Executive compensation
“There are, of course, reasons to see excessive severance
payments as a bad thing.”
executives, but they know companies want to be both more flexible and in line with the market practice,” is how Williams puts it. “It is the same in the governance realm.”
“There are, of course, reasons to see excessive severance payments as a bad thing,” Havey adds. “There are always cases where the nuance is lost, however, and with severance packages, if there is a change in control and a person moving on is divested of equity, then a shareholder severance proposal might cap the payout even if the company was sold for a lot of money. So, the lack of nuance is an incentive to not sell the company, which may ultimately not be in the interest of shareholders.”
Sticking with say on pay
Whether it is through shareholder proposals or the more common say-on-pay votes, investors clearly want compensation to be linked to performance. That became a tricky issue during the pandemic. “The success of say-on-pay proposals changed during the pandemic because of the effect it had on company performance,” says Williams. “Some companies performed poorly but that did not show up in their compensation arrangements, so there seemed to be a misalignment between pay and performance, which is not what investors want. “In the pandemic, boards had to make tough decisions, including whether to make adjustments to long-term equity incentives or leave them as they are,” he adds. “In 2021, there was an issue that some outstanding equity awards were not going to pay out, so there was a question of whether companies should make retention grants to persuade executives to stay. With supply chain issues and cybersecurity issues, there was a need to retain talent when executives knew they were not going to get rewards because performance metrics were not adjusted to take account of the pandemic.” Now that conditions have somewhat normalised, the focus is back on the more common and more effective mechanism for shareholders to express their views on executive compensation: namely the say-on-pay vote that has become familiar around the world since legislation was formalised in the UK back in 2002. In the US, the campaign really took off in 2008 and by 2011 more than 2,000 companies had a management proposal to approve executive compensation. Generally, say-on-pay votes pass – but passing is not enough. If the majority vote in favour falls below certain thresholds, that sends some strong signals to the board. “The proxy advisory firms that institutional investors rely on – Glass Lewis and Institutional Shareholder Services (ISS) – have policies that say if the majority is less than 70% in the case of ISS
30
and 80% for Glass Lewis, then the company must show some responsiveness to that sentiment,” Williams clarifies. “And if the board is not responsive, then rather than just voting against say on pay, those proxy advisers would recommend votes against individual directors, particularly members of the compensation committee, at the next annual meeting.”
“There is reputational harm from a lower vote for their re-election,” Havey adds, using a scholastic metaphor to bring his point home. “It is like school. If you only get 70% of the vote, then you need some tutoring to get back on track. Less than 50% then you really need some special support.” As far as ‘responsiveness’ is concerned, ISS and Glass Lewis generally mean that a company must actively engage with more of its shareholders, listen to what they are saying about compensation and take action that shows those views have been understood. Furthermore, that action must be proportionate to how low the vote was. Most companies can target their top 20 shareholders – which usually account for 40–50% of the shares. The influence that proxy advisers have on say- on-pay votes should not be underestimated. If ISS opposes a compensation package, for instance, then it could reduce the vote in favour by 25–30% less, which could well take it below the 70% threshold. The key, therefore, is to understand what affects the outcome of say-on-pay votes. The crucial factor seems to be the strength of the link between pay and performance. “Now,” Havey notes, “investors may take issue with one-time awards, retention awards that are not performance-based or multi-year awards where there is a perceived misalignment between pay and performance. It is all about linking pay to performance now. “We advise the boards of large companies and explain the points of view that ISS and Glass Lewis will have and how they might influence the views of institutional investors and activist investors,” Havey noted when explaining his firm’s role. “We help them understand the broader issues and the nuance. We show them what has worked at other companies – and what has not.” With the different levers that investors can pull to influence compensation, navigating the right path can be a complicated process with little guarantee of success – unless the compensation committee fully understands market practice. It is all about finding the boundaries, then understanding the consequences of stepping outside them. And that, in short, is where the experience of a compensation consultant can make all the difference. ●
Chief Executive Offi cer /
www.ns-businesshub.com
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
