Balancing the Tension: Current Topics in Executive Compensation

Ira Kay is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Kay, Steve Pakela and Lane Ringlee. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Executive compensation programs at major U.S. companies are crucial for economic success—both for the companies and the economy at large. The topic is complex and controversial, however, with criticisms aimed at the magnitude of pay packages and purported misalignment of compensation with corporate performance and shareholder returns. This contentious environment has been exacerbated by a confluence of proxy advisor influence, regulatory oversight, union criticism, and media scrutiny. The broader income inequality narrative has drawn attention to the compensation provided to U.S. company leadership, exposing companies, boards, and executives to reputational risk. As a result, compensation committees are increasingly struggling to “balance the tension,” motivating executives to increase shareholder value in this regulatory and economic environment.

On the one hand, these committees are chartered by boards to provide oversight and guidance for programs designed to attract, retain, and motivate skilled leadership in order to develop and implement strategies that will enhance the value of shareholder investments. To supplement requisite disclosure of pay programs, issuer proxy disclosures now routinely describe committees’ reactions to “Say on Pay” votes, insight from shareholder outreach efforts on executive pay issues, and performance attributes that justify pay outcomes. Every year, the “bar” for disclosing pay programs through the compensation discussion and analysis (CD&A) section of the proxy ratchets higher. With greater disclosure comes a greater risk of pay decisions.

On the other hand, these committees must skillfully navigate the proxy advisory firms’ pay-for-performance rubric—primarily Institutional Shareholder Services (ISS) and Glass Lewis—as well as institutional investors’ proxy voting guidelines. These often differ, sometimes even contradicting each other, complicating the balancing act committees must endure. Additionally, the proposed and final Dodd-Frank regulations challenge compensation committees due to enhanced disclosures of CEO pay versus employee pay (“CEO Pay Ratio”) and CEO pay versus performance.

Pay Governance’s latest book, Balancing the Tension (2017), provides guidance for committee members on current topics related to the importance of appropriately designing, administering, and governing executive/board compensation programs in this challenging environment. This book is aimed at providing invaluable insights into the ongoing debate on executive compensation, drawing from the experience and research of Pay Governance’s Partners and staff. In addition, the book includes research on current compensation design trends across the major industry sectors of manufacturing, utility, banking, and more.

Contemporary issues that are addressed in the book’s chapters include:

  • What are compensation committees’ key responsibilities?
  • How can one resist the trend toward “one-size-fits-all” compensation design due to standardized proxy advisory group policies?
  • Which definition of “pay” has the greatest alignment with total shareholder return?
  • Is there a relationship between stock buybacks, managerial behavior, and executive pay?
  • How should companies adjust incentive programs and stock-based awards in times of declining firm performance?
  • How can a compensation committee best incorporate discretion in determining incentive awards?
  • How is compensation changing for boards of directors, and what can be expected in the future?
  • What are the key compensation considerations for companies preparing for a spin-off transaction?

Despite the potential for regulatory reform, the executive pay environment represents an era of increased risk for companies and committee members and will remain extraordinarily challenging for committees. Pay Governance’s Balancing the Tension rises to the challenge through strong governance practices, thoughtful issue deliberation, and leading analytic processes.

The book is available for download here.

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