Executive Compensation Update
It's summer - and it has been a beautiful one so far (yes - it is officially still spring). The weather is great; people seem to be in a positive place - the economy appears to be slowly recovering (lumpy recovery, but the trajectory seems positive). What better time to talk about . . . . . . . Executive Compensation! Thanks to an HR leader/long-time friend, I am invited each semester (including the summer semester) to be a guest speaker in an HR Management class she teaches. My topic is always the same: Executive Compensation Update and 'Introduction' to Search Firms. The material seems to change with each semester.
Trends in Executive CompensationAnyone that knows me will attest to the fact that I am not an executive compensation expert. To prepare for the class, I look to the trends and headlines. These last few months have provided great material. Here are a few examples - and the trends we need to be aware of.
- We are under a period of intense scrutiny. Everything is public (even with private companies at times). Focusing on public company headlines only, these grabbed our attention:
- Top six UnitedHealth Group executives average $10M a year in pay (from Minneapolis/St. Paul Business Journal)
- JPMorgan Said to Consider Clawing Back Bonus After Loss (from Blomberg)
- High CEO Pay Leads to Lower Shareholder Support (from HR Magazine)
Pay for Performance (P4P) appears to finally be taking holdIn looking across multiple sources, P4P is getting more attention. There are a few trends that will continue to develop for 2012 (and hopefully beyond):
- Companies are adding performance restrictions to equity awards.
- Plan design features more commonly include financial gates or triggers.
- Pay caps and clawback provisions are becoming more broad than mandated (by Dodd-Frank).
- Negative discretion is being used more frequently.
But wait - is there a War for Talent?The answer is yes at the leadership level (and in many other non-executive areas of the employment marketplace as well). Companies compete for talent - and at the executive level, this competition is not just domestic. Mercer's 2012 Planning Guide talks of how global shortages (of impactful leaders) are impacting the market. Our 10,000+ public companies may be taking a more performance-oriented approach and not being as generous as they were in the past. Global companies in need of key talent are not necessarily wanting to take the same approach. One additional item relating to the War for Talent - the national unemployment rate moved up to 8.2% this past month (May 2012). The unemployment rate for 4-year plus degreed individuals (age 25 and older) moved down to 3.9% nationally (it is typically lower in Minnesota). Any economist I know would call this full employment.
There will be more to keep us focused on this topic
- Occupy Wall Street is targeting companies that are not being conservative in their compensation practices. And their protests are making the news.
- Proxy advisory firms are taking on incredible power - more than 2/3 of U.S. publicly held companies say that their executive compensation programs are influenced by the recommendation of outside proxy voting advisors (Conference Board - March 2012).
- And wait - what comes next will be the stories of the ratio of CEO pay to the average worker. The Dodd-Frank Act mandates that public companies disclose the ratio of CEO pay to the median salary of employees. The SEC has not yet implemented this rule. The book How to Lie with Statistics by Darrell Huff (yes - this is an actual book) will likely be referenced!