Executive Compensation - a 'Book Report'
I am not an executive compensation expert. We work with compensation packages on every search; we have an amazing amount of information (we ask every candidate we pursue about their compensation package). We are able to give good market data to our clients.
I started out by saying I am not an executive compensation expert. This evening (2/15) I am guest lecturing in a college Human Resources Management class. Executive compensation is one of my two topic areas. To prepare, research had to be done (thank you to our amazing research people). I call it a book report - it was a chance for me to read varying reports and studies about what is happening (or projected to happen) in 2011.
The SEC (Securities and Exchange Commission) has voted (3 to 2) to adopt final rules that give shareholders of publicly traded companies the right to weigh in on executive compensation through nonbinding advisory votes. This will apply to roughly 9,000 companies. Shareholders will also be able to vote on certain so-called "golden parachute" pay packages. Companies are required to make additional disclosures about these arrangements.
The consulting company Towers Watson conducted a study (reported on 1/13/11) that found that companies are uncertain how they will deal with the implications of this Say-on-Pay ruling. How often shareholders can vote and what to do with the results of the vote are among the issues that need to be addressed.
People are upset!
Shareholders and general public are getting more and more upset (probably because of news stories over the past few years combined with each of us feeling the impact of our economy) about executive perks that have values in the hundreds of thousands/millions. The most noticeable ones - the use of company property (or a company plane) and tax gross-up payments for other favorable treatments surrounding cars, club memberships, etc. These will also be getting much more scrutiny than in the past. No one wants their company to be the next major breaking news story.
Other trends - less controversial . . . .
Companies continue to work toward more focus on pay-for-performance. This has been coming for years. The goal is to link company or unit results to the executive's direct influence/control. Mercer, on January 21, 2011 reported that 65% of organizations introduced OR plan to introduce (in 2011) new financial performance measures. A related finding in the same study found that more than 35% of companies will still use some level of discretion in funding incentive payouts.
That said, a recent survey by PricewaterhouseCoopers (PwC) found that 58% of the directors surveyed felt that U.S. company boards are still having trouble controlling CEO (and other senior executive) compensation. The good news - they are aware and working on it more and more diligently.
More and more companies will be making the news if they do not listen to their shareholders and if they do not tie their payouts to true performance. Sibson Consulting reports that the best-result organizations will pay attention to the metrics and continue to work toward better tracking performance and the implications of building a true pay-for-performance culture.
It is too early to tell how this will impact total executive compensation in 2011. As a result - watch for more updates on this area throughout the year!