Pay for Performance Alignment
Pay and Performance Alignment: The Anchor of Transparent Disclosures Goes Mainstream
Although we anticipate several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act will be eliminated [or minimized] over the next few years, we believe most of the executive compensation provisions will survive in one form or another. When we consider that many companies have voluntarily included pay and performance in their proxies, increased shareholder engagement, and have mostly passed their say on pay votes, it is clear these provisions have had a positive impact on disclosure and transparency.
Farient’s Point of View
Going forward, we expect companies will continue to provide pay and performance disclosures as part of good corporate hygiene. At Farient, we say 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. Importantly, over the years, we have found that highly paid doesn’t always mean overpaid. In fact, it’s often not the level of pay at issue; it’s lack of alignment, (i.e., the lack of linkage of pay to sustained total shareholder return (TSR) over time.) And contrary to popular belief, gifts of equity grants do not assure alignment.
Farient has always been very vocal that pay and performance should be aligned and disclosed. We have a wait-and-see approach right now to see if the administration and the SEC will follow through on some official aspect of their pay and performance disclosure provision where companies will be required to show relative TSR over three years in year one, four years in year two and five years in year three.
Many people think 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. Finally, they may make the mistake that alignment can be determined one year at a time. We encourage our clients to look at the pattern of performance-adjusted compensation relative to TSR performance over time, at least three years, since that is what really tells the story.
How Farient Can Help
Farient can provide an Alignment Assessment of the Pay for Performance for your company by running our proprietary Farient Performance Alignment Reports™ (PARs)™. This enables us to 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 credible and transparent communications to investors, helping your organization capitalize on a clear and defensible story around your pay practices.