CEO Pay Tracks with Performance Despite ‘High Concerns’ From Shareholder Advisory Services
March 15 2012 - 2:45PM
Business Wire
Shareholders at thousands of companies are getting ready to cast
their Say-on-Pay votes and many will base their votes on a
potentially flawed interpretation of overall alignment of CEO pay
to company performance, concludes a study by Pay Governance, LLC,
one of the nation’s premier independent compensation consulting
firms.
Proxy advisors – such as ISS and Glass Lewis – provide
Say-on-Pay recommendations that guide institutional shareholders in
their voting. The single most powerful determinant of whether their
recommendations will be positive or negative is the overall
alignment of CEO pay to company performance – measured primarily by
Total Shareholder Return (TSR).
Many large companies receive “high concern” or “medium concern”
ratings for pay-for-performance alignment – and in more extreme
cases, “against” recommendations for Say-on-Pay votes from
Institutional Shareholder Services – despite the reality that, when
properly measured, their pay programs exhibit true alignment. This
may adversely affect the outcomes of Say-on-Pay votes, according to
Pay Governance’s just released Viewpoint on Executive
Compensation.
Pay Governance found strong alignment of a company’s TSR with
realizable CEO pay. Realizable pay is the sum of actual cash
compensation earned, the aggregate value of in-the-money stock
options the current value of restricted shares, actual payout from
performance share or cash plans, plus the estimated value of
outstanding performance share or performance contingent cash. The
alignment between pay and performance found in these measurements
is directly linked to the substantial amounts of stock-based
incentives in these compensation packages. Other assessment methods
cannot provide this clear linkage of pay and performance because
the time period used to measure pay opportunity is usually not
concurrent with the one used to measure performance.
“We conducted a review of CEO pay and performance alignment at
large companies using the realizable pay model and a pay
opportunity tool which simulates the new ISS Relative Degree of
Alignment (RDA) test,” said Pay Governance managing partner Ira
Kay. “Using realizable pay, we found a better than 91 percent
alignment with TSR. This supports our believe that realizable pay
is the preferable measure of pay to look at when comparing pay to
performance.”
Most evaluations of pay for performance by shareholder advisors
tend to only look at pay opportunity –cash compensation and the
value of equity incentives on the date of grant – which can create
the appearance of high pay compared to performance even if that
performance, and consequently realizable pay, is low.
“We have consistently used realizable pay to make comparisons
between compensation and performance,” said Pay Governance partner
Ben Stradley. “We usually make comparisons over three-year periods,
but we’ve been able to use longer periods of time capturing an
individual executive’s compensation over an entire career.”
Using both tests, approximately 86 percent of the companies
exhibited the same levels of alignment versus misalignment of pay
with performance. In more than 10 percent of the cases, however,
the opportunity-based test found misalignment (high pay opportunity
with low TSR) when pay was actually aligned with performance.
For its pay for performance study, Pay Governance examined
long-term stock-based incentives for CEOs who had served three or
more years at 374 S7P 500 companies filing proxy statements from
2008 through 2010. The study was limited to companies that had
filed proxy statements and had held Say-on-Pay votes by mid June
2011. These firms had median revenues of $8 billion and market
capitalizations of $11.7 billion.
For a full copy of the study, please visit
www.paygovernance.com.
About Pay Governance
Pay Governance LLC is an independent executive compensation
advisory firm. Our focus is on providing sound advice and counsel
on how pay programs attract, retain, and motivate executives to
create shareholder value. The firm helps compensation committees
and management ensure that compensation programs align pay with
performance, while being supportive of appropriate corporate
governance and risk structures. For more information, please visit
www.paygovernance.com.