This month Frederic W. Cook & Co., Inc. released a great report summarizing the executive pay landscape in 2012, and also gave us a look at what we can can expect in 2013 and beyond. You can read the entire report here.
Honestly there’s so much to write about here that I may revisit the paper for a follow up post at a later date.
Today, however, I’d like to talk about one specific section of the study – namely that which focuses on the role ISS (and Glass Lewis) have in influencing shareholder votes on executive pay.
Check out the chart below:
Two key takeaways:
1. Most companies are getting ISS support (which is strongly correlated with passing one’s “Say on Pay” vote).
2. Even if a company doesn’t get a “yes” recommendation from the ISS, they will probably still pass the vote anyway (albeit by a smaller margin).
With all that said, the ISS does have considerable sway over shareholder voting behavior (to the tune of about 30%), which is probably not enough for a company to fail their shareholder vote, but *is* enough to damage a company’s image with the public.
Most companies seem to intuitively understand that although these votes aren’t binding, it’s still critical to generate shareholder buy-in.
As the Swiss have demonstrated in recent months, if the general public doesn’t feel that companies are doing enough to ensure executive pay doesn’t grow 1. For the record, I don’t agree with the Swiss capping bonuses as a multiple of employee salaries. Even though (as I’ve said before) executive skill transfer-ability is low (making retention a negligible issue), over time companies will find a way around this legislation. For starters, I anticipate that there will be a move towards much larger base salaries in places where this law (and those similar to it) goes into effect. This isn’t what shareholders should want at all, since if executive pay moves from bonuses/equity to base salary then their compensation will no longer be as aligned with company performance. This is a bad solution to a cultural problem (that being the growing divide between executive and average worker pay). I’ll write more on this topic another day.“out of control” they will take it into their own hands. 1 The U.S. is probably a long ways away from taking any actions quite so drastic, but then again pre-2008 financial crisis the Dodd–Frank Wall Street Reform and Consumer Protection Act would have been considered pretty drastic.
To this point, there has been an increasing move towards aligning executive pay with TSR by tying a larger share of total compensation to equity (that only pays out if share price increases or certain performance targets are hit). There are many arguments for why this doesn’t actually align executive’s goals with those of shareholders, but it may be the best system available right now. Many issues still exists around realizable versus realized pay (and the way that ISS/Glass Lewis weight them when formulating recommendations), but I think they’ll eventually find a mix that works.
I’m more concerned with the modern day hyper-focus on quarterly returns. This is not good for the long term health of either the companies focusing on them, or (more broadly speaking) the global economy. What moves the share price up over a quarterly (or even five year period) is not always in the long term best interest of any given firm, and yet the vesting schedules of most executive pay packages encourage short term, share price focused thinking. Executive’s are beholden to the share price for remuneration (and their jobs).
There *must* be a better way to compensate executives.
If you figure it out let me know.
As always, please share your thoughts below.
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