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Compensation committee members face a daunting workload in the New Year as they prepare for incoming disclosure regulations and deal with expected scrutiny of executive pay. Here Agenda looks at issues that compensation committees will most likely be focused on in the coming year.
Regulation
Experts told Agenda in October that boards should not get bogged down in the headline-grabbing pay ratio rule and should instead focus on the outcome of their pay-versus-performance analysis.
At the time, Aalap Shah, Managing Director at Pearl Meyer, said, “If I was sitting on a compensation committee, I would be more worried about pay-for-performance than the pay ratio rule.”
Shah added, “What the committee should be more focused on is the pay-for-performance rule because that really [reveals whether] they structure the compensation program effectively. Can you demonstrate to your shareholders that you have proper alignment? Is your CEO’s pay properly aligned with [investor] interest, and is that conducive to creating and maintaining a performance-orientated culture within the company?”
According to compensation data provider Equilar, 83.2% of S&P 500 companies included disclosure of pay for performance in their 2015 proxies. This was down slightly from 87.6% in 2014.
Sharon Podstupka, Principal at Pearl Meyer, suggested that compensation committees prepare early for new disclosure requirements. “Model in advance to understand what is required, as well as to understand what your company’s disclosure will look like. This will help you develop a solid rationale for your strategy-based compensation and will highlight any potential red-flag issues,” she said.