Daily Archives: Monday, April 29, 2019

Realizable Pay: Insights into Performance Alignment

Posted by Kosmas Papadopoulos and John Roe, ISS Analytics, on
Monday, April 29, 2019
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Kosmas Papadopoulos is Managing Editor and Executive Director with ISS Analytics, the data intelligence arm of Institutional Shareholder Services, Inc., and John Roe is Head of ISS Analytics. This post is based on an ISS Analytics memorandum by Mr. Papadopoulos and Mr. Roe. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

How much compensation does a CEO really end up with? It’s a tough question to answer—the summary compensation table is often cited as what the CEO is paid, but the ultimate value that an executive realized from those grants can differ significantly from the amounts disclosed.

For years, companies have recognized this potential discrepancy; since even before the advent of say-on-pay, companies in perilous performance positions have turned to alternative measures of pay to demonstrate that executives have shared in the pain that investors feel in their portfolio values. These alternatives have included various forms of realizable and realized pay. An early example includes the disclosure below made at least six years ago, which still reflects the types of disclosures we see today:

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Complex Compliance Investigations

Posted by Veronica Root Martinez (Notre Dame Law School), on
Monday, April 29, 2019
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Veronica Root Martinez is Associate Professor of Law at the University of Notre Dame Law School. This post is based on her recent article, forthcoming in the Columbia Law Review.

There are a variety of accepted understandings—both within industry and academic scholarship—about what is necessary for the creation of an effective compliance program. However, when one considers the many significant compliance failures—think Wells Fargo’s fraudulently opened accounts or General Motors’s faulty ignition switch—that continue to occur despite the adoption of increasingly sophisticated internal compliance programs, it suggests that it may be time to affirmatively question certain understandings and assumptions that serve as the foundation of modern-day compliance programs. This Article contributes to that effort.

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Economic Value Added: What Companies Should Know

Posted by Jim Kroll, Marc Roloson, and Jamie Teo, Willis Towers Watson, on
Monday, April 29, 2019
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Jim Kroll, Marc Roloson, and Jamie Teo are directors at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum.

Institutional Shareholder Services (ISS) is adding Economic Value Added (EVA) metrics in its proxy research reports this year, which is causing many companies to wonder: What is EVA? Why is ISS interested in EVA, and how will it be used? And what should boards and management do about it?

What is EVA?

Simply put, EVA is a financial measure of a company’s residual profit after accounting for the cost of capital. If a company’s net operating profit exceeds its cost of capital, it is creating value. If not, it is destroying value.

EVA = net operating profit after tax – capital charge
        = [operating income X (1 – tax rate)] – (weighted average cost of capital X capital)

Proponents of EVA often claim it is highly aligned with shareholder value creation, and it holds managers accountable for generating healthy returns on an organization’s capital. It is also considered harder to game since managers cannot take on additional capital to drive returns because cost of capital is removed from profit. Despite these benefits, critics are quick to point to the measure’s lack of clarity and its “black-box” perception as reasons not to adopt the metric.

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