November 27, 2018

The Seven “Deadly Sins” for Compensation Committee Agendas in 2019

In the spirit of the holiday season that precedes proxy season, we have developed our “Seven Deadly Sins for Compensation Committees in 2019” that are bound to place you on Santa’s naughty list should you make the mistake of not avoiding them. Our list, which includes specific action steps for committees to take, is based on investor feedback, proxy advisor sentiment and emerging “hot topics” in addition to our own observations.

The Seven Deadly Sins 

  • Not Re-Evaluating Your Clawback Policies: The current climate of reputational risk, cyber-attacks, and the #MeToo movement have prompted many companies to evaluate expanding their clawbacks to have broader definitions.
  • Focusing Only on Your Organizational Design of Today: Disruption is threatening to upend the way in which many companies operate within the next five years. The rise of AI and “Big Data” requires entirely new executive positions, ones of which you may not yet be aware (Chief AI Officer, for instance). As the benchmarks for these positions may not be available yet, it’s all the more important to evaluate overall pay structure to provide for future flexibility and adaptability.
  • Thinking About Director Pay Disclosure the Same Way: Director compensation will be in focus for 2019’s proxy season. Companies need to bolster their narrative around how Directors are paid for the purpose of communication with shareholders.
  • Doing a Perfunctory Review of the Compensation Committee Charter: Compensation committees’ roles have been expanded beyond compensation per se to culture and talent strategy as well. Committees may need to rethink some fundamental elements of their charters for 2019 proxy season.
  • Ignoring the War for Talent: The fight to attract and retain top executive talent has accelerated, thanks to a decade-long bull market coupled with more equity-laded, higher-leverage pay. Compensation committees need new ways of thinking about balancing enticement with an ability to protect the company if executives don’t work out.
  • Disregarding the Elephant in the Room – the Potential for a Downturn: Corporations may be enjoying record valuations and high profits, but most economists and analysts see a bear market if not a recession in the near future. A downturn will impact every aspect of compensation strategy, and you need to be prepared for that eventuality.
  • Failing to Understand Economic Value Added (EVA): ISS may be replacing revenue, earnings and return metrics in its recently-debuted Financial Performance Assessment (FPA) with several EVA metrics. As institutional investors look to ISS for advice on how to vote their shares, it’s imperative that compensation committees understand how EVA metrics work.

A more in-depth evaluation of the seven sins and recommendations on specific actions your committee can take to avoid them can be found by downloading the full report:

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So, take our list, check it twice, and find out if your Committee will be naughty or nice.  We’re confident avoiding these sins next year is bound to continue the Holiday cheer all the way through proxy season and beyond.

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