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Agenda
July 5, 2016

Pay Ratio Enters the Home Stretch

Compensation experts are encouraging boards to have their HR teams perform dry runs of their pay ratio calculations this year and next year in preparation for the mandatory 2017 fiscal year disclosures. They are encouraging boards to monitor the HR, legal, and compliance teams charged with producing the pay ratio calculation and determine whether they are comfortable with the valuation methods they use.

At least initially, proxy advisors are not expected to issue recommendations on the basis of the pay ratio disclosure, except for in outlier cases. While some shareholder activists may complain about the ratio, it is not expected to have a significant effect on say-on-pay votes. Many experts are more concerned about the effect of the ratio on internal workforce relations than on external forces.

“In 2018, for the very first time, people are going to have a window into what the quote-unquote average employee earns in his or her organization,” says Sharon Podstupka, principal in the New York office of executive compensation consultant Pearl Meyer. Some may not like what they see.

Management and the board should agree on what the key messages are around the organization’s pay philosophy when it comes to competitive benchmarking, long-term wealth creation, career advancement opportunities, and governance processes that apply to how compensation works for employees at the company beyond named executive officers, Podstupka says.

Employees are expecting more transparency from their employers on compensation and career development than ever before. The pay ratio rule may have the unintended consequence of ushering in more employee demands on transparency.

“Pay transparency is one of those things we’re going to have to start to get used to and get better at, and what that means is thinking not just about the number, but the messages that surround the methodology,” Podstupka says.

Bloomberg
June 30, 2016

CEOs Feel Pain as Oil Price Slump Hits Canadian Energy Producers

As of the end of 2015, the realizable values of compensation awarded to CEOs at five of Canada’s largest oil companies had slid an average of 40 percent below the figures that were reported to shareholders in the proxy statements, according to a Bloomberg review of regulatory filings.

But some shareholders only look at the reported figure, not the realized figure. That’s because pinpointing how much an executive actually makes can be difficult as some awards vest over several years and because not all companies show the difference between reported and realized compensation.

Oil and gas producers tend to include more equity in executive compensation than similar-sized companies in other industries, said David Bixby, a managing director at executive pay consultant Pearl Meyer.

Reported pay figures can also be inflated compared to realized values due to timing issues. Since filings for companies’ general meetings list compensation from the previous fiscal year, there can be a one-year lag between when stock awards are granted and when they are disclosed.

Many figures in 2016 proxies are based on “grants valued back in February of last year, when we were still midway down the slope,” said Bixby. “There were a lot of firms that saw their stock price decline another 50 percent between that time and now.”
 

Agenda
May 13, 2016

Listed: The Highest Paid CEO-Chairs

Combined CEO-chairs were paid about $1 million more than non-chair CEOs at the 100 largest companies by revenue that filed proxy statements by April 1, according to research by compensation data firm Equilar.

Salary is usually the smallest part of a CEO’s total compensation compared to variable metrics, so it seems unlikely that CEO-chairs are making extra simply for being chair, explains Jan Koors, managing director and head of Pearl Meyer’s Chicago office.

“What’s entirely possible is … that this group of companies just performed better this year so these CEOs’ bonuses were higher or their equity grants were higher,” Koors says.

“In my experience, when an incumbent is sitting in that role, they don’t lose money when they lose the title. And they don’t get money when they get the title,” Koors adds.
 

Inc.
May 3, 2016

Here's What Happens to Founders' Pay After an IPO

Taking a company public is usually the crowning achievement for entrepreneurs lucky enough to build a successful business.

Besides the pride they take in turning a scrappy startup into a reputable company underwritten by big Wall Street banks and valued and traded by public markets, they usually reap an enormous cash windfall. That's the prize for taking a risk and building something new. But what happens after that to executive compensation?

It turns out things are quite different for founder-led public businesses, such as those on our list of Founders 40 companies, compared with companies that go public without the influence of the founder. That's according to Theo Sharp, Managing Director at Pearl Meyer, an executive compensation consulting firm.

"For founders there really is no trend," Sharp says. "There are so many variables and they don't follow any particular formula."

By contrast, non-founder chief executives of newly public companies see their salaries go up somewhat predictably. Average base salaries for the heads of software companies, for example, spike by an average of 18.3 percent, according to Pearl Meyer's 2013 data, its most recent. CEOs of life sciences companies see a smaller salary bump of about 10 percent. 

The Financial Times
April 27, 2016

Lose the CEO Who Wants Too Much Pay—The Best Chief Executives are More Concerned About Their Contribution Than Their Reward

"At a smart business dinner the other evening I sat next to a distinguished corporate figure who had recently served as chair of a remuneration committee. What was that like, I asked. 'Bloody awful,' he said. 'They all hated me. Never doing that again.' "

No wonder Simon Patterson, from pay consultants Pearl Meyer, describes the role of remco chair as "the job everybody wants done but nobody wants to do."

We are in the middle of another shareholder uprising against excessive chief executive pay, possibly more substantial than that of four years ago. Remuneration committees are struggling to balance the need to retain effective leaders with the reasonable expectations of shareholders. It is all a bit of a mess. Even the cautious Investment Association admits boardroom pay systems are broken.

For remcos, there is a series of simple but crucial questions. Is the committee confident it understands any share-based element of the package? Who set the comparator group for the pay package — was it an independent person? What about succession planning? Are top executives receiving conspicuously preferential treatment at times of corporate or sectoral difficulty?

Agenda
April 18, 2016

Use of Total Shareholder Return Evolving, Comp Consultants Say

Now that more companies are using total shareholder return (TSR) as a metric for measuring CEO performance, compensation committees are being urged to determine if the way TSR is being applied is having the desired effect.

While consistent market growth over the last several years has made it easy for boards to see TSR’s main benefit as being a relatively simple way to tie an executive’s pay to company performance, compensation experts say using TSR is more complex than that.

“I think now is probably a good time for comp committees to rethink whether or not [TSR] is the most effective metric,” says Peter Lupo, managing director and head of the New York office for Pearl Meyer. “It’s not ideal for a long-term incentive plan, but it can still be an important component.”
 

Agenda
April 18, 2016

Boards Capping Total Comp for Directors

More boards are capping the compensation directors can earn in a calendar year. New figures show that one quarter of Fortune 500 companies now have limits on the amount of equity that can be paid to board members, and most have adopted those measures in the past three years.

The continued threat of lawsuits challenging director compensation has propelled a crescendo of activity in director pay governance, according to a Pearl Meyer report published in early April by the National Association of Corporate Directors. As a result, caps on pay are slowly becoming a more standard practice. In addition, given that board pay continues to increase modestly each year, experts say that directors will continue to keep a close eye on trends in litigation and adapt pay practices as needed.

Jan Koors, managing director and head of Pearl Meyer’s Chicago office, says she doesn’t think huge numbers of boards will move to swiftly adopt limits on cash. It’s more likely, says Koors, that boards will take the step of granting shareholders a “say” on director pay, much like advisory say-on-pay votes for executive compensation.

Koors adds that boards have paid close attention to the lawsuits and have reviewed their own compensation plans and peer groups more critically to ensure that pay programs can withstand scrutiny. However, Koors says director compensation “typically isn’t going to be the smoking gun.” Usually, director pay comes up as an issue only when a company is criticized for poor performance or other governance issues, she says.

The NACD and Pearl Meyer 2015–2016 director compensation report finds that total direct compensation paid to directors on boards at the largest companies increased 3% from 2014 to 2015. Compensation at medium-size companies increased 1%, the study reports.

Because the study found a year-over-year increase in a year when many companies suffered losses, Koors says boards are acutely aware of the impression a director pay increase makes in years when company performance has lagged.

“Even if market data would say that a board is running behind the market, boards tend not to make increases in a year when company performance has been bad,” Koors says.
 

Orlando Sentinel
April 3, 2016

Salaries of Local CEOs Decline

Average CEO salaries at Central Florida's publicly traded companies dropped by over 9 percent in the past year that they reported compensation. The local trends follow the national outlook, which has investors scrutinizing top executive pay.

Starting in 2017, public companies will have to start calculating how CEO pay compares with that of the median workers', but they won't have to submit that data until 2018.

While CEO pay has been watched more closely in recent years, it's hard to tell how comparing that with the pay of the median worker at a company will change anything, said Sandy Godwin, Managing Director at Pearl Meyer in Atlanta.

"This has never been done before, so we don't really know what to expect," Godwin said.
 

Agenda
April 1, 2016

Director Pay for Committee Membership Drops

More boards are cutting director pay for committee membership, according to a new report by Pearl Meyer. The numbers show that boards are moving toward an “all for one and one for all” approach to director compensation, according to Jan Koors, Managing Director at the compensation advisory firm and head of its Chicago office.

“When things hit the fan, we’re all in this together,” Koors says. “Everybody is adding to the responsibilities of the whole by sitting on whatever committees they are assigned to, so why have a differentiation?”

The trend toward cutting committee membership pay, which Koors says has coalesced over the past five years, could influence board composition choices.

Koors says there has been a streamlining of director compensation in other areas as well. For instance, boards are moving away from offering meeting fees.

The trend toward streamlining director pay is a reversal from common pay practices following the passage of the Sarbanes-Oxley Act in 2002, which encouraged companies to be more granular in how directors were paid. That meant breaking down pay by meeting fees and committee type.

“What we’re seeing is the pendulum swing back,” Koors says.

The report was produced by Pearl Meyer for the National Association of Corporate Directors. It touches on a number of hot topics in director compensation, and includes a discussion of one of this year’s biggest shareholder issues: proxy access.

It’s still unclear how proxy access might impact director pay, but if it becomes widespread, it could change how directors view their duties—and how much they feel they should be paid for their time and service.

At companies that have adopted proxy access bylaws, investors who meet a set threshold of share ownership can nominate a certain number of directors to be listed on the company’s proxy card for election. If shareholders exercise the right to nominate new directors, it could force incumbent directors to campaign for reelection against other proxy-card nominees.

“Do you just take your chances or do you actually have to commit time to campaign and meet with investors to convince them to vote for you instead of the other guy?” Koors asks.
 

Agenda
March 28, 2016

Pay-for-Performance Rule May Confuse

Concerns about the SEC’s final version of its pay-versus-performance rule have some compensation consultants warning that the regulator’s efforts to add clarity to assessing executives’ pay relative to company performance may complicate matters instead.

Companies must disclose total shareholder return (TSR), and provide the median TSR of companies in their peer group going back five years. Although the proposal allows companies to include other pay-for-performance scenarios beyond those measured by TSR, some consultants say the SEC’s emphasis on TSR will be a challenge for some companies.

“The challenge is making companies define their performance in terms of TSR regardless if it is a measure that is being used or not,” says Sharon Podstupka, a Principal in the New York office of Pearl Meyer. She notes that while investors and proxy advisory firms consider TSR to be a meaningful metric, many companies use performance metrics that focus on longer-term growth, such as earnings per share.

Podstupka also notes that performance measured by TSR tends to be more volatile, which can make explaining how pay and performance are linked more challenging in some years compared to others.
 

The Sunday Times
March 27, 2016

Take the Money and Run

Four years on from the Shareholder Spring, when big investors turfed out a handful of overpaid bosses and called for a new era of accountability, little appears to have changed.

That’s not to say pay is soaring. Average compensation for FTSE 100 bosses has leveled off at £4.9m a year after boards, in the wake of the financial crisis, began linking pay to new targets, particularly total shareholder return (TSR), a measure of share price growth plus dividends.

The idea was that bosses would do well only when their investors did. Britain followed America’s lead, where since 2004 TSR’s presence in bonus schemes has tripled, from 17% of the S&P 500 to 48%, according to new research by pay consultant Pearl Meyer and Cornell University’s Institute for Compensation Studies.

The result of that shift, however, is surprising. Simon Patterson, Managing Director of Pearl Meyer, said: “There is no evidence that the inclusion of TSR leads to increased firm performance. In fact, there is at least weak evidence that it is associated with lower shareholder returns and revenue performance.”

Patterson’s argument is that the pay revolution has led companies to focus on the wrong things, such as a TSR target influenced by myriad factors outside an executive’s control, from market swings to economic shocks.

Absolute pay, meanwhile, has scaled new heights by virtually any measure. In 1998, the average chief executive made 47 times the salary of a typical employee. Last year average compensation hit more than 180 times. Patterson said: “We have ended up in the wrong place. Average performers routinely get paid more than they deserve.”
 

Corporate Board Member
Q1 2016

Time for Clarity

When it comes to the compensation discussion and analysis (CD&A) in proxy statements, things have come a long way over the past several years, but there’s still work to be done.  It’s only going to get more challenging for issuers to prevent the CD&A from getting longer, as more disclosure requirements are on the way.

This will likely exacerbate the problem of add-ons, where issuers insert new material into last year’s CD&A template, but don’t take out much. Companies are loathe to a change in format, says Sharon Podstupka, Principal in the New York office of Pearl Meyer. “They fear it’s going to have to be reviewed by a committee, the board, or vetted by an outside attorney,” she notes.

In our interviews with sources, Corporate Board Member came up with some guidelines to follow this proxy season and beyond.

Start early (next year)
While this approach might be too late for this proxy season, it’s a good strategy. Regardless, there’s a myth out there, especially for smaller companies, that there’s not enough time to get a clear, best-practice CD&A delivered, says Podstupka. “That myth gets debunked in the timing.” For a company whose fiscal year coincides with the calendar year, that means starting in July or August.

Podstupka says questions for companies to pursue include: How can we continuously improve this document? What are the strategies we need to think about over the next three to four months to help us make this a better document when we are ready to start drafting? “That way, the various departments aren’t scrambling to pull it all together during proxy season,” Podstupka says.

Involve the communications team
“Issuers that have measurably improved the clarity of their CD&As are the ones that transitioned the primary authorship to communications experts,” says Podstupka. Attorneys are critical, she notes, “but from a primary authorship perspective, the tone and style is just not what the investor market wants.”

About 79% of companies reported using internal corporate or human resources communications personnel according to a 2015 survey of 93 issuers by Pearl Meyer. About 43% used external graphic designers, and 37% relied on external writers. Almost 90% of issuers say reader friendliness is as important as technical accuracy according to Pearl Meyer.

Dissect the draft
In terms of trends in content development, Pearl Meyer’s survey indicates 86% of boards or compensation committees requested making the CD&A easier to read and understand; about 49% suggested including an executive summary; and 42% asked for more charts and tables.  

The European
March 15, 2016

Pay Transparency: What Have We Got to Hide?

Secrecy around pay is common in workplaces throughout Europe and around the world, with some notable exceptions. Laws and regulations may require large corporations to make senior executives’ pay figures public, but when it comes to the lower level employees, few salary details are disclosed.

There are also unique country-by-country issues that can add extra layers of complexity to introducing salary transparency. In Britain, for example, many people are uncomfortable discussing their income.

Depending on the seniority of an employee, different sets of issues can appear as a direct result of sharing salary information openly. “Transparency allows other executives (and non-executives) access to information which can be used to push up pay, such that ‘leap-frogging’ pay levels contribute to a much higher than normal pay inflation rate,” says Simon Patterson, Managing Director of remuneration advisory firm Pearl Meyer, London. “Some cite the possibility of strategic information being ‘leaked’ through pay transparency. In practice, delays in reporting make this highly unlikely.”

In highly specialized banking divisions, such as capital markets, greater pay transparency has done more harm than good, according to Mr. Patterson. As staff employed in this field often view pay as being linked to personal worth and have high levels of individual negotiating power, overpaying talent is frequent.

Fortune
February 25, 2016

Houston, We Have a Problem: The Oil Rout Hits Texas

Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world's oil capital are among the hardest hit, largely because tanking energy firm shares make up much of oil and gas executives' compensation.

While Houston's economy is far more diversified now than in the 1980s when the city lost 13 percent of its jobs, it remains home to 5,000 energy-related firms and the fortunes of oil and gas executives are tied more than ever to the energy market.

Since U.S. lawmakers passed a law in 1992 encouraging "performance-based" pay, the share of stock options in executive compensation has steadily increased, said David Bixby, Managing Director and head of the Houston office for Pearl Meyer compensation consultants.

"Now, you're looking at 70 to 80 percent of CEO compensation in stock on average for oil and gas companies," Bixby said. "They are going to be exposed to commodity price cycles."

Agenda
February 8, 2016

Comp Committees Tweak Bonus Plans to Fit Strategy

Compensation committees are fine-tuning annual bonus plans to more closely pair executive pay with performance. A review of 2015 proxies shows that boards made small adjustments to underlying performance metrics, rebalanced the weighting of metrics, and altered the size of bonus opportunities.

Overall, Jan Koors says she sees little homogeneity in the types of changes companies are making to their annual bonus plans.

“What we’re seeing is companies continue to try to fine-tune that pay-for-performance relationship,” says Koors, who is Managing Director and head of Pearl Meyer's Chicago office. “Companies want to be able to demonstrate in public disclosures that there is a strong link between company results and the payout to senior executives.”

Agenda
January 11, 2016

Comp Committees Urged to Reconsider TSR

Compensation committees that are considering adding total shareholder return as a performance metric in incentive programs are being warned to tread lightly and not succumb to pressure, experts say. Use of the metric has skyrocketed, experts say, mainly because proxy advisory firms favor the measure due to its alignment with shareholder return. However, compensation committee members say the use of TSR is not right for every company.

Research by Cornell University ILR School’s Institute for Compensation Studies, in collaboration with consultancy Pearl Meyer, found that in 2013, 48.3% of the S&P 500 used the metric, compared with roughly 16% in 2004.

According to a survey by Pearl Meyer, 75% of respondents said that they included TSR because of peer practices, 56% said it was included in response to investor concerns and 52% said it was in response to a proxy advisory group.

Aalap Shah, Managing Director at Pearl Meyer, said this is a worrying trend because following what others do does not necessarily lead to creating a meaningful executive compensation program. He pointed to the Cornell and Pearl Meyer research, which found that while more companies are adopting TSR as an incentive metric, those that have brought it into their plans more recently are putting less weight on it.

“What this indicates is that companies don’t think it is the right thing to do, or are not sure if it is the right thing to do,” said Shah. “So what happens is that you are missing an opportunity to place a greater emphasis on a meaningful existing metric that has a potentially demonstrated correlation to value creation or adding other metrics that have that ability to add value over the … performance period.”

Shah said that once companies add TSR to an incentive program, it is hard to change it, or take it out. “You could get pressure in subsequent years if you decreased the weighting or removed the metric,” he added.

“If you currently don’t have total shareholder return in your program and are thinking about it, this is one of those things that you cut once, measure twice,” Shah said. “You will certainly be talking about it; hopefully you will decide it is best for the company and not do it because everyone else is.”

Agenda
January 11, 2016

Top Concerns for Comp Committees in 2016

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.

Corporate Secretary
Winter 2015-2016

Motivating your Executives: Which Incentives Work Best?

Peter Lupo, Managing Director at Pearl Meyer, notes that stock options continue to be popular—and in some sectors more than others. Companies new to the public markets, especially those in industries like IT and life sciences where results are very volatile, often prefer stock options “because it’s so difficult to set goals and select metrics,” Lupo explains. He also notes that companies with diversified lines of business typically experience difficulties setting performance criteria and so may default to stock options.

Some argue that ISS and investor advocates have made long-term incentive awards a cookie-cutter exercise—and that this is worrisome. While ISS likes to see long-term awards tied to a quantifiable benchmark, in a perfect world compensation committees would have the courage to vest executives who performed well even if market conditions meant they didn’t clear certain hurdles.

Envisioning longer time horizons might make sense, but Lupo says companies whose pay plans deviate too far from common practices must be prepared to defend themselves vigorously. “If a company has been successful for decades and is highly respected, it’s easier to do something different,” he says.

In the end, the amount of latitude a company has to take a more creative approach to executive compensation incentives may come down to the company’s reputation—and its overall financial performance. Lupo emphasizes that shareholders tend to probe deeply into long-term incentive plans only when performance is flagging. “If you’re a successful company, investors don’t care about how you design your compensation program to get results,” he says. "They care about the results." 



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