Though most U.S. public companies received strong shareholder support for their executive compensation programs during the 2012 proxy season, a new survey by consultancy Towers Watson reveals that almost half of the respondents either made or will make program changes to strengthen the link between pay and performance in advance of the 2013 proxy season. The study also found that while the vast majority of companies say they pay executives for performance, only about six in 10 have actually conducted a pay-for-performance analysis to demonstrate this linkage.
The survey was conducted in September 2012 and is based on responses from executive compensation executives and professionals at 253 large and midsize U.S publicly traded companies. It found that 45 percent of respondents either made or will make changes to their executive pay programs in 2012 to further strengthen the link between pay and performance. Among these respondents, more than half (55 percent) are introducing or enhancing the emphasis on performance-based equity while 50 percent are changing the performance measures used to determine incentive payouts. These changes are occurring even though only 2 percent of respondents failed to gain majority shareholder support in their most recent say-on-pay votes.
“While companies have generally received strong shareholder support during the first two years of say-on-pay voting, most are far from complacent as we head into year number three,” said Andy Goldstein, leader of Towers Watson’s executive compensation consulting practice for the central U.S. “Even companies that received overwhelming shareholder support in 2012 are considering fine-tuning how they pay executives, and we’re seeing the most activity among those receiving less than 90 percent say-on-pay support.”
The vast majority of companies (90 percent) state in their proxies that their executive compensation programs pay for performance. However, only 61 percent have conducted a pay-for-performance analysis that compares the company’s relative financial performance with its relative pay positioning.
Shareholder Disclosure Weighed
Additionally, only about half of the companies that conducted pay-for-performance analyses decided to disclose the results to shareholders in their public filings. Among those that did, nearly three-fourths (73 percent) believed their disclosures were effective or very effective in boosting shareholder support for their pay programs.
When asked why they decided not to disclose the results of their pay-for-performance analyses to shareholders in 2012, companies offered various reasons. Nearly four in 10 (39 percent) said they were waiting for SEC disclosure rules to be issued, while roughly three in 10 were concerned about setting a precedent that would likely require the disclosure of a similar analysis in the future or said the analysis did not yield incremental valuable information to shareholders.
Other findings from the survey include:
• Among the companies that conducted a pay-for-performance analysis, 81 percent compared their performance to a company-defined peer group.
• More than half (52 percent) of companies conducting analyses continue to rely on the pay required to be disclosed in their proxy statement's Summary Compensation Table when assessing pay for performance. While this may align with how proxy advisors have historically considered pay, there’s growing interest in other measures of pay outcomes, such as earned pay and “realizable pay,” that take into account stock plan payments the Summary Compensation Table ignores, according to Goldstein.
• In terms of measuring performance, 73 percent of those conducting analyses used total shareholder return, but most also considered other measures that reflect income statement and balance sheet results.
• About half of the survey respondents addressed shareholders regarding pay-for-performance issues in 2012; nearly another quarter (23 percent) plan to engage more actively with shareholders in 2013.
Executive Pay: How Much Is Too Much?, SHRM Online Compensation Topics, October 2012
The Evolving Say on Dodd-Frank’s ‘Say on Pay,’ SHRM Online Compensation Topics, May 2012
Executive Pay Programs Stabilize, Reflecting Best Practices, SHRM Online Compensation Discipline, March 2012
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