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When it comes to executive compensation, board members say they are primarily focused on linking performance metrics with strategic objectives, as opposed to dealing with proxy advisors or regulatory issues such as the pay ratio disclosure rule.
According to Agenda’s Directors’ and Officers’ Outlook: Q1 2018 survey of 55 directors and officers, 38.2% say selecting the appropriate performance metrics is their top concern. Meanwhile, 30.9% said recruiting and retaining talented executives was the highest priority. Conversely, the influence of proxy advisors and shareholder activism and the pay ratio disclosure paled in comparison, with only 16.4% and 12.7% of respondents pointing to those issues as the main comp concern, respectively.
According to David Swinford, president and CEO of compensation consulting firm Pearl Meyer, the responses underscore the discussions boards are having regarding a move away from TSR’s lead role in incentive plans and toward other metrics that may be more appropriate.
“I think there’s a real trend there in terms of focusing much more tightly on [whether] these are the right measures and goals,” he says. Moreover, as companies are edging away from the heavy use of relative total shareholder return (TSR) in determining performance pay, compensation committees are designing compensation plans more thoughtfully, according to Swinford.
“As a result of the last couple of years’ [discussion] around the limitations of TSR as a measure of what management is doing right now, there is a lot of focus on [whether] the measures that we’re using in our plan [are] connected to our strategy,” said Swinford.
TSR has been criticized as being more dependent on the economy and stock market as a whole than on specific actions taken by executives, although shareholders typically like TSR as a metric since it tracks with their own investment risk.
Swinford adds that it’s likely that the survey’s proximity to proxy season also had an impact on respondents’ views.
“At the time when you’re doing the proxy statement, the focus is very much on, ‘Are our investors satisfied with our performance?’ and ‘Is our compensation going to be viewed positively in light of our performance?’” explains Swinford.
Boards are also setting performance goals this time of year, so the question that naturally follows is whether the right metrics are in place to achieve those goals, Swinford says.
In addition to performance metrics, about one third of respondents said their main concern was recruiting and retaining key executives. Indeed, CEO turnover between January and February of this year was the highest it’s been since 2008.
“If you can’t attract and retain the right talent, you can’t compete in the marketplace,” says Swinford. “I think boards kind of recognize, at least deep down, that attracting and retaining is first and aligning pay with performance is second. You have to have the horses in place if you want to take the wagon somewhere.”
Swinford explains that because shareholders are demanding results faster than ever before, boards are feeling the pressure and therefore also pressuring CEOs to deliver on the company’s strategy and performance goals.
“Boards are not as patient with delays in realizing results as they used to be,” says Swinford. “While it is difficult to question whether it’s time for a well-liked CEO to leave the company because he or she is not performing as well as the board would like, directors seem to be getting more comfortable with that conversation.
“That’s a really tough message. But boards are starting to ask that one sooner now, and they’re getting less patient waiting for it to happen,” Swinford says.