Tag: Pay for performance


Alternatives to Equity Shares in a Low Stock Price Environment

Steve Pakela is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Pakela, Brian Scheiring, and Mike Grasso.

Compensation Committees face the challenge of balancing the tension in motivating their executives to create shareholder value in the current Say on Pay and economic environment. The current pullback in stock prices and the uncertain financial outlook for 2016 at many companies will make this year’s compensation decisions even more challenging. Stock prices at many companies and in many sectors are down 50% or more over the past year and, in particular, since equity awards were last granted to executives. The table below illustrates the effect of a significantly low stock price on the number of shares granted. For companies whose stock price is down 50%, the number of shares required to deliver equivalent value will be double that granted last year. For those companies whose share price is down 67% or 75%, share grants will need to be three or four times greater than the shares granted last year, respectively. This can pose a number of problems ranging from creating potential windfalls when share prices recover to previous levels to exceeding maximum share grant levels contained in a shareholder approved equity incentive plan.

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Activist Hedge Funds, Golden Leashes, and Advance Notice Bylaws

Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Jason D. Schloetzer of Georgetown University. The complete publication, including footnotes, is available here. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

The tactics used by activist hedge funds to target companies continue to command the attention of corporate executives and board members. This post discusses recent cases highlighting activist efforts to replace directors at target companies. It also examines the use of controversial special compensation arrangements sometimes referred to as “golden leashes,” the arguments for and against such payments, their prevalence, and the parallel evolution of advance notification bylaws (ANBs) to require disclosure of third party payments to directors.

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Trends in S&P 500 CEO Compensation

Aubrey E. Bout is a Partner in the Boston office of Pay Governance LLP. This post is based on a Pay Governance memorandum by Mr. Bout, Brian Wilby, and Steve Friedman.

Executive pay continues to be a hotly debated topic in the boardroom among investors and proxy advisors, and it routinely makes headlines in the media. As the U.S. was in the heart of the financial crisis in 2008-2009, CEO total direct compensation (TDC = base salary + actual bonus paid + grant value of long-term incentives) dropped for two consecutive years. As the U.S. stock market sharply rebounded and economy stabilized and started to slowly grow again, CEO TDC also rebounded. Large pay increases occurred in 2010 and they were primarily in the form of larger LTI grants. Since then, year-over-year increases have been fairly moderate—in the 3% to 6% range. While CEO pay increases have been higher than seen for the average employee population, they are well aligned with company stock price performance.

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Harvard Convenes the 2015 Executive Compensation & Corporate Governance Roundtable

The Harvard Law School Program on Corporate Governance and the Harvard Law School Program on Institutional Investors convened the Harvard Roundtable on Executive Compensation & Corporate Governance last Wednesday, October 21, 2015. The event brought together for a roundtable discussion 62 prominent experts with a wide range of perspectives on the subject, including senior officers from leading institutional investors (both mutual funds and public pension funds) with aggregate assets under management exceeding $13 trillion, and from significant issuers, prominent advisors, and academics. Participants in the event, and the topics of discussion, are set out below.

The Roundtable discussion on issues relating to the process of determining executive compensation included discussion of the work of proxy advisors and their interaction with investors and issuers, engagement between issuers and investors themselves and compensation disclosure issues, such as pay-for-performance disclosure and pay-ratio disclosure. The Roundtable then moved to a discussion of the substantive terms of compensation arrangements, including compensation levels, composition, and structures. Issues that were considered included the composition of long-term and short-term incentive pay and contractual provisions such as claw-backs and hedging policies. The Roundtable ended with a discussion of current issues in corporate governance, including lessons from the 2015 proxy season, current thinking on engagement with investors, and proxy access.

The Roundtable was co-organized by Lucian Bebchuk, Stephen Davis, and Scott Hirst, and was supported by a number of co-sponsors (listed here), the supporting organizations of the Program on Corporate Governance (listed on the program site here), and the institutional members of the Harvard Institutional Investor Forum (listed here).

The participants in the Harvard Roundtable on Executive Compensation & Corporate Governance included:

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Executive Overconfidence and Compensation Structure

Ling Lisic is Associate Professor of Accounting at George Mason University. This post is based on an article authored by Professor Lisic; Mark Humphery-Jenner, Senior Lecturer at UNSW Business School; Vikram Nanda, Professor of Finance and Managerial Economics at University of Texas at Dallas; and Sabatino Silveri, Assistant Professor of Finance at the University of Memphis. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

In our paper “Executive Overconfidence and Compensation Structure,” forthcoming in the Journal of Financial Economics, we investigate whether overconfidence affects the compensation structure of CEOs and other senior executives. There is a burgeoning literature on the impact of CEO overconfidence on corporate policies. Overconfident CEOs are prone to overestimate returns to investments and to underestimate risks. Little is known, however, about the nature of incentive contracts offered to overconfident managers or even whether firms “fine-tune” compensation contracts to match a manager’s personality traits. We help fill this gap.

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2016 Proxy Season Update

Laura D. Richman is counsel and Michael L. Hermsen is partner at Mayer Brown LLP. This post is based on a Mayer Brown Legal update, available here, authored by Laura D. Richman, Robert F. Gray, Michael L. Hermsen, Elizabeth A. Raymond, and David A. Schuette.

It is time for public companies to think about the upcoming 2016 proxy and annual reporting season. Preparation of proxy statements and annual reports requires a major commitment of corporate resources. Companies have to gather a great deal of information to produce the necessary disclosures. In addition, with increasing frequency, companies are choosing to implement the required elements of their proxy statements with a focus on shareholder engagement, seeking to clearly present, and effectively advocate for, their positions on annual meeting agenda items. As the process for the 2016 proxy and annual reporting season begins, there are a number of recent developments that public companies should be aware of that will impact current and future seasons.

This post is divided into five sections covering the following topics:

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The Limits of Using TSR as an Incentive Measure

David N. Swinford is the President and Chief Executive Officer of Pearl Meyer & Partners, LLC. This post relates to research conducted by Pearl Meyer and the Cornell University ILR School’s Institute for Compensation Studies.

The widespread and growing use of total shareholder return (TSR) as an incentive measure is not the panacea many believe it to be. To test our point of view we wanted to explore one critical question: Does the inclusion of TSR measures in long-term incentive plans result in improved firm performance?

To find out the answer, Pearl Meyer collaborated with the Cornell University ILR School’s Institute for Compensation Studies to conduct original research on the use of TSR by S&P 500 companies over a ten year period.

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The Effect of Relative Performance Evaluation

Frances M. Tice is Assistant Professor of Accounting at the University of Colorado at Boulder. This post is based on an article authored by Ms. Tice.

In the paper, The Effect of Relative Performance Evaluation on Investment Efficiency and Firm Performance, which was recently made publicly available on SSRN, I examine the effect of explicit relative performance evaluation (RPE) on managers’ investment decisions and firm performance. Principal-agent theory suggests that firms can motivate managers to act in shareholders’ interest by linking their compensation to firm performance. However, firm performance is often affected by exogenous factors, and as a result, performance-based compensation may expose managers to common risk that they cannot directly control. In such cases, RPE enables the principal to compensate managers on their effort and events under their control by removing the effect of common shocks from measured performance, thus improving risk sharing and incentive alignment. However, RPE use as implemented in practice may not be effective in addressing agency costs because of potential peer group issues, such as availability of firms with common risk or a self-serving bias in peer selection. In addition, prior research also suggests that a large gap in ability between the RPE firm and peers (“superstar effect”) may actually reduce managers’ effort because the probability of winning is low. Therefore, the question of whether explicit RPE use in executive compensation does indeed reduce agency costs remains unanswered in the empirical literature.

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Can Institutional Investors Improve Corporate Governance?

Craig Doidge is Professor of Finance at the University of Toronto. This post is based on an article authored by Professor Doidge; Alexander Dyck, Professor of Finance at the University of Toronto; Hamed Mahmudi, Assistant Professor of Finance at the University of Oklahoma; and Aazam Virani, Assistant Professor of Finance at the University of Arizona.

In our paper, Can Institutional Investors Improve Corporate Governance Through Collective Action?, which was recently made publicly available on SSRN, we examine whether a collective action organization of institutional investors can significantly influence firms’ governance choices. Growth in institutional investor ownership over the last few decades puts these investors in the position to have significant influence, particularly if they can work collectively and coordinate their efforts. But we have very limited evidence whether institutional investors are able to overcome the obstacles to collective action. We focus on the Canadian Coalition for Good Governance (CCGG), an organization of institutional investors whose mandate is to promote good governance. We use proprietary data on its private communications and find that its private engagements between owners and independent directors influenced firms’ adoption of majority voting and say-on-pay advisory votes, improved compensation structure and disclosure, and influenced CEO incentive intensity.

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CEO and Executive Compensation Practices: 2015 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO and Executive Compensation Practices: 2015 Edition, an annual benchmarking report authored by Dr. Tonello with James Reda of Arthur J. Gallagher & Co. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

The Conference Board, in collaboration with Arthur J. Gallagher & Co., recently released the Key Findings from CEO and Executive Compensation Practices: 2015 Edition, which documents trends and developments on senior management compensation at companies issuing equity securities registered with the U.S. Securities and Exchange Commission (SEC) and, as of May 2015, included in the Russell 3000 Index.

The report has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages and the evolving features of short-term and long-term incentive plans (STIs and LTIs), the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design.

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