Executive Compensation Consultants Serving Public and Private Companies Worldwide.

Pay for Performance Alignment

pay for performance alignment

Finally. Pay and Performance take Center Stage

The Issue

Finally. The SEC is moving closer to implementing the Pay and Performance Provision of the Dodd Frank Wall Street Reform and Consumer Protection Act. It seems that this has been a “long time coming,”  We say that pay and performance are aligned when total compensation, after performance has been factored in, is both, “reasonable relative to peers and sensitive to performance over time.” It’s important to note that over the years we have found that highly paid doesn’t always mean overpaid. In fact, it’s often not the level of pay that’s at issue; it’s the lack of alignment, (i.e., the lack of linkage of pay to sustained Total Shareholder Return (TSR) over time.)  And contrary to popular belief, large dollops of equity grants do not assure alignment. Going forward the SEC will require public companies to disclose how pay and performance are synching up and what metrics are being used to calculate performance.

Farient’s Point of View

Farient believes that pay for performance should be aligned over time, but that a clearer definition of what this means and better guidance as to whether companies are achieving this is what is needed.  In particular, Farient defines alignment to be when total compensation, after performance has been factored in, is: (1) Reasonable relative to market comparables and for the performance delivered and (2) Sensitive to TSR over time.

Many people think that alignment is only when pay fluctuates in response to performance, or they mistake the definition of pay as target compensation, rather than compensation that has been adjusted for performance (i.e., Performance-Adjusted CompensationTM (PACTM)). Finally, they make the mistake that alignment can be determined a year at a time.  But it’s really the pattern of PAC relative to TSR performance over time that tells the story.

How Farient Can Help

Farient can provide an Alignment Assessment of your company’s Pay for Performance  by running our proprietary Farient Performance Alignment Reports (PARS)TM and Farient Forecaster ™. We can quantify and visually illustrate the degree to which your company’s compensation program has been and likely will be aligned with TSR over time.  This analysis helps us “drill down” to diagnose the cause of any problems that exist, and helps us to redesign your pay program and/or suggest a different approach to pay actions when warranted.  Finally, Farient can help you develop a credible and transparent story for investors, helping your organization get ready for  the pending disclosure requirements.