CFO – Performance-Based Pay Comes Under Fire

By David McCann

The Council of Institutional Investors this month overhauled its policy on executive compensation, urging public companies to dial back the complexity of their pay plans and set longer periods for measuring performance for incentive awards.

While acknowledging that boards of directors need to tailor pay packages to company-specific circumstances, the new policy suggests that companies explore adopting simpler plans composed of salary and time-vesting restricted shares that vest over five years or more. Historically, a majority of time-vesting restricted stock awards have vested over three years.

The policy also recommends that companies consider barring the CEO and CFO from selling stock awarded to them until after they depart, in order to ensure that management prioritizes the company’s long-term success.

Perhaps most controversially, the policy suggests that boards and investors step up their scrutiny of performance-vesting shares, which vest upon the achievement of corporate performance milestones. “Steadily rising average pay, even when market performance is mediocre, suggests that pay for performance can be a mirage,” says CII executive director Ken Bertsch.

Boards may not be easily convinced that the suggestion has merit. According to a research report by Mark Hodak of compensation consultant Farient Advisors, published in the Summer 2019 edition of the Journal of Applied Corporate Finance, 83% of S&P 500 companies offered long-term incentives (LTIs) paid as performance shares in 2018. That was up from 50% in 2009.

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