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29 Apr. 2011 | Comments (0)

In the first year of mandated advisory votes on executive compensation plans, two observations can be made: large public companies are shifting pay practices toward pay for performance and CEO compensation at most non-banks is back to the higher pre-financial crisis levels. On one hand, an argument can be made that since the recovery -- as tepid as it is -- has begun, companies are more apt to go back to the old ways of exorbitant executive compensation. On the other hand, an argument can be made that the higher compensation reflects higher performance by those companies and that there is focus on pay for performance, where there wasn’t before. So what is the reality of the situation? If you hear one important institutional investor tell it, you would believe the higher compensation reflects their companies’ higher profits. But at the same time many of those S&P 500 companies are seeking out shareholders’ views on the compensation plan itself. “A lot of companies went away from [rewarding stock] options to straight cash [rewards] that were less structured to the stock market price,” Michael P. McCauley, senior officer of investment programs and governance at the State Board of Administration of Florida, told me earlier this week. The SBAFLA voted 3,566 proxies in 2010, according to its 2011 Corporate Governance Report. In fact, he mentioned to me that a lot more companies are reaching out to him to discuss their compensation plans prior to the annual meeting. “In the past, we would get dozens of calls a year from companies,” McCauley said. “Now, it’s gone up 20 to 30 percent per year just before the vote takes place.” He related two different calls he received recently. In one case, members of management and the general counsel called him after they received negative reports from the proxy advisory firms Glass Lewis and Institutional Shareholder Services (ISS). The other call involved a trucking company that actually had a clean bill of health from the proxy firms. “We had a different conversation with each one,” he said. “The company [with the clean bill of health] called to tell us they lowered the award threshold and they explained the mitigating circumstances.” There are two recent studies from compensation firms that tell two different facets of the story. Equilar, on behalf of the New York Times, reported that the median pay for top executives at 200 major companies was up 12 percent last year to $9.6 million from 2009. ClearBridge Compensation Group found that Fortune 500 company boards are minimizing non-performance-based pay, reinforcing shareholder alignment and improving disclosure on pay for performance. [Read a white paper that analyzes ClearBridge’s findings.] Meanwhile, the New York Times article that reported Equilar’s findings stated that American corporations posted $1.678 trillion in profits during the fourth quarter of 2010 (a 29.2 percent increase) while the unemployment rate hovered around 9 percent. One of the main points in the NYT article is that while high executive pay and even higher profits are back at many major U.S. companies, that good fortune has yet to filter down to most of the workforce, which is still struggling to pay their mortgage and simple bills. It points out the starkness of this disparity. That point hasn’t been lost by one of the leading unions. According to the AFL-CIO’s analysis of 299 companies, a CEO of a Standard & Poor’s (S&P) 500 Index company received, on average, $11.4 million in total compensation in 2010.  “In other words, the combined pay of 299 CEOs could support 102,325 workers earning the median wage,” the union reports in its 2011 Executive Paywatch. The AFL-CIO breaks down the compensation of executives at the S&P 500 through data it got from In addition to a pay disparity ratio database, the union offers case studies, a CEO pay database, and section on CEO pay trends. The AFL-CIO is pretty clear in its motives behind releasing such data to the public: it wants to make an argument for higher pay for its constituents, who are the blue collar workers. So, as you could expect there wasn’t any analysis about pay for performance and whether or not higher compensation reflects higher profits. The folks over at ClearBridge, which is a compensation consultant, focused on just that issue when it analyzed the first 100 Fortune 500 companies to files proxy statements this proxy season. They found that many of those companies minimized non-performance-based pay and enhanced shareholder alignment. Some of their findings include:
  • Nearly 40 companies, including companies such as AT&T and OfficeMax, eliminated excise tax gross-ups (either from existing or future arrangements).
  • Three companies reduced severance multiples for the CEO from 3x cash compensation to 2x cash compensation.  Six companies have a policy requiring shareholder approval of any payouts greater than 2.99x cash compensation, including one company (Bank of New York Mellon) that adopted the policy in 2010.
  • Of 79 companies disclosing clawback provisions for their named executive officers, 34 adopted or enhanced these provisions recently.
On the disclosure regarding pay for performance, the study found:
  • Use of executive summaries more than doubled, from 30 companies last year to 64 companies this year.
  • Several companies, including Kimberly Clark and Lockheed Martin, enhanced their pay-for-performance discussion by adding a comparison of Total Shareholder Return (TSR) vs. CEO pay at the beginning of the CD&A.
  • Some companies have re-introduced the proxy performance graph, which compares the company’s TSR to TSR of an index and peers over a multi-year period and is now required 10-K disclosure.
“Clearly, well into the 2011 proxy season there is evidence of a shift in pay practices among the largest corporations in the world, with an emphasis on pay for performance,” said Russ Miller, managing director at ClearBridge Compensation Group, an independent executive compensation consulting firm based in New York City.  “Companies that perform, and successfully demonstrate that their pay programs support and drive performance, are more likely to win shareholders’ votes.”
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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