NFPCC Original Article: Executive Compensation Best Practices for 2020 Series 1 – Public Companies
Companies often ask us, “What are we not doing that we should think about as it relates to executive compensation?” We recognize the executive compensation environment is continually heating up with pressure from just about every angle, and as a result, the answers to this question periodically change. As such, we have compiled a few thoughts applicable for the current market for public company consideration.
Even if periodically, consider the compensation committee chair and another board member of influence reaching to the top 10 shareholders to solicit their opinion of what could be better. Summarize findings for the board, consider if changes are needed, and report in the proxy statement what the Compensation Committee decided. This proactive effort goes a very long ways in today’s active investor market.
CONDUCT A REALIZED PAY ANALYSIS
Most employees, investors or casual media reader truly don’t understand that a proxy statement does not equal a bank statement. Proxy statements which include a description of realized pay can mitigate concerns of optically high reported pay as required in the summary compensation table. Whether times are good or not, this will only reinforce the company’s true pay-for-performance model.
CONSIDER THE INSTITUTIONAL COST OF POOR PAY PRACTICES
Investors have really taken note of problematic pay practices such as:
- Automatic acceleration of equity upon change of control
- Increasing CEO pay during a year when Total Shareholder Return went down
- Discretionary bonuses (as many companies have done due to the change in 162m)
- Excessive perquisites
- Legacy employment agreements that are renewed
- Lack of rigorous performance goals in short and long-term incentives
- Awarding large multi-year equity grants
If your company has one of these as a historical practice, it may be worth simply asking the question, “Is there a better way to deliver currency more effectively to the executive team?”
Many companies fail to do their homework ahead of a change of control to know what the actual payout to executives will be, if there will be 280G excise tax liability, and are the change of control provisions market competitive. Not only does this create unwanted exposure during normal course of Say-on-Pay reviews, it can also create serious complications if a board is trying to make last minute changes to severance programs. Exhibit A is the board’s last-minute changes to Anadarko’s executive severance agreements that occurred just this last week.
An institutional advisory firm recently stated that a proxy statement is the window to a Company’s soul. That might be a little strong, but there is probably some truth. However, most companies do not view the proxy statement with that much importance. Typically, the board relegates the proxy responsibility to a group of attorneys who are meeting the SEC letter of the law. Compensation Committees should consider getting outside advice from experts in proxy disclosure and design to ensure the Company’s best foot is not hidden behind a pile of juris prudence.
With increasing focus and litigation on director compensation, companies should consider expanding the discussion of how the board determines benchmarks and rationale for outside director compensation. While at it, the company may also consider disclosing ownership requirements as well as director compensation limits. Director pay that is considered an outlier is a growing issue among investors as well as litigators.
GET AHEAD OF GENDER PAY DISCLOSURES
Most everyone could predict that the CEO pay ratio would happen years ahead of the law being passed, and that also the disclosures would be pretty much meaningless to everyone. And they have been. Gender Pay disclosures will be different. Yes, they will happen at some point (they are already required by law in the UK), and when they do, they will have meaning as well as media and legislature attention. It would serve a Company well to proactively make these calculations, identify and close any gaps, and disclose the Company’s good practices in the CD&A well ahead of the laws that will require it.
If these items are not on your radar screen, NFPCC can assist the compensation committee to get ahead of the game. Contact us to get the process started. As information, we will continue this series for private companies (Series 2) and tax-exempt organizations (Series 3) in the coming months.