Executive Compensation in the 2019 Landscape: What You Need to Know
For the past years, several factors were drivers of change in the U.S. executive compensation landscape. This year, the Tax Cuts and Jobs Act is one of the top developments that is expected to continue to have implications on compensation programs in 2019 and beyond. The #MeToo movement is also affecting some aspects of executive compensation.
Our panel of key thought leaders and practitioners will offer a discussion of the fundamentals as well as the updates regarding the latest and significant issues surrounding Executive Compensation in 2018 and their rippling effect in 2019. This LIVE Webcast aims to help you to avoid common pitfalls and risk issues thru best compliance practices which will be discussed in-depth by the speakers.
Key topics include:
- U.S. Executive Compensation: Recent Developments
- Strategy and Implementation Trends in 2018
- Hot Issues Affecting Executive Compensation
- Best Compliance Practices
- Outlook for 2019
Stephen F. O'Byrne, President
Shareholder Value Advisors Inc.
- Alignment of relative CEO pay and relative performance is very poor even though most companies and directors believe it’s very good.
- Analysis of S&P 1500 companies in 2007-2016 shows that relative TSR only explains 11% of the variation in relative CEO pay.
- Almost all companies are convinced that their executive pay program aligns management and shareholder interests, largely because they have a high percent of pay at risk and limit target pay to the 50th percentile.
- Companies embrace four pay policies that undermine alignment:
- Competitive pay policy, i.e., a policy of providing 50th percentile target pay regardless of past performance, creates a systemic “performance penalty” that undermines the correlation of cumulative pay and cumulative performance: poor performance is rewarded with more shares, while superior performance is penalized with fewer shares.
- Using percentages of the target bonus to weight multiple performance measures. Many companies allocate the target bonus to drivers of shareholder value, e.g., revenue growth, earnings growth and ROIC or cash flow, but don’t realize that their weighting is not consistent with discounted cash flow value, and hence, undermines the correlation of pay and shareholder value.
- Using vesting to leverage operating or market performance. The goal of vesting should be to take out the industry component of company performance. Popular vesting practices frequently led to high pay for industry performance.
- Fixed payout dates with no holdback to ensure alignment of cumulative pay and performance. The goal should be to align career pay with career performance.
- The first step to better pay programs is better measurement of the three basic objectives of executive pay: providing strong incentives to increase shareholder value, retaining key talent and limiting shareholder cost.
- Companies rely on percent of pay at risk as a measure of incentive strength and target pay percentile as a negative measure of retention risk and a positive measure of shareholder cost. These are not meaningful measures.
- Companies should measure the three objectives of executive pay using a regression trendline that relates relative pay to relative performance.
- The slope measures incentive strength (and its two components, alignment and relative risk), and
- The intercept, i.e., the pay premium at industry average performance, is a negative measure of retention risk and a positive measure of shareholder cost.
- Better measurement leads to more meaningful benchmarking and better pay design.
- Companies should benchmark pay leverage, pay alignment and the pay premium at industry performance, not target pay percentile regardless of past performance.
- Pay design should be guided by “perfect” pay concepts: pay designs that provide a perfect correlation of relative pay and relative performance.
- There a basic pay plan with annual grants of performance shares that provides a perfect correlation of relative pay and relative TSR.
- There is a basic pay plan with fixed sharing in operating value added that provides a perfect correlation of relative pay and relative operating return.
Edward A. Hauder, Senior Advisor
- Non-Employee Director Compensation
- Say on Pay vote
- Equity Plan Proposals
- Front Loaded Equity Awards
- CD&A Disclosure for Smaller Reporting Companies (even companies newly able to qualify)
Roman Beleuta, Senior Associate
Compensation Advisory Partners
- Clawback Policies
- Current State
- Key Considerations
- What’s New and Market Expectations
- Questions Directors Are Asking
- Gender Pay
- Bonus and Long-term Incentive Programs
- How are we differentiating our company/program?
- Do proxy advisors view incorporating discretion — such as an evaluation of individual performance — in the determination of executive bonuses as a “red flag”?
- Have stock options, for the most part, gone away?
- Proxy Advisors
- ISS proxy reports will now include EVA comparisons. How will the calculation(s) work? How will this information be used? What do you think about this?
- Will using absolute stock price goals help get a positive Say on Pay vote recommendation?
- Is a long-term incentive program that incorporates relative TSR the preferred approach?
- Outreach – what’s new?
- Proxy Disclosure -- CD&A, Etc.
- Simple steps to make disclosure effective
- Upcoming changes
Ron Rosenthal, Lead Consultant
Meridian Compensation Partners, LLC
- The decline in many companies’ stock prices in late 2018 will impact performance shares that use total shareholder return (TSR) as a measure and calendar-year companies’ performance under the quantitative portion of proxy advisory firms’ pay for performance evaluations for 2018. Companies should understand the impact of the decline in stock price on outstanding performance awards and projected outcomes under the proxy advisors’ pay for performance evaluations for the upcoming proxy season.
- While total shareholder return (TSR) remains one of the most commonly used measures in executive long-term incentive plans, the role of TSR in long-term incentive awards is beginning to shift.
- On December 18, 2018, the Securities and Exchange Commission adopted final rules requiring companies to disclose hedging policies in the annual proxy statement. In view of the issuance of final rules, companies should review their existing hedging policy and evaluate if changes should be considered during 2019. Companies without a hedging policy should consider adopting such a policy.
- It is advisable for companies to periodically examine the design of their short- and long-term incentive programs to confirm that they continue to support the business strategy, achieve appropriate alignment of pay and performance, and result in sensible pay outcomes.
Who Should Attend:
- Top Level Management
- Benefits Managers
- C-level Executives
- Executive Compensation and Benefits Managers
- Member of Board Compensation Committees
- Human Resource Executives
- Executive Compensation and Benefits Consultants
- Executive Compensation Managers
- Employee Benefits & Compensation Lawyers and Consultants
- Employee Benefits Attorneys
- Other Related/Interested Professionals
Stephen F. O’Byrne is President and co-founder of Shareholder Value Advisors Inc., a consulting firm that helps companies increase shareholder value through better performance measurement, incentive compensation and valuation analysis. His work on measuring the strength and cost-efficiency of top management incentives has been published in the Harvard Business Review, the Journal of Investing, Conference Board Director Notes, the Journal of Applied Corporate Finance and the WorldatWork Journal. He is the co-author, with Professor David Young of INSEAD, of EVA and Value-Based Management. He was previously head of the compensation consulting practice at Stern Stewart & Co. and a Principal in the executive compensation practice at Towers Perrin.
Print and review course materials
Method of Presentation:
On-demand Webcast; Group-Internet Based
Basic knowledge of executive compensation
NASBA Field of Study:
Finance – Technical
NY Category of CLE Credit:
Areas of Professional Practice
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