Regulatory, Shareholder and Market Updates

The Issue

Today, all stakeholders are paying close attention to actions by Congress and the Securities and Exchange Commission as they work to repeal provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Shareholder advocacy groups, including Institutional Shareholder Services (ISS) and Glass Lewis, are gearing up to scrutinize these regulatory areas more closely to truly understand the impact on corporate behaviors and disclosures. But according to Global Trends in Corporate Governance, the recently released research initiative from Farient Advisors and the Global Governance and Executive Compensation Group (GECN Group), compliance burdens of publicly traded companies will continue to increase around the world, regardless of what happens in the U.S.

Of Dodd-Frank’s more than 900 provisions, fewer than 10 address executive compensation. In many respects, the existing non-binding Say on Pay vote and voluntary disclosures have become best practices, and we do not expect them to go away any time soon. Though it should be noted the long-awaited, and mostly dreaded, CEO Median Employee Pay Ratio provision, which would require public companies to calculate CEO to median employee pay, is currently under review. Waiting in the wings are the Clawback provision – a literal “clawback” of misbegotten incentive payouts – and the Pay and Performance provision, which has been recently defined to require a table in addition to the Summary Compensation Table that shows actual pay year over year.

Farient’s Point of View

Going forward, boards of directors and executives will be taking a wait and see approach regarding the CEO to Median Employee Pay Ratio. At Farient, we have always thought of this provision as a non-starter. With too much leeway in how companies calculate this measure, it would be difficult for investors to accurately compare CEO to median employee pay across companies. With regard to the Pay and Performance provision, irrespective of whether the provision is implemented, most companies will continue to disclose this. As the definitive experts on Pay and Performance for more than 20 years, Farient will continue to recommend:

• Alignment of executive pay relative to performance and to market pay reasonableness
• Performance of the company (i.e., total shareholder return, both relative and absolute)
• Transparency of pay programs and decisions

Farient continues to view the intent of the provisions of Dodd-Frank as an opportunity to demonstrate the integrity of your compensation programs and actions, or to explain adjustments where improvements may be needed.

How Farient Can Help

Now that pay and performance alignment is really a best practice, it’s no surprise an increasing percentage of executive compensation is tied to financial performance metrics. In fact, we can almost say that pay for performance has gone mainstream. Unfortunately, going mainstream does not translate into simpler execution. The easy answer may be to incorporate TSR into your performance plan and be done with it. However, many companies have learned through stakeholder feedback that TSR can be fraught with both internal and external perception issues.

Farient can help develop the inputs you’ll want and need to help your company decide how and when to engage stakeholders. These inputs include how other companies are responding, how shareholder advisors will advise investors, and whether or not your company has a good story to tell. In this regard, Farient’s Performance Alignment Reports™ (PARs), Farient Forecaster™, and Shareholder Value Analysis™ can paint a clear picture of whether your executive pay design and actions have been and will be both sensitive to TSR and reasonable and fair for the company’s size, industry and performance.

If the picture isn’t so pretty, we can help modify the pay programs to tell a better story about the future. Finally, Farient continues to have strong relationships with the investor community and can work closely with your board and/or management to prepare disclosures and engage shareholders in a productive discussion about current and future pay practices.