heim says. A combination of equity-dilution concerns and line-of-sight considerations has "tended to reduce the size of the population eligible for long-term incentives over the past five or so years," he says, with long-term incentives being more and more limited to those employees with the most impact on share-price performance.

"At the same time, there is pressure to provide additional performance hurdles to long-term incentives, and to lengthen the vesting period or bolster ownership requirements to ensure true long-term alignment with shareholders," he says. As such, "HR needs to be positioned to support pay decisions that will provide the most bang for the buck by identifying critical-need populations," Heim says. "HR also needs to be deeply involved in developing principles-based processes for allocating these long-term incentive pools.

"In the 'say on pay' era," he says, "it is increasingly important that pay decisions be defensible to both investors and employees reading the proxy filing."

Conducted by independent compensation consultant Pearl Meyer & Partners, [a new] study found that company stock options for executives remain very popular among smaller companies and in certain sectors, such as life sciences, despite a shift among large companies toward performance-based awards that don't depend on the ups and downs of the market.

"It's not surprising to see the largest companies denominating more of their LTI in the form of performance shares,” said Jim Heim, managing director of Pearl Meyer & Partners.

"They’re under greater scrutiny from shareholders and are often at a mature stage of development where setting multiyear goals is a bit easier than what you’ll see for emerging life sciences or high-tech companies," Heim said.

Jannice Koors, a partner with Pearl Meyer & Partners, says there are several factors at work in the decline in retirement policies. First, it’s difficult to replace good directors, she says. Boards often want to recruit active CEOs, but most active CEOs have cut down on their board service, and many now serve on only one outside board. At the same time, however, it starts to look bad when boards repeatedly exempt directors from mandatory retirement year after year.

Second, robust board evaluations are becoming a best practice. These assessments force boards to look closely at each director’s skills and contributions. If someone has become less useful to the board, that becomes clear during an evaluation, Koors says.

Lead directors or independent board chairs should ask such directors to improve, and if they don’t, they should be asked to leave. Consultants say it has become rarer for a board to sit back and wait for an underperforming director to hit mandatory retirement age.

Jim Heim, managing director at the Southborough office of compensation consultancy Pearl Meyer and Partners, said the employers he works with, largely publicly traded technology companies, are typically giving 3 percent raises, down from the 4 percent that was typical before the recession.

But Heim said the bigger change is that, thanks to a 2009 federal law that gives shareholders more control over compensation, the companies are much more focused on merit pay, both for executives and for regular employees. He said it’s no longer uncommon for one executive who reports to a CEO to get a 6-percent increase, while a peer at the same level gets nothing. Bonuses, which typically make up the bulk of high-level executives’ compensation, are also coming under greater scrutiny.

At the lower levels of a company, Heim said, middle managers are being forced to examine data, determine exactly what their subordinates are contributing to the company’s value and then set their compensation accordingly. “Whether they’re unpleasant conversations or not, they’re being required by the management,” he said.

Heim said lower-level employees are definitely in a weak bargaining position, with many unemployed peers and recent college graduates available to take their jobs. That means people in those entry-level positions may not get the same raises as people with more specialized skills. “It will absolutely seem like a case of the rich getting richer,” Heim said.

Managing Director Jannice Koors was interviewed on best practices in succession planning.

Boards should make realistic individual assessments of the succesor “also-rans.” Are they all equally critical for retention. First, boards should make realistic individual assessments of the “also-rans.” Are they all equally critical for retention? Do their individual career aspirations preclude a continued productive role in the company?

Once retention priorities are determined, the company can then consider several effective compensation tools, such as additional equity grants with back-loaded vesting or cash-based retention awards with clawback provisions. Care should be taken to avoid too much emphasis on base salary adjustments, as these can create problems with internal equity and future senior executive recruitment. Compensation isn’t the only important factor; the company can consider organizational changes to provide new or expanded responsibilities to the runners-up as a visible, public sign of their continued value to the organization.


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