Looking Ahead to Executive Pay Practices in 2020

The scrutiny on executive pay will continue to intensify as we head into a presidential election year. A number of candidates have already introduced proposals to link corporate tax rates to CEO Pay Ratios or to impose fines for gender pay gaps. Shareholder activism is also on the rise and large institutional investors are increasing their focus on human capital management, corporate culture, ESG, and diversity & inclusion. The volatile economic and market environments also pose significant challenges in terms of business planning and incentive plan goal-setting. These developments suggest that time commitments and responsibilities for compensation committees will continue to increase going forward. 

Even as labor markets continue to tighten, base salary increase budgets remain at or near 3.0%, and most respondents target senior executive pay at or near the market 50th percentile. However, a significant number of respondents (25%) have recently increased or plan to increase target positioning due to competitive pressures and/or the use of stretch incentive plan goals. Compensation committees need to ensure that compensation programs align executive pay with company performance and long-term value creation while also reinforcing employee retention, especially for high performing/high potential talent.

While some companies are starting to take a more holistic assessment of performance by introducing non-financial metrics, most continue to place primary emphasis on quantitative financial goals, very mindful of the need to demonstrate the linkage between senior executive pay and company performance. Many respondents are conducting internal assessments of gender pay equity and gender pay gap. Sharing more of this information at the board level and linking a portion of executive compensation to diversity & inclusion goals will further demonstrate commitment to promoting these objectives. 

Proxy advisory firms, which are starting to receive additional external scrutiny from regulators, generally exert some, but not a significant level, of influence on executive compensation design, as evidenced by the low number of respondents (5%) that use or plan to add EVA as an incentive plan metric. While most respondents conduct shareholder outreach, with many doing so annually, opportunities exist to increase the level of compensation committee involvement in these discussions. 

While it’s easy to get distracted by all the external scrutiny from politicians and proxy advisory firms, business and talent strategy should be the primary drivers of executive compensation design, to help ensure programs serve as a power catalyst for sustainable, long-term value creation and competitive advantage.