Tag Archives: ISS

Sunday Reading: August 17, 2014 – Storytelling, Succession, and Equity Comp

17 Sunday Aug 2014

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Sunday reading for August 17, 2014:

1. Brad Bingham, HR Operations Manager at Unum has a post up on Linkedin espousing the utility of being able to communicate a simple, compelling message to an audience. In an effort to provide as much clarity as possible, it is easy to go too far and instead overload one’s audience with information. Bingham provides some helpful hints detailing how to can avoid this trap and instead tell rich, captivating stories that inspire those listening/reading to take the actions you ask of them. Check the full piece out here.

2. Organizational Transformation Consultant Ron Ashkenas has a great post up on Forbes wherein he writes about the challenges organizations around the globe are facing with succession planning at all levels. He highlights the adverse impacts poor succession planning can have on companies, including lower employee engagement and retention, costly replacement processes, and operational performance deficiencies. He closes by offering up two table stakes ingredients that organizations must implement on an enterprise level in order for succession planning to succeed… which I won’t spoil in this post. Instead, to learn more read the full article here.

3. I haven’t worked directly in the comp space for about 18 months now. Aside from annual merit reviews at my location and putting together packages for new hires, my current role simply doesn’t require much of me here. With that said, I still like to keep up to date on what’s going on in the field. And to that end there are few resources as valuable as Dan Walter over at Performensation. He has a short piece up on his blog highlighting changes to the annual ISS executive comp evaluation process. ISS now has a new portal that will allow employers to ensure alignment with the firm on the accuracy of their key plan data points. The portal also provides greater transparency into ISS’ plan analysis process. If you are part of your organization’s executive compensation team and any of this sounds the least bit new to you this one is a must read.

As always, please share your thoughts in the comments below.

Best,

Rory

Executive Compensation – Year in Review (and a Look to the Future)

08 Monday Apr 2013

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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:

Image Credit:

Image Credit:  <Frederic W. Cook & Co., Inc.>

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).

Image Credit:

Image Credit:

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.

Best,

Rory

If you have questions about something you’ve read here (or simply want to connect) you can reach me at any of the following addresses: 

SomethingDifferentHR@gmail.com OR rorytrotter86@gmail.com

@RoryCTrotterJr

http://www.linkedin.com/in/roryctrotterjr

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Executive Compensation Packages – Are They Fair?

05 Tuesday Mar 2013

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As promised in an earlier post, today I want to expound a bit on executive pay.

There has been a lot of discussion about this topic in the news media lately. Companies are being sued by shareholders, and while many of the suits are being thrown out some companies have also settled. The legal 1. Shareholders/plaintiffs have made several arguments in suits over the years, from inflammatory claims that boards cognizantly granted stock options and RSUs in violation of company incentive plans, to the citation of obscure sections of the IRC like section 162(m) – the argument here being that directors violated their fiduciary duties by giving executives compensation exceeding 1 million (the maximum tax deductible amount by law).arguments plaintiffs have made in filing suit are many 1, ranging from frivolous to plausible enough that some companies have settled rather than fight them in court… but the legal suits shareholders are bringing against companies is not the primary subject of today’s post.

Instead, I want to address a more simple question – are executives paid fairly?

How much is too much? What is "fair"?

How much is too much? What is “fair”?

Let’s set aside the questions of legality and compliance for a moment – 2. If you dislike Wikipedia you can read more here and here.the Dodd–Frank Wall Street Reform and Consumer Protection Act 2 will have companies and scholars grappling with those questions for some time to come.

Let’s look instead at the question of if executives are overpaid for what they do. If tomorrow hypothetical big cap Company X decided it was going to pay 10% or 20% or even 50+% less for its senior executives could it retain that talent?

…Or if the company couldn’t retain said talent could they get someone just as good for cheaper?

To answer this question the best place to look is probably at how executive pay is determined in the market. The Washington Post has a great piece on3. Here are some other great books where you can learn more: i. Charles M. Elson, Journal of Business & Technology Law, No. 2, 2007 ii. Elson and Ferrere, 2012 this topic 3 that I’ve cited before, but here is my summary/interpretation of (the quantitative metrics behind) how executives are compensated:

A. The majority of companies use a “peer bench-marking” process to help determine executive pay – they look at comparator companies in 4. The ISS prefers to select peer groups by GICS code. Conversely, most companies prefer to use their own methodology for selecting peer groups (which may or may not match up closely with GICS codes). It’s a really hot topic in the world of executive compensation right now. the same industry and of similar size 4, market pricing the total direct compensation (TDC) of executives in the comparator companies against their own executives’ TDC.

B. Pretty much every company targets median or higher pay for their executives, with the logic being that any executive that isn’t at least middle of the pack isn’t worth retaining, and that if an executive is at least middle of the pack they should be paid accordingly.

C. This means that in a good market executive pay mostly goes up for the majority of execs on an annual basis (regardless of performance). Since every company targets median or better pay for their executives (even those performing below average), compensation continues to rise as a product of every company chasing the average or better (even though every executive by definition cannot be average or better)

D. All of the above will usually happen, but market forces (specifically the stock market) drives average CEO pay down since most executive pay packages are highly equity driven and tied to Total Shareholder Return (TSR). As such, if executive stock options are collectively underwater because of poor market performance then the average realizable pay goes down.

Executive Pay

This brings us to the heart of it. We have two underlying themes that tell us different things about the “fairness” of executive pay.

1. Executive pay packages are (on average) more or less tied to Total Shareholder Return. The majority component of most executive pay packages – equity – is only worth something if the stock price goes up at some point during the vesting period (i.e. post grant date). This seems fundamentally fair, since executives pay is tied directly to company performance.

2. On the other hand, executive pay in a bull market will generally continue to 5. This term originated (as far as I know) in Executive Pay At a Turning Point” by Ira T. Kay.rise for even below average executives as a product of the “ratchet effect” 5 aka the “Lake Wobegon effect“.

An example of the illusory superiority some executives suffer from.

An example of the illusory superiority some executives suffer from.

I personally lean on the side of calling executive pay “fair”. Boards are generally trying to pay executives fairly (and competitively), and the existing pay model in most publicly traded companies is heavily pay for performance.

With that said, there are some really good arguments for internal based pay models (based mostly around the idea that executives are so locked into their respective companies by un-vested equity that it’s almost impossible for a rival company to poach them) that we didn’t touch on today.

Further, there are some pretty decent populist arguments citing the rising ratio of executive pay against the average American worker that suggest something is wrong with the system… and there are of course just as many strong arguments advocating the other side (starting with the fact that executives are in an entirely different labor market than average Joes).

We also haven’t tackled the various soft/subjective metrics many companies use in determining executive pay (you can read more about these in a company’s Compensation Discussion & Analysis aka the CD&A).

This article is getting a bit long now, however, so I’m going to wrap it up here. I’ll continue to touch on executive pay in the future (including some topics I just scratched the surface of today).

In the interim, please share your thoughts below.

Best,

Rory

If you have questions about something you’ve read here (or simply want to connect) you can reach me at any of the following addresses: 

SomethingDifferentHR@gmail.com OR rorytrotter86@gmail.com

@RoryCTrotterJr

http://www.linkedin.com/in/roryctrotterjr

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