FIS provides independent research on pay for performance alignment. Our Performance Alignment Reports (PARs) have rapidly become recognized as providing the best “pure” pay for performance analysis, and are being used by both leading investors as well as by boards and management in corporate communications.
Our Alignment Model is based on extensive research and analysis. Farient analyzes the Russell 3000 going back 15 years, and has developed clear and consistent definitions to provide comparability across companies and time periods. The key definitions include:
- Alignment: when total compensation, after performance has been factored in, is:
- Reasonable relative to the market; and
- Sensitive to company performance over time
- Pay: 3-year rolling total Performance-Adjusted Compensation (PAC), including:
- Actual salary, bonus, and all “other” compensation
- Performance-adjusted equity valuation
- Performance: 3-year rolling TSR (Total Shareholder Return)
- Alignment Zone: a range of acceptable pay outcomes based on size, peers and performance
- The industry/peer pay line is derived from 15 years of inflation- and size-adjusted data
- The Alignment Zone reflects typical executive compensation program leverage – where pay should be
- The chart below shows an example of the Alignment Zone – comparable pay (PAC) should increase as performance (TSR) rises, with company pay falling within a reasonable range (the Alignment Zone) when compared to company peers
The PAR Alignment Zone makes identifying poor pay alignment intuitive and quick.
Farient Forecaster™: The Power to Predict Pay for Performance
The foundation of Farient’s PARs has always been an in depth view of historic pay outcomes that enables investors to quickly assess pay for performance alignment over the long term. Imagine seeing the future of a pay plan today. With the Farient Forecaster™ investors can now do just that to understand the potential outcomes of the current pay plan.
The Farient Forecaster enables investors to quickly answer important questions about pay and performance alignment including:
- Have companies truly reformed past pay practices?
- Have those reforms gone far enough to adjust pay to reasonable levels?
- Is there sufficient equity in the pay plan to align the CEO’s interests with that of shareholders and most important will pay be sensitive to company performance over time?
The Forecast above showcases the subject company’s target pay (center line) being reasonable and appropriately sensitive to TSR across a wide range of TSR outcomes. But going forward, pay would exceed reasonable amounts (area above alignment zone) at maximum award levels (Performance Shares, Plan-based cash bonuses) with higher TSR returns.
Why wait until there is a pay for performance issue? Why wait for a pay plan to unfold? Now, at a glance, investors can understand potential future outcomes of the current pay plan and address concerns with issuers proactively.