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Using multiple definitions of pay and performance can reveal how well programs are working
This year, 6 in 10 U.S. public companies assessed how closely their executive pay levels aligned with company performance, a survey by consultancy Towers Watson found.
The survey, conducted in September and October 2014, is based on responses from executive compensation professionals at 104 large and midsize U.S. publicly traded companies.
“Leading companies are paying close attention to pay-for-performance alignment and are using multiple definitions of pay and performance to better understand how their executive pay programs are working,” said Steve Kline, who leads Towers Watson’s pay-for-performance analytics team.
Among companies that conducted a pay-for-performance analysis this year:
• Nearly all (96 percent) compared their performance to a company-defined peer group.
• 79 percent used a three-year period to measure performance.
• 54 percent used pay as reported on their proxy statement’s required Summary Compensation Table in their pay-for-performance analyses, while 44 percent also used some form of realizable pay, which considers the value of awards granted in prior years.
While total shareholder return (TSR) was the most common measure of performance that companies analyzed, cited by 84 percent of the respondents, most assessed their performance using both TSR and a measure of operating financial performance, such earnings, revenues, profits and cash flow.
Moreover, “about half the surveyed companies analyzed pay for performance for all their named executive officers, rather than just the CEO,” noted Kline. “This additional effort shows that many companies are being thoughtful and consider how programs cascade below the CEO.”
Companies continued to make changes to their executive pay programs to further strengthen the link between pay and performance, the findings revealed:
• 43 percent changed their peer comparison group this year.
• A slightly lower percentage (40 percent) changed the performance measures used to determine incentive payouts.
• Slightly more than a quarter used more demanding performance goals and changed the equity pay mix.
“Most companies are making an ongoing effort to strengthen the calibration of their performance goals and metrics,” said Andrew Goldstein, leader of Towers Watson’s executive compensation consulting practice in the central U.S. “With say on pay and increasing shareholder activism, pay-for-performance analytics are taking hold in the market as companies are more determined than ever to get pay for performance right.”
Analyzed but Not Disclosed
Interestingly, nearly two-thirds (63 percent) of those that analyzed their companies’ pay-for-performance practices did not disclose that they conducted an analysis, or the results of the analysis, in their 2014 proxy statements.
When asked why they didn’t disclose this information, three-fourths of respondents (76 percent) said they were waiting for the Securities and Exchange Commission to issue disclosure rules, while one-third said they were concerned about setting a precedent that would require similar disclosure in the future.
About 2 in 10 respondents said the analysis did not yield information they felt would be useful to shareholders.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.
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