One can’t seemingly open a newspaper these days, without reading somewhere about alleged or real executive compensation excess. Given the meltdown in asset values over the past 3 quarters, investors and investor advocacy groups have cited the current disconnect between management pay-outs and shareholder returns as grounds for calling for non-binding shareholder votes on executive compensation. Many Boards, under unrelenting pressure to do so, have agreed to include such resolutions in their Annual General Meeting materials. What this all means, and what actions CEOs, CHROs, and Boards might wish to consider, is new & uncharted territory and worthy of some thought.
Executive compensation covers everything from base pay to perqs; from bonuses to equity; and from separation to retirement arrangements. We usually read about the excesses in the news, and the impression left is one of corporate leaders helping themselves to the corporate piggy bank. The reality though is that the vast majority of leaders and boards act prudently and in a fiscally conservative manner when it comes to executive compensation, with bonuses being reasonable and hard earned and non-performance related benefits and/or perqs limited and in line with what individuals at all levels of the organization are entitled to. Differences in $$$ are based on supply and demand for scarce and differentiated proven skills and experience in the marketplace.
Prudent boards as well understand that if they are penny-wise and pound foolish, that is to say, that they deliberately underpay executives vs. the competitive market for talent, they will risk losing these leaders, and take a big hit on their company’s market cap, (Note: I have heard the hit described as being 10% if the CEO goes and 5% if the CFO leaves.) For a Company with a $1 billion market cap, the dollars quickly add up vs. paying leaders what they are worth.
On to “Say On Pay”, which simply put, is the empowerment of shareholders via a proxy on whether or not to approve (in a non-binding resolution), the board’s recommendations with respect to executive compensation, at the Company’s annual general meeting.
Arguing against “say on pay” is a bit akin to arguing against motherhood and apple pie. Who can be opposed to shareholders wanting some assurance that the management they entrust to grow the value of their investment is truly earning their pay.
But what does this mean? Is this about executive compensation only for the Named Executive Officers (NEOs)? In many organizations, the next level down, especially in revenue generating positions, often earns much more than do some of the NEOs. Is this about compensation for the Boards of Directors, who increasingly earn (and work hard for this remuneration) substantial dollars and/or equity? What does “say on pay” cover? Everything that is non-base pay related? Base-pay increases? Anything that has a dollar cost? Any dollars above a certain threshhold? How do shareholders know what they are voting on? Are they educated with respect to market compensation for like roles and business results? Do shareholders have relevant context in terms of history, business-related factors, and alignment with strategy going forward? How should the question to be asked of shareholders be framed? Finally, what is the role of shareholders vs. board members vs. management in this new environment, as shareholders ask to have a say in decision areas traditionally delegated to Boards and Management?
Well, every new challenge presents a wonderful opportunity for leaders to re-invent the world, and “say on pay” is no exception. Boards, CEOs, and Chief Human Resources Officers (CHROs) have a chance to answer the questions posed above, and to guide shareholders and employees to a better place.
Here are some thoughts regarding where the work might start:
1. Articulate (or update) your Executive Compensation Philosophy. This should include concepts such as “pay for performance” “aligned with growing shareholder value and shareholder returns” “competitive with market” “quartile to pay at vs. market, based on the kind of talent you’re seeking and your ability to pay for this”.
2. Articulate a stakeholder Executive Compensation Communications strategy. This should include “shareholder education” “transparency with all stakeholders” “framework for say on pay” “the groups e.g. executive and other management roles/Board, covered by the strategy”.
3. Define roles and responsibilities with respect to managing the process, with respect to both internal parties (such as CHRP, CEO, HRCC and Board Chairs) and external parties (such as independent executive compensation consultants). Define also, timelines and milestones so that there are no surprises as to when decisions are being considered and communicated.
At the outset of this work, however it will be vitally important to properly set stakeholder expectations. This is a journey into uncharted waters and mistakes will be made along the way. The work though will evolve, and companies who are first off the mark, will justly earn shareholder respect and build credibility. More importantly, by being pro-active, Boards and Management will help to ensure that they, who best understand how to create value for shareholders, continue to lead, vs. being subject to regulations and/or pressure to conform being exerted by parties who are not able to create enduring and substantial value for shareholders. Along the way, they will help shareholders to see that in the vast majority of cases, the system works and management is fairly compensated, and where this is not the case, now have the means to enact meaningful change to better align pay with value creation.