Executive Compensation Consultants Serving Public and Private Companies Worldwide.

Regulatory, Shareholder and Market Updates

And the beat goes on…

The Issue

With several years of Say on Pay (SOP) under our proverbial belts, most companies get it. In fact, over the past few years about two percent of companies have failed their SOP vote.  With improved shareholder, engagement, the threat of activist investors, and other pending regulatory initiatives, SOP, by now, should be a slam dunk, layup or whatever colloquialism we use.

In the not so distant future, the SEC will be rolling out the final Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The long-waited and mostly dreaded CEO Median Employee Pay Ratio Provision, which will require public companies to calculate median employee pay, is slated to debut in 2017.  Waiting in the wings are the Clawback Provision which is exactly that—a clawback of misbegotten incentive payouts.  and the  Pay and Performance provision which has been recently defined to require a table, in addition to the Summary Compensation Table that shows actual pay, year over year, rolled out in the following time frame: a three year period (in year 1), y four year period (in year 2) and a five year period (in year 3).

Today, all Stakeholders are paying attention to pending regulatory actions by the Securities Exchange Commission. Shareholder advocacy groups including Institutional Shareholder Services (ISS) and Glass Lewis are gearing up to scrutinize these regulatory areas more closely to truly understand the impact on corporate behaviors and disclosures. And, according to a soon to be released research initiative from Farient Advisors and the Global Governance and Executive Compensation Network (GECN) entitled Global Trends in Corporate Governance, compliance burdens of publicly traded companies have increased significantly around the world (e.g., binding SOP votes in Switzerland, The U.K. and Australia.)

Farient’s Point of View

The good news is that Say on Pay is old news. Very old news. With better shareholder communications and a deep understanding of what actions around pay create negative reactions from investors, companies are mostly getting this right.  This year boards of directors and executives will be focused on getting ready for the CEO to Median Employee Pay Ratio. Beginning in 2017, public companies will be required to disclose the ratio of CEO pay to median worker pay, providing transparency into pay across public companies—from the janitorial staff (assuming they are not outsourced) to the CEOs office. We think this may be a non-starter.  With too much leeway in how companies calculate this measure, it will be difficult for investors to accurately compare CEO median employee pay across companies. Recommendations on how to disclose may vary based on industry and company size.

More good news. With regard to the pay and performance Provision. Most companies have been disclosing this for years. As the definitive experts on Pay and Performance for more than 20 years. Farient will continue to recommend:

  • Alignment of executive pay relative to performance and to market pay reasonableness
  • Performance of the company (i.e., total shareholder return, both relative and absolute)
  • Transparency of pay programs and decisions

Farient continues to view the Provisions of Dodd-Frank as an opportunity to demonstrate the integrity of your compensation programs and actions, or to explain adjustments where improvements may be needed.

How Farient Can Help

Farient can help develop the inputs you’ll want and need to help your company decide how and when to engage stakeholders.  These inputs include how other companies are responding, how shareholder advisors will advise investors, and whether or not your company has a good story to tell.  In this regard, Farient’s Performance Alignment Reports (PARs)™ and Shareholder Value Analysis™ (SVA™) can paint a clear picture of whether your executive pay design and actions have been and will be both sensitive to Total Shareholder Return (TSR) and reasonable and fair for the company’s size, industry and performance.  If the picture isn’t so pretty, we can help modify the pay programs to tell a better story about the future.  Also, we can help prepare the new Pay and Performance and other disclosures that will be required. Finally, Farient has strong relationships with the investor community and can work closely with your board and/or management to engage shareholders in a productive discussion about current and future pay practices.

With the pay and performance regulatory disclosures pending,   it’s no surprise that an increasing percentage of executive compensation is tied to financial performance metrics. In fact, we can almost say that pay for performance has gone mainstream. Unfortunately, going mainstream does not translate into simpler execution.  The easy answer may be to incorporate TSR into your performance plan and be done with it, however, many companies have learned through stakeholder feedback that TSR can be fraught with both internal and external perception issues.

Today, with the unrelenting focus on aligning corporate performance and executive pay, boards of directors are asking tough questions that include:

  • Are we selecting the metrics that most closely align with our company performance?
  • What metrics are appropriate for our current strategy?
  • How do we demonstrate the linkage between our chosen metrics and the creation of shareholder value?
  • How do we combine multiple metrics to ensure that they are sufficiently challenging and reflective of the company’s business strategy

Farient’s Shareholder Value Analysis takes a systematic approach to answering these questions.  Incorporating your business strategy and longitudinal financial and market data, the Shareholder Value Analysis reviews a broad set of financial metrics to identify those that drive the creation of shareholder value.  Building your short-term and long-term incentive plans around the identified metrics ensures that the interests of all of your stakeholders are taken into account.