January 28, 2019

Agenda – Are Comp Plans Too Similar?

No two companies are identical. So why should their compensation plans be?

It’s a question that’s frequently being asked by board directors and compensation consultants, especially at this time of year, leading into proxy season, as governance observers are noting an increasing convergence in plan design across the board for companies, such as a heavy reliance on performance-based pay, a movement away from stock options and the use of TSR as an incentive metric.

While sources’ views on the reason for the broad similarities across plans vary, many are questioning whether the homogenization of executive pay plans has gone too far.

Some groups blame the regulation of compensation, while others have said that compensation consultants, which could have dozens or more clients, are to blame for plans’ becoming too similar.

Michael Albano, partner at Cleary Gottlieb Steen & Hamilton, says since the passage of Dodd-Frank, having an independent consultant “has become a hot-button issue.” He adds, “It is a factor to consider in the fact that you see less variety.”

Albano concedes, “Simplicity is winning out a little bit.”

How We Got Here

Dodd-Frank rules on executive compensation such as say on pay increased board directors’ attention to winning over shareholders regarding CEO pay.

Though comp professionals can point fingers at different issues, many who have spoken to Agenda bring up compensation committees’ increasing reliance on guidance coming from proxy advisors like Institutional Shareholder Services and Glass Lewis .

One example is the ongoing debate about how proxy advisors have favored total shareholder return as a performance metric, one that prompted most compensation committees to prominently measure TSR.

The metric has its fair share of critics. Anthony Eppert, partner at Hunton Andrews Kurth, says, “I never liked TSR. It’s not something you can chase. You don’t want someone not to invest in R&D, for instance, to chase TSR.”

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