Nearly 60 percent of companies say that their boards expanded compensation explanations in proxy statements as a result of shareholder feedback, and almost one-third of these boards changed executive compensation plans outright in response to pressure from investors.
Those findings come from the National Association of Corporate Directors and respondents to its newly released 2014–2015 Public Company Governance Survey. Shareholder pressure, an accompanying report says, is amplified by both enacted and forthcoming Dodd-Frank Act rules, among them advisory shareholder votes on executive compensation (say-on-pay); pay-for-performance disclosures; and disclosing CEO compensation as a ratio to median employee pay.
The components of compensation plans and the link between compensation and company performance are under intense scrutiny from shareholders, employees, policymakers, the media, and other stakeholders, the report says. It recommends that the compensation committee and board work together to establish an executive compensation philosophy that supports the company in creating long-term, sustainable value.
The report includes 10 recommendations for companies and compensation committees to consider when evaluating their approach:
The compensation committee should broaden its scope beyond CEO succession to include oversight of talent development at multiple levels of the organization, especially the leadership pipeline.
Compensation committee composition should represent a range of diverse perspectives and skill sets, as well as evidence of diligence, expertise, courage, and communication skills.
Consider a retainer for the compensation committee chair that is in line with that of the audit committee chair.
Executive compensation plans should balance long-term incentives with short-term operational goals, clearly reflecting and supporting the company’s strategic plan.
Peer group and market data should be used as a “reasonability test” for executive pay plan design; it should not drive decisions.
The compensation committee should be able to exercise discretion in evaluating and rewarding performance, as long as it clearly discloses its rationale.
Compensation committees have a responsibility to inform and educate the full board on an ongoing basis about the link between performance and pay outcomes.
The board should view Compensation Discussion and Analysis disclosures as the company’s primary vehicle for communicating compensation matters to shareholders.
Disclosures should clearly explain (in “plain English” and with key metrics defined) how compensation decisions are tied to performance.
The compensation committee chair should be prepared and “presentation ready” for shareholder communications.
The report also offers suggestions for what compensation committees should consider presenting in the CD&A. That advice includes: an explanation of how pay philosophy translates into key decisions; explaining how company performance links to decisions on executive pay; disclosing the process for goal-setting and establishing targets and thresholds; explaining the rationale for peer-group design; detailing instances where discretion was used by the board; and presenting key points related to the company’s shareholder engagement activities on executive compensation matters.