In the past week there have been two major reports describing how to fix executive compensation. The first is from the UK report and comes at the end of a project by the “Executive Remuneration Working Group” (those Brits love their whimsical names) This project was publicly announced September 8, 2015 as an effort by The Investment Association. The second report “Commonsense Principles of Corporate Governance” is from a group of executives in the US. It covers a broad list of corporate governance issues. For the purposes of this post we will focus only on the section titled “Compensation of Management.” Here’s the basic run down:
The UK list (paraphrased)
It should be easier to utilize more flexible executive pay structures. Pay should be aligned with strategy and business needs.
The head of the Comp Committee should serve on the committee for at least a year before begin put in charge.
The entire Board should be engaged in determining executive pay.
The Committee shouldn’t be slaves to their consultants and should shop around on a regular basis.
Shareholder engagement should focus on strategic issues for pay. They should be clear about their thoughts and reasoning for or against support.
Companies should focus engagement with shareholders on material issues with a goal of truly understanding shareholder concerns.
Companies should be clear, in advance, about how they set short-term incentive targets. They should also disclose ranges for STI after a cycle has been completed.
If a program allows for discretion, the company should make the potential impact clear in advance.
Companies should make sure everyone understands why pay maximums are what they are.
Committees and consultants should guard against the inflationary impact of market data.
The US list (paraphrased)
It should be easier to utilize more flexible executive pay structures. Pay should be aligned with strategy and business needs and private a level of continuity over multiple years.
There should be both current and long-term pay elements.
Companies should be clear, in advance, about how they choose metrics and set incentive targets. They should also disclose ranges for STI after a cycle has been completed. Programs should allow for a level of discretion, the company should make the potential impact clear in advance.
A substantial portion (for some companies 50% or more) of executive pay should be in the form of equity compensation or similar instruments. Vesting should align the executive with the long-term performance of the company. There should be no discounted equity awards.
Companies should clearly communicate their pay programs to shareholders. They should also be able to design plans that are best fit to their specific needs without feeling constrained by common practices or proxy advisor opinions.
The impact of any large or unusual compensation awards should be carefully evaluated and clearly explained to shareholders.
Clawbacks should exist for all forms of executive compensation.
These lists end up being fairly similar. They also end up looking pretty much like everything that would be considered typical guidance for the past several years. The most promising focal point is the emphasis on flexibility to create LTIP programs that don't follow the lockstep vanilla model that has become expected. I think it’s important the readers know these lists are out there, but I think it will be a while before most companies act on them. Share your thoughts in the comments below.
Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is also a leading expert on equity compensation issues and has written several industry resources including the one-of-a-kind Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.