Say on Pay

Semler Brossy Consulting Group (download required)

» We collected results for 257 more companies this week, bringing our total to 1,075 for the season. This week, we found seven more companies that failed Say on Pay, bringing our total to 17. These companies include: Apache Corp, Everest Re Group, Gentiva Health Services, Hecla Mining, Middleby Corp, OraSure Technologies, and Volcano Corp. Year-over-year, fewer companies are failing Say on Pay (to date, 1.6% of the sample; 2.6% of the sample failed in 2012) and receiving ISS 'against' recommendations (to date, 12% of companies; this compares with 14% of companies in 2012). In our “Vote of the Week,” we discuss Prudential Financial, which received 78% vote support in 2013 after receiving a 96% vote in 2012 (year-over-year decrease of 18%). Proxy advisors cited positive factors including a limited CEO pay increase of 3% year-over-year and a mandatory deferral of a portion of both short-term and long-term incentives. Despite a few noted positive changes, the lower support in 2013 may be due to: pay and performance disconnect (per proxy advisors), discretionary aspect included in the annual bonus plan, and relatively high bonus targets and opportunities.

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Conflicting Findings Regarding CEO Pay Levels and Effectiveness

The debate over CEO pay levels and their impact on the executive’s performance continues. Science Daily highlights a University of Nebraska-Lincoln (UNL) study that finds that CEOs with higher initial pay packages turn out to be better matches (defined by tenure as CEO). The UNL research notes that CEOs that served for at least four years earned roughly 18 percent more when hired relative to CEOs that did not reach the 4-year mark. The effect is further pronounced when the CEO is an internal hire, which is possibly attributable to the Board’s enhanced knowledge of the candidate. On the other hand, the Financial Times cites a study from the University of Pennsylvania and French business school EMLYLON that contends that excessive pay fails to improve executive performance and can actually hinder productivity. The researchers argue that large incentives cause executives to have a narrow focus with little room or motivation to consider other items or new ideas because they are consumed with the compensation. Further, they explain that the recruitment process for hiring new executives is inherently flawed as there is too much emphasis placed on past performance, personal recommendations and the use of unstructured interviewing techniques where candidates are asked different questions, making meaningful comparisons difficult. The Financial Times article also notes that excessive pay often increases company cost structures and can be demotivating for other employees, particularly with the growing interest in closing the pay ratio gap between top executives and average employees.

CEOs Who Are Good Matches for Firms Have Higher Initial Compensation (Science Daily)

High Pay Does Not Equal High Quality (Financial Times - subscription required)

CEO Sign-On Practices, Risks

NACD Directorship

Semler Brossy’s Greg Arnold describes recent trends and key considerations for new CEO sign-on awards. Sign-on awards are granted to newly hired CEOs to help ensure retention, provide a meaningful equity stake to promote CEO-shareholder alignment, and, in some cases, to make up for compensation that was forfeited when leaving a previous employer. To help address frequently asked questions related to this area of executive compensation, Semler Brossy analyzed the sign-on awards granted to 18 externally hired CEOs in the Fortune 500 between 2010 and 2012. The results indicated that CEO sign-on awards do not appear to impact company share price. Subsequent Say on Pay vote support was only noticeably lower when the new CEO received a significantly larger compensation package than the previous CEO. The typical sign-on packages were sized between $10-15 million, roughly 2.4x the value of the departing CEO’s LTI award. Awards were most commonly granted in the form of Restricted Stock Units. The study concludes that while market trends provide valuable insight, companies should also consider their strategy, pay philosophy, and shareholder and proxy advisor preferences when structuring new hire packages.

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