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Compliance Week
January 10, 2012

Demystifying ISS' Evaluation of Pay-for-Performance

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.

Human Resource Executive
December 16, 2011

Earning It

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." 

BusinessNews Daily
November 29, 2011

Small Businesses Make Stock Options a Preferred Employee Reward

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.

Agenda
November 28, 2011

Fewer Boards Enforce Mandatory Retirement

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.

Worcester Business Journal
November 21, 2011

Wage Watchers Foresee Small Raises For 2012

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.

C-Suite Insight
Issue 6 - 2011

Finding Success with Succession Planning

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.

USA Today
October 26, 2011

Company Directors See Pay Skyrocket

"It sounds like a lot of money for a part-time job, but there are some pretty full-time risks," says Jan Koors of pay consultant Pearl Meyer & Partners.

Financial Times
October 5, 2011

U.S. Banks Defer 60% of Executive Bonuses

The new trend is a departure from pre-crisis practices, said Peter Miterko, managing director at compensation consultancy Pearl Meyer & Partners.

“Nothing was deferred. It was straight-up cash,” Mr Miterko said. “You got your bonus cheque at the end of the year and that was it.” The pay consultant, who said he worked on five of the Fed’s pay reviews, reckons the new trend is likely to reduce excessive risk-taking. Senior bank executives tend to agree, he said.

TheDeal.com
September 18, 2011

The Calculus of Compensation

“[Historically], if the banker and the bank had a great year, the banker would get a $5 million bonus, and in year two, if the banker had a bad year but the bank had a good year, he might get zero. There is something inherently wrong with that because zero is not enough of a penalty," says Peter Miterko, managing director at New York compensation consultant Pearl Meyer & Partners LLC. Deferring bonus pay allows the banks "to measure and encourage performance over a longer period of time," he adds.

Directorship
September 2011

Driving Boardroom Innovation

There are many areas of debate when it comes to devising and explaining what are often complicated pay packages. However, directors should be aware of some potential red flags that deserve vigorous discussion by the compensation committee and full board. These include perquisites, tax gross-ups and evergreen arrangements, which seem to draw the most attention from shareholder activists and ISS. That said, board members were encouraged by Jannice Koors, managing director of Pearl Meyer & Partners, to have the courage of their convictions. “If you’re doing the right thing for the company and the shareholders, don’t worry if it’s slightly outside the norm,” Koors said. “Shareholders don’t necessarily want a cookie-cutter approach. They want demonstrated pay for performance.”

Directors need to control the narrative. The best way is through the Compensation Disclosure & Analysis (CD&A) filed in the proxy. Wrest control of the CD&A away from the attorneys and make sure that it addresses stakeholders’ concerns. The CD&A is an important communications vehicle that should be shareholder-, ISS- and media-ready. “The primary audience for the CD&A used to be the SEC. Now the CD&A is the company’s main ‘sales pitch’ to shareholders for say on pay,” Koors said. “Making the case sometimes means including more information than what is strictly required by regulations.”

Plastics News
September 13, 2011

Court ruling delays SEC financial reforms

“The ratio [between CEO pay and the median pay of a company’s workforce] is going to take an extraordinary effort to do, and companies are not going to do it until they have to do it,” said Joe Mallin, a managing director and head of the Atlanta office of New York-based compensation consulting firm Pearl Meyer & Partners LLC. “It is going to be an operational nightmare just to figure out how to do it, and it is also going to be a public relations/shareholder nightmare as the number will be out there in a vacuum.”

“I don’t suspect the ratio is going to have much impact,” he said. “We have a pretty good sense of what CEOs are being paid, and publicizing that number in the proxy isn’t going to do much.” Even as companies fret, there is still no way right now for them to even develop that formula, as the two-thirds of a page devoted to it in the 2,200-page bill provides no guidance on how to calculate that ratio. “The provision is very vague,” Mallin said. “There is nothing in the bill on how it is to be calculated and nothing on whether it includes just U.S. employees or all employees, and whether it includes part-time and seasonal employees.”

What will happen next with the marketwide proxy access rule is unclear. But the consensus is that SEC won’t appeal the ruling.“The SEC will likely propose a revised and presumably narrower rule” because the court’s ruling “contained unequivocal criticism of the rule,” Pearl Meyer said in a client alert the consulting firm issued after the court ruling July 22.

Plastics News
September 13, 2011

One-year Incentive Plans Questioned

“Having relative measures can be an aid in getting compensation appropriate as setting the numbers is what is really difficult,”said Joe Mallin, a managing director and head of the Atlanta office of Pearl Meyer and Partners LLC. “But at the same time relative measures was one of the crutches companies fell back on” when they found goal-setting to be an exasperating endeavor.

The contentious issues with goals and targets for short- and long-term incentive compensation plans underscore the difficulty of the task, said Mallin. “The problem with setting performance objectives is that you are always looking in the rear-view mirror. Companies are always trying to rub the scales together to enhance the linkage between compensation and performance to get their performance they want to achieve,” he said.

Mallin agrees that there can be a disconnect between shareholder value and stock prices. “Stock prices and shareholder value don’t always move in tandem, as share prices move for reasons other than performance,” Mallin said. “That’s why companies are always looking for that Holy Grail that links to shareholder value. But a single solution doesn’t exist.”

The Conference Board Review
Summer 2011

What About the Rest of Us? Beyond CEO Pay

“I get concerned when I see that a CEO makes five times more than the Number Two,” says Jim Heim, managing director at compensation consultancy Pearl Meyer & Partners. “Some groups of investors get concerned when it’s more than three times more.” When a company head earns far more than his management team, the logic goes, it indicates that the CEO is king and everyone else a courtier.

Boardmember.com
Third Quarter 2011

Nays on Say: The Stories Behind the Votes

Susan O’Donnell, a managing director at executive compensation consultant Pearl Meyer & Partners, agrees that there are a lot of gray areas when it comes to making a judgment call against a company’s compensation plan.

“There’s a lot of ire against ISS right now, and it’s frustrating for a lot of companies,” she says, noting that some ISS opponents are calling for more regulation from the SEC. ISS, she explains, has no authority, but “a huge amount of power and influence,” so given that, directors have to understand its rules. O’Donnell says the rising number of say-on-pay no-votes are increasing the chances of litigation. Beyond the lawsuits already filed, she says, “I suspect there will be more. Even if the litigation doesn’t stick, you don’t want to have that on your shoulders, because it’s a huge additional expense and a waste of time.”

O’Donnell offers three cogent tips to help directors make sure they’re prepared to face shareholders with their compensation plan:

• Understand your shareholders. “I’m not suggesting that companies don’t know who their shareholders are, but [they need to] understand their perspective on compensation. Related to that, if you have a lot of institutional shareholders, they [either] already have their own thoughts and ideas on compensation or are depending on services like ISS or Glass Lewis. You need to be very aware of what their voting guidelines are. And you need to know where your no votes are likely to come from.”
• Pay close attention to your disclosure. “Your disclosure is the end result of your year’s worth of decisions. You have to clearly highlight for people what you want them to know, and you have to make it easy for them to understand things.”
• Look at your policies and processes. “You really should review all of these things. Clean up those policies—think about things like clawbacks, ownership guidelines, holding requirements, and the design of your incentive plan. Think about your decisions as you go along, and assess your pay-for-performance relationship because that is the key item that will get you a no vote from your shareholders.”

thecorporatecounsel.net
August 15, 2011

Director Pay Climbs a Bit and Shifts More to Equity

As noted in this recent study of 2010-2011 director pay conducted by the NACD and Pearl Meyer & Partners, director pay recently rose 5% at larger firms and 20% smaller firms, with an increasing emphasis on equity compensation in the form of full value shares.

Compliance Week
August 9, 2011

How to Avoid a Negative Recommendation From ISS on Say-on-Pay

Deborah Lifshey, managing director at compensation consulting firm Pearl Meyer & Partners, suggests that companies go through ISS's checklist and avoid certain pitfalls such as tax gross-ups, single-trigger severance packages during a change in control, and option re-pricing without the approval of shareholders. “Focus on ISS. They have become very powerful. Whenever possible, restructure and clean up pay practices according to the ISS checklist,” she says. Critiquing ISS's model won't change that reality, she adds.

Other methods companies have chosen to improve voting results include hiring proxy solicitors and increasing outreach to shareholders. According to Lifshey, outsiders say companies don't truly “pass” say-on-pay unless they received at least an 80 percent approval rate. Meanwhile, shareholders will have more time to review compensation plans in the next season. “Figure out what the votes in the past proxy season mean, and reach out to shareholders and ask the question why they are not voting for yes,” she says.

CFOWorld.com
August 8, 2011

The New Pressures on Executive Comp

"Most companies are in a back-to-basics mode," says Peter Miterko, managing director with compensation consultancy Pearl Meyer & Partners. More firms are linking pay to performance through a mix of measures like return on assets, return on equity, and total shareholder return, he says.

"Companies are saying that we need to hit benchmarks," Miterko says. "If we do, we know that we'll end up with long-term value creation for shareholders."

ABA Bank Directors Briefing
AUGUST 2011

Get Your Bank Ready for More Regulation of and Attention to Pay - Including Your Board's

Susan O'Donnell, managing director, Pearl Meyer & Partners, warned that board remuneration is hidden and embedded in the proposed rules.

O'Donnell said that explicit compensation policies in general are important. Five key elements are:

• Objectives of the overall pay program
• Components of the program
• Competitive reference and positioning – how you'll pay versus your peer group, for instance.
• Mix of total compensation – base pay, bonuses, incentive compensation, etc.

"This should be clear and easy to understand and to disclose to both regulators and shareholders," said O'Donnell.