About half of employers (45 percent) plan to alter their executive pay programs this year to strengthen the link between pay and performance, according to a new survey by Towers Watson, a global professional services company.
Another 55 percent of respondents are introducing or sharpening the focus on performance-based equity, and 50 percent of respondents are modifying metrics that determine incentive payouts. Although these changes are being implemented, only 2 percent of respondents report that they did not attain majority shareholder support regarding their most current say-on-pay votes.
"While companies have generally received strong shareholder support during the first two years of say-on-pay voting, most are far from complacent as we head into year number three," says Andy Goldstein, leader of Towers Watson's executive compensation consulting practice for the central U.S. "Even companies that received overwhelming shareholder support in 2012 are considering fine-tuning how they pay executives, and we're seeing the most activity among those receiving less than 90 percent say-on-pay support. That's a very high standard."
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While 90 percent of respondents outline their executive compensation programs pay for performance in their proxies, just 61 percent have ran a pay-for-performance analysis evaluating the company's relative financial performance with its relative pay positioning. Among the respondents that conducted pay-for-performance analyses, roughly half say they reported results to shareholders in their public filings, and of those, 73 percent say doing so provided an effective or very effective way to improve shareholder support for their pay programs.
"We were surprised that many companies that conducted pay-for-performance analyses chose not to disclose the findings to their shareholders, particularly given that the companies that did so found their approach helped boost shareholder support," Goldstein says. "This finding reinforces our belief that conducting and disclosing a thoughtful pay-for-performance analysis is a best practice that companies should adopt regardless of whether the SEC requires such disclosure for upcoming proxies."
Thirty-nine percent of respondents say they did not share results because they were waiting for SEC disclosure rules to be announced, and approximately three in 10 respondents say they did not do so to prevent establishing a precedent that would likely require future disclosure of a similar analysis, or it failed to produce incremental valuable information to shareholders.
The survey also finds that 81 percent of respondents say they conducted a pay-for-performance analysis measured their performance to a company-defined peer group, and 52 percent of those same respondents say when evaluating pay for performance, they still rely on the pay required to be disclosed in the Summary Compensation Table.
When it comes to measuring performance, 73 percent of respondents conducting analyses say they used total shareholder return. Most, however, also were open to other measures that show income statement and balance sheet results. Approximately half of respondents report being engaged with shareholders on pay-for-performance issues this year while 23 percent of respondent say they expect to become more active in doing so in 2013.
"With companies under growing pressure from shareholders to strengthen the governance of their executive compensation programs, our survey results clearly underscore the complexity of designing, analyzing and disclosing pay for performance," Goldstein says. "Companies are adopting a wide range of approaches and performance measures as they continue to refine their programs. The bottom line is that each company is different, and there is no single approach that is right for all companies."
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