A Look Back at Compensation Committees’ Greatest Challenges

December 12, 2023

What a year it has been. Our world was beset by unthinkable humanitarian crises and wars likely to alter social, personal, and political proclivities for generations to come. It was a good year to refresh our thinking on all aspects of leadership beginning perhaps with Walter Bennis and Burt Nanus’s 1991 book. Leaders: The Strategies for Taking Charge introduced the concept of VUCA, an acronym for volatility, complexity, uncertainty, and ambiguity originally coined at the U.S. Army War College in 1987. (Ever since some military brass have challenged its misappropriation by civilians, but that’s a story for another time.) Nonetheless, VUCA does capture the importance of agility when so much of what constitutes day-to-day decision-making is beyond our control to manage. The boardroom is deluged with such a wide range of risks, it’s wise to manage that which can be controlled. For business to march on,  priorities at all levels of an organization must be in order. As executive pay and corporate governance advisors, what boards and their compensation committees pay leadership is our exclusive focus. In this—our last newsletter issue of 2023—we revisit some of this year’s top stories in governance as we saw them complete with charts from our Data Analytics Team—DAT for short.

 

Stuck in the Middle as Pay Collides with Governance

The need to attract, retain, and appropriately compensate top talent sometimes results in tension and even outright conflict. Compensation committees, particularly those serving large-cap companies under scrutiny, are caught in the middle of this “collision course.” Despite the current economic downturn, the competition for top talent remains fierce, especially in highly desirable roles. This sometimes leaves boards with little choice but to meet the market demands for compensation, even if those decisions cause consequences. If companies meet talent demands, they may be criticized by investors and proxy advisors for pay and performance misalignment. On the other hand, if they refuse to meet talent demands, they risk losing valuable assets and suffering subsequent hits to corporate value, reputation, and culture.

Turnover at the Top

Boards are facing a potentially daunting challenge: an upsurge in executive turnover that could deprive companies of vital, experienced talent at a time of pivotal change. That was the finding of a survey of nearly 200 U.S. public company board members conducted by Corporate Board Member and Farient Advisors.

According to the data, 64 percent of respondents expect to lose a member of their C-suite in the next two years, and 57 percent reported having already experienced some level of voluntary turnover. Understanding what level of talent is at risk can help companies and boards take action to prevent premature departures, notes Farient Founder and CEO Robin A. Ferracone. The research indicates that the CEO’s direct reports are most at risk of leaving in the view of respondents (67% affirmed this), followed by executives one or two levels below the CEO’s direct reports (50%), employees below the executive level (17%), and the CEO themselves (11%).

Ethics, Compliance, and the Role of Compensation

Fraud and other criminal or unethical activities can cause harm not only to corporate entities but to their shareholders, communities, and employees. When unethical business practices become engrained into corporate culture, they can bring down a whole sector or the entire economy. The sudden bankruptcy of the cryptocurrency exchange FTX in 2022 and the shuttering of Silicon Valley Bank (SVB) by its regulator in March provide striking examples of the risks faced by companies and their stakeholders when guardrails are insufficient to prevent alleged wrongdoing and oversight mechanisms are not in place to identify and resolve potential problems before they reach a tipping point. There is no shortage of other examples. This article explored the relationship between E&C programs and compensation.

Nuanced Results from Proxy Season

The 2023 proxy season plugged along with more whimpers than roars. This was a big year for the overall number of proposals submitted. In 2023, that number increased 2% to 889 proposals—the highest number since 2016. Up significantly were proposals related to executive compensation: 108% from 2022, with a large proportion seeking shareholder approval of certain executive severance agreements. Compared to the 2022 proxy season, the number of both environmental and social proposals also increased, up 11% and 3% respectively, and 68% and 24% respectively, compared to 2021. In contrast, governance proposals overall declined 14%, and civic engagement (i.e., lobbying and political spending) proposals declined 6%. Our 10-point review of proxy season provided a handy lookback. We’ll also be reviewing the results for insight into what lies ahead for the 2024 proxy season.

Outcomes of New Clawback, PvP Rules

Erroneously awarded compensation is the aim of clawback rules mandated by the U.S. Securities and Exchange Commission. In short, the rule requires mandating the clawback of excess incentive-based compensation of current or former executive officers during the three fiscal years preceding a required accounting restatement. This article anticipated the compensation committee’s most germane questions as the rule was being implemented for the first time. Results of the S&P 500’s practices during the first year of SEC-mandated pay versus performance disclosures showed tables more popular than narrative in proxy statements. Farient’s proprietary suite of data trackers, including the PvP Tracker, provides data that can be sliced and diced across numerous indices, peer groups, company size, or sector.

A Tug of War: Moonshot Awards vs. Shareholder Value

Many companies across multiple sectors granted their CEOs uncharacteristically large equity awards in recent years. Among the most well-known examples is Tesla’s 2018 grant to its CEO Elon Musk but there are plenty of other examples, too. We asked whether so-called “moonshot” awards results to chief executives match the value realized by shareholders.

 

Photo credit: Michael Skok

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