Stock options are out, performance shares and restricted stock are in, equity may constitute 50% to 70% of the compensation of a public company CEO, and the ISS is on the move. Trends in CEO compensation for the coming year were examined at the November 11th Breakfast meeting in Boston of the New England Chapter of the National Association of Corporate Directors.
Stock options used to be the standard equity play for CEOs. For companies undertaking substantial growth, they still can constitute a serviceable compensation tool for the equity side of the equation. However, performance shares and restricted stock seem to have taken over as the equity mechanisms of choice in most instances.
Other trends include establishing ownership guidelines for a CEO, and what is likely to come next is a mandatory holding period during which the CEO must retain shares after they have vested.
Golden parachutes are shrinking in importance, the multiple of annual salaries paid to CEOs in the event they are fired after a change of control is shrinking. Nobody is any longer granting a tax gross up to these CEOs to cover the taxes in the event they receive a parachute payment.
There was speculation that activist shareholders might be holding down run-away CEO pay, and there was debate over the efficacy or non-efficacy of the proposed SEC disclosure rule which will require information about the “all in” compensation of CEOs expressed as a multiple of the median employee salary. This metric, long overdue, creates problems for companies with international operations, where compensation of a US CEO will be perhaps thousands of times higher than median pay if most employees are located in places like India or China. It was suggested that alternate metrics could be provided, in addition to the required disclosure, perhaps also expressing CEO compensation as a multiple of median United States-only employees.
The influential Institutional Shareholder Services, which advises investors as to whether boards should be supported, is introducing a variety of changes to its outlook on CEO compensation for the 2015 proxy season. In terms of disclosure, credit will be given to companies for positive forward-looking compensation disclosures (historically disclosures have been more backward looking), and in evaluating plans for equity compensation the ISS will be more holistic, considering such matters as planned cost to shareholders (SVT or “shareholder value transfer”), grant practices (including historical plan grant burn-rate), and plan features (minimum vesting periods, minimum holding periods and clawbacks).
The ISS is also considering gender diversity, indicating that boards without women pose a higher government risk to investors based upon academic studies, and is also considering the number of financial experts on an audit committee (implying that having more than one such expert may result in less governance risk).