Corporate Directors Focusing on Executive Compensation

Shareholders reject ‘cherry picking’ performance metrics from year to year

By Stephen Miller, CEBS Dec 12, 2011

Investor demands and regulatory pressure for improved corporate disclosure have had a dramatic impact on directors’ oversight roles and their focus on critical areas such as executive compensation, risk management and succession planning, according to accounting and consulting firm PricewaterhouseCoopers' (PwC) 2011 Annual Corporate Director Survey.

“Board members are serious about embracing change and are focused on identifying areas of risk and opportunity,” said Don Keller, a partner in PwC’s Center for Board Governance. “Directors are willing to address and communicate about the concerns of key stakeholders.”

Executive Compensation: Boards Consider ‘Say on Pay’

Directors expressed concern about shareholders' views of executive compensation levels, even in the face of a majority vote from shareholders in favor of current compensation. The 2011 proxy season marked the first in which shareholders were entitled to such a vote, or “say on pay,” and 72 percent responded that they would reconsider executive compensation even though fewer than 50 percent of shareholders voted against the compensation levels.

Proxy advisory firms recommended “against” votes for approximately 250 U.S. companies in 2011, and 38 companies ultimately failed say-on-pay votes. "This would suggest that the advice of proxy advisory firms may not be completely persuasive, even though it does have an impact on the level of negative votes," according to PwC's analysis. In turn, "their advice may still cause directors to reconsider executive compensation."

Many companies engaged institutional shareholders (and proxy advisors) in dialogue around their executive compensation programs in advance of filing their proxies."The importance of the proxy advisory firms' views is supported by the survey finding that 24 percent of board members have had increased board-level communications with proxy advisory firms over the last 12 months," PwC noted.

Impact of Proxy Advisors on ‘Say on Pay’ in 2011

Percentage of "yes" votes where shareholder advisors recommended a "no" vote

Percentage of "yes" votes where shareholder advisors recommended a "yes" vote

Overall median percentage of "yes" votes




The reasons institutional investors gave for "no" votes included:

A disconnect between pay for performance and "cherry picking" performance metrics from year to year.

"Make-up" cash and equity awards when the plans do not pay out after performance goals are not hit.

Executive perks, with personal aircraft travel coming under extra scrutiny.

Tax gross-ups and excessive severance agreements/awards.

Proxy disclosures that obfuscate the pay-for-performance relationship.

Compensation levels just facially "too high."

Source: PricewaterhouseCoopers.

To prepare for the say-on-pay vote and to embrace investor concerns relative to executive compensation, two-thirds of the responding corporate directors made changes to their approach from prior years, with 45 percent using simpler language in their proxy statement's required Compensation Discussion and Analysis (CD&A) section and 31 percent adding an executive summary to their CD&A.

Companies enhanced their descriptions of the pay-for-performance relationship and explained better why severance and change-in-control programs were necessary.

Changes in Executive Compensation Programs

PwC reported that many companies made changes to their compensation programs in advance of filing their 2011 proxies because of the say-on-pay requirements. These changes included:

Proactive elimination of gross-up provisions.

Reductions in executive benefits and perquisites.

Establishment of performance conditions on long-term incentive grants.

Tighter alignments between annual incentive payouts and performance.

Some companies made unprecedented changes to previously granted equity programs or contractual rights including:

Changing previously issued stock option grants to make them performance-based.

Rescinding contractually agreed-to change in control tax "gross-up" provisions for senior executives.

Adding multiyear performance periods to prior equity grants.

For 2012, many companies were considering further changes to their incentive compensation based on the 2011 say-on-pay results and shareholders' reactions to their programs.

Risk Management: Emphasis Continues to Expand

Despite constant changes in risk--whether financial, environmental or IT security risks--only 19 percent of directors rated their board as effective at monitoring plans to reduce corporate exposure to risk. "Directors recognized the significant competitive advantages that can be gained through the use of emerging technologies as well as the threats posed by increasingly sophisticated cyber attackers," PwC said.

Securing company and customer data is increasingly complex, and as a result, nearly half of directors surveyed (46 percent) believe that their board’s ability to oversee strategic use of IT is less than effective and 38 percent want to spend more time on IT. A majority (53 percent) said finding IT expertise is difficult.

Hot Topics: Succession Planning, Diversity, Board Gadgets

Among other survey highlights:

Succession planning. With several high-profile CEO successions in 2011, directors would like to focus more of the board's time on planning for the future leadership of the company. Fifty-nine percent looked to spend more time and focus on succession planning, up from 50 percent in 2010. Thirty-six percent of directors surveyed were not satisfied with CEO succession planning.

Diversity. The increased emphasis on diversity, driven by globalization and an increase in purchasing power of women and minorities, had many boards assessing their composition. The directors polled indicated that racial and gender diversity were the most difficult to improve. Nearly two-thirds (65 percent) found it difficult to increase racial diversity on the board, and 55 percent found it difficult to improve gender diversity.

Board gadgets. Mobile computing devices are becoming more common in the boardroom. A large majority of respondents have started (42 percent) or wish they had started (38 percent) using tablets or smart phones to receive their board materials. Notably, board members who have served more than five years and whose boards do not use such devices are more likely to hope that their boards don’t start doing so.

The survey, fielded in the summer of 2011, collected the opinions of 834 directors serving on the boards of the top 2,000 U.S. publicly traded companies by revenue—67 percent of the companies had annual revenues of more than $1 billion, and 13 percent had revenues of more than $10 billion. Eighty-four percent of surveyed directors were independent board members, and 16 percent were inside directors. PwC reported its survey results in December 2011.

An archived Pwc webcast, Designing and Disclosing Pay for Performance Programs in a Say on Pay World, is accessible at no cost.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​


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