Executive Compensation: Strategy, Design, and Implementation in 2019
The recent years have witnessed the controversial and ever-changing landscape of executive compensation. From the notable changes in the tax code, to the implementation of the CEO pay ratio disclosure rules, companies grapple in adjusting their pre-existing strategies and policies to minimize exposure to risks and legal pitfalls. This instability in the landscape, which is expected continue in 2019, could incur potential challenges for companies. Thus, they must keep track of the emerging reforms to be able to formulate a sound and doable strategic plan to avoid pitfalls.
In this LIVE Webcast, a panel of distinguished professionals and thought leaders organized by The Knowledge Group will provide an in-depth analysis of the significant trends and updates in executive compensation. Speakers will dig deeper as they provide practical strategies in this continuously evolving landscape.
Key topics include:
- Executive Compensation Over the Years: A Lookback
- Current Pay Trends and Developments
- Emerging Executive Pay Risks and Issues
- Best Design Practices
- 2019 Outlook
Stephen F. O'Byrne, President
Shareholder Value Advisors Inc.
- The objectives of executive compensation have been the same for 100+ years (providing strong incentives to increase shareholder value, retaining key talent and limiting shareholder cost) but the approach to achieving them as changed dramatically.
- In the first half of the 20th century, companies used value sharing plans, e.g., GM’s plan making all incentive pay equal to 10% of profit in excess of 7% of capital, before shifting to competitive pay policy and target percent of pay at risk.
- The old approach made it challenging to retain key talent because the company had to built up a reserve in good times to pay enough to retain key talent in bad times.
- The new approach makes it challenging to provide strong incentives because competitive pay policy creates an inherent performance penalty – poor performance is rewarded with more shares, while superior performance is penalized with fewer shares – that undermines the linkage between cumulative pay and cumulative performance.
- Companies can measure the three objectives of executive pay from a regression trendline that relates relative pay to relative performance.
- The slope measures incentive strength (and its two components, alignment and relative risk),
- 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.
- Measuring the three objectives is vitally important because it:
- Shows that alignment is very low at most companies.
- Shows that perfect alignment requires consistent sharing (not performance penalty sharing!): sharing in the excess return must be equal to market pay sharing in expected value.
- Shows the way to “perfect” pay design, i.e., pay plans that provide perfect correlation of relative pay and relative performance.
- There is a simple pay plan with annual grants of performance shares than provides “perfect” pay:
- Target pay is market pay adjusted for trailing relative performance. Grant shares are target price divided by the stock price.
- The vesting multiple (1/(1 + industry return from the date of grant)) takes out the industry component of the stock return.
- All cash paid out prior to retirement is treated as a draw against the value of the performance shares.
- The perfect pay plan highlights three fundamental weaknesses of contemporary pay plans:
- Competitive pay policy, i.e., competitive target pay regardless of past performance.
- Paying for industry performance (most performance share plans provide a gate, not a filter).
- Weak mechanisms to link cumulative pay and cumulative performance.
- Executive pay practices have statistically and economically significant effects on future period returns.
Daniel Laddin, Founding Partner
Compensation Advisory Partners
- The Evolution of Executive Compensation
- Payouts as percent of target
- Long-term incentive vehicles
- Long-term incentive metrics
- Trends, Best Designs & Practices
Todd Krauser, Principal
- A brief historical review on U.S. long-term incentive design practices
- Current trends among the largest 250 companies in the S&P 500 index and other proprietary FW Cook databases
- Alternative performance share design approaches
- Prognostications on where long-term incentive design may be heading
Scott Munn, Partner
Hugessen Consulting Inc.
The current approach by boards in designing executive compensation plans (and their advisors), and the review of executive compensation plans by institutional shareholders and proxy advisors has created a “norm” in executive compensation plans. Board-led shareholder engagement may be a powerful tool for board members to interact with the proxy voting groups of large institutional shareholders to enable “non-normal” plans in some circumstances.
Our presentation will focus on the following:
- Defining “board-led shareholder engagement” (and defining what it is not)
- How proactive engagement differs from reactive engagement
- Steps to enable successful engagement by board members with shareholders
- The benefits of board led shareholder engagement to the board and to shareholders
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.
Stephen F. O’Byrne is President and co-founder of Shareholder Value Advisors Inc., a consulting firm that helps companies increase shareholder …
Dan Laddin is a founding Partner of Compensation Advisory Partners LLC (CAP) in New York. He has over 20 years of experience working with Boards and management, consulting in all areas of executive compensation, including annual and long-term incentive design, performance measurement, target-setting, regulatory/compliance as well as outside director compensation programs.
He works closely with Committees to ensure strong governance of their executive compensation programs and that programs drive performance and are aligned with shareholders. Dan is a regular speaker at NACD, Equilar, Faculty for World@Work, and often quoted in publications (CNBC, WSJ, Businessweek, Bloomberg, Agenda). Dan was named to the NACD Directorship 100 for his work done in overall corporate governance.
Dan received his MBA from the University of Chicago Graduate School of Business and graduated magna cum laude from the University of Albany with a BS in Accounting.
Dan Laddin is a founding Partner of Compensation Advisory Partners LLC (CAP) in New York. He has over 20 years …
Todd Krauser joined FW Cook in 2015 and has 20 years of executive compensation consulting experience working with compensation committees and senior management teams. Todd works closely with his clients to ensure their executive compensation programs are responsible to shareholders and support the company’s short and long-term business strategy.
Todd’s areas of expertise include pay strategy development; incentive plan design; performance measurement linkages; governance and regulatory issues; CD&A disclosure; equity share plan authorizations; and non-employee Director pay.
He has advised companies of all sizes in a variety of industries, including health care, consumer brands, REITs, restaurants, banking and technology. Todd has also consulted on compensation issues for privately held companies as well as companies with special circumstances such as IPOs, joint ventures and spin-offs.
Todd has spoken on executive compensation related topics for national and regional industry groups. Recent presentations, articles and research reports have covered topics such as “Diving Deeper into the Evaluation of Executive Compensation Plans,” “Tools and Techniques for Aligning Pay and Performance,” “Trends and Best Practices,” and “Director Compensation”.
Todd Krauser joined FW Cook in 2015 and has 20 years of executive compensation consulting experience working with compensation committees …
Scott is a Partner with Hugessen Consulting. He has advised boards for over 20 years as a Partner at Hugessen and as a National Partner for Mercer. Scott advises on all aspects of executive compensation, performance goal setting / evaluation and related governance. His clients operate in a variety of industries (oil and gas, mining, financial services, and real estate) and include publicly traded and privately held companies.
Scott is a frequent speaker and a long-standing faculty member for the Institute of Corporate Directors. At Hugessen, Scott is involved in all aspects of the business including strategy development and implementation, intellectual capital development, training / mentoring, marketing, and client management.
Scott is a Partner with Hugessen Consulting. He has advised boards for over 20 years as a Partner at Hugessen …
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Method Of Presentation:
Basic knowledge of Executive Compensation
NY Category of CLE Credit:
Areas of Professional Practice
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About Compensation Advisory Partners
Supported by rigorous analytics, we work with boards of directors and management teams to develop innovative and practical solutions that advance company objectives.
Our advice is grounded in extensive real-time experience and aligns with strong corporate governance standards. Our client experience ranges from some of the largest Fortune 100 multi-nationals to smaller start-ups. Our clients benefit from the collective intelligence and practical experience of our consultants to provide superior market insight.
After working together for many years at other large consulting firms, our partners saw the need to create a new firm positioned to provide strictly independent executive compensation consulting advice. CAP was founded in 2009 to deliver this important service with excellence.
About FW Cook
FW Cook provides independent executive compensation consulting assistance to publicly-traded and privately-held organizations in developing compensation plans for their executives, key employees and non-employee board of directors. Our service offerings are broad and are designed to help our clients attract and retain key employees, motivate and reward them for achieving performance objectives, and align their interests with shareowners.
Our firm’s principle objective is to add value to the executive pay programs and processes. We accomplish this by partnering with our clients in the process of developing and administering meaningful and effective compensation programs that align with the company’s business strategy and culture. In our role as outside advisor, we provide the experience, resources, support, and objective advice to help our clients make informed decisions about executive compensation matters.
About Hugessen Consulting Inc.
Hugessen Consulting is an independent consulting firm dedicated to meeting the executive compensation consulting requirements of boards and their compensation committees. With offices in Toronto, Calgary and Montreal, and New York, the firm’s mission is to be the leading provider of advice on executive compensation, performance measurement and assessment, and related governance to the compensation committees of medium and large companies in Canada, the U.S., and the U.K.Hugessen Consulting is an independent consulting firm dedicated to meeting the executive compensation consulting requirements of boards and their compensation committees. With offices in Toronto, Calgary and Montreal, and New York, the firm’s mission is to be the leading provider of advice on executive compensation, performance measurement and assessment, and related governance to the compensation committees of medium and large companies in Canada, the U.S., and the U.K.