At its December 10th breakfast meeting, the New England Chapter of the National Association of Corporate Directors explored the learning from the 2013 compensation season and it’s ramifications for 2014. The panel included a couple of directors of public companies, a consultant, and a representative of ISS (the proxy advisory company which recommends proxy voting positions to institutional investors, including with respect to CEO comp).
Key takeaways:
- Over the last year or two, CEO base pay for large public companies has remained flat (not surprisingly, because base pay is penalized under our tax code if it exceeds $1,000,000 per annum).
- Bonus targets have been increasing; they used to cluster around 100% of base pay and now have come upwards to as much as 150% of base pay; but paid CEO bonuses are falling because far fewer boards are awarding bonuses which exceed target.
- Most investors believe that more shareholder engagement in CEO pay would be beneficial; very few directors agree; in 2013, investor concern in this area focused around perceived non-responsiveness of compensation committees to shareholder input.
- There was unanimous agreement that engaging major shareholders is essential, although a caution was sounded that SEC Regulation FD prohibits selective dissemination of material information; the outreach should be to gather information from shareholders, not to convey corporate plans.
- According to ISS, issues likely to be the subject of shareholder activism in 2014 include: increase in the “vote no” campaigns against say-on-pay; compensation claw-backs not only where malfeasance has occurred but also where there has been failure to meet corporate objectives; pro-rata vesting of equity compensation; and, mandatory retention of shares for some time after employment has terminated.
- Public audit committees must be populated by people with relevant experience, but not so for compensation committees; perhaps there will be a cultural change so as to require greater skill sets to serve on comp committees.
- Not surprisingly: activist investors generally have a time horizon for a certain target stock price, which may be inconsistent with considered compensation arrangements.
- How to structural long term CEO incentives? One suggested model that elicited some nods from the panel: 40% based on revenue growth, 30% earnings per share, 30% total shareholder return (contrast to short term goals of free cash flow and immediate earnings).
- How much stock should your officers and directors hold? One suggestion was the CEO should hold a value equal to five to six times base pay, the next tier three times base pay, EVPs two times base pay; directors should have a meaningful equity stake, $200,000 to $300,000.