Posts Tagged ‘executive compensation’

Debating the Role of TSR in Executive Compensation

April 1st, 2015 | By

Using total shareholder return (TSR) as a compensation program metric emerged as a hot topic for both panelists and attendees during the third annual Leading Minds of Compensation event last week at the Grand Hyatt in New York City. Discussing the day’s most pressing compensation issues in a panel selected  by NACD Directorship magazine Publisher Christopher Y. Clark and Editor-in-Chief Judy Warner were: Steven Hall, managing director of Steven Hall & Partners; Dayna Harris, vice president of Farient Advisors; Jeff Joyce, partner of Pay Governance; Rose Marie Orens, senior partner at Compensation Advisory Partners; Jannice Koors, managing director of Pearl Meyer & Partners; and Barry Sullivan, managing director of Semler Brossy.

Jannice Koors noted that, while not a practice used by the majority of public companies, TSR is a popular metric. “It has some benefits: it clearly is the most directly aligned metric between shareholders and executives, so it’s an easy story to tell, it rewards results, it’s easy to present to shareholders.” But, according to Koors, the pros of TSR are readily outweighed by the cons. “The purpose of an incentive plan is to incent behaviors, actions, and decision making,” she said. “You don’t have behaviors that create stock price.” Dayna Harris agreed. “TSR doesn’t focus people on things they can control,” she said. “When you go to a one-size-fits-all compensation plan, you are reducing the number of tools in the tool chest that help the board and management to improve overall company performance.”

Koors expressed another major reservation with this metric. “You’re measuring movement over that period of time—it creates some natural spikes. So what goes up must come down. What naturally happens in TSR plans—and what a lot of companies who are coming up on that third and fourth and fifth year of having a TSR plan in place are finding—is that if you’re in the top quartile at the end of your three years, you have vastly improved the likelihood that you are going to be in the bottom quartile at the end of your sixth. So what TSR really rewards is being a steady eddy in the middle of the pack.”

But, during the Q&A portion of the event, one director self-identified as an advocate for TSR as a valid and valuable metric, said it’s the purest way to align shareholders with directors. If companies were to move away from TSR, what data is available to lure away TSR’s most ardent adherents? “I’m not going to try to dispel the notion that it is purely aligned,” Koors said. “I’m just saying it’s a reward, not an incentive—and it depends on what you want your long term incentive plan to do.”

Rose Marie Orens added her thoughts about TSR, saying that there is a time and a place for this metric, particularly in the financial services industry. Though acceptable to use TSR as a portion of an award, and to use it as a reminder that driving stock prices is a priority for executives, Orens didn’t think it should be used as the main metric behind executive compensation. “I would drive either for relative performance on metrics that are important in my industry and I want to demonstrate that I am doing better,” Orens said.

Barry Sullivan directed attendees’ attention to “The Problem with Total Shareholder Return,” a study mounted by his firm in 2012 that gave Koors’ intuition and Orens’ observations a statistical bite. “What do we need to do from a growth and profitability perspective over a long period of time to drive TSR?” Sullivan asked. “When you look at the data, those companies that outgrow at a return above their weighted cost of capital drive superior total shareholder return. Focus on growth, focus on profitability, and TSR will come.”

Jeff Joyce didn’t take issue with TSR in and of itself, but rather, he found fault with its application. He observed that, because TSR is measured over a fixed period of time, a sudden lull in stock price at the end of that period undermines shareholder alignment. “While it does play a role, stock price is captured in other forms of equity,” he said. “It doesn’t have to be explicitly measured in terms of total shareholder return.”

NACD Directorship will host a “Prognosticators of Pay” event on July 17th in Seattle. Directors interested in attending this complimentary program may request an invitation online.

Look for full coverage of NACD’s Leading Minds of Compensation event in the May/June 2015 issue of NACD Directorship magazine.

Discussion Topics for Compensation Committees in 2013

March 28th, 2013 | By

In 2012, the focus for those both inside and outside the boardroom was compensation. Although numerous rules mandated by Dodd-Frank affecting the compensation committee—say on pay and compensation committee and advisor independence—have been implemented, directors still brace for those to come: pay-for-performance disclosures, clawbacks, and median pay ratios. As such, it is expected that the focus on executive compensation will not shift dramatically in the coming year.

As boards head into proxy season, NACD has recently released a new white paper: Compensation Committee Priorities for 2013. With input from our National Compensation Committee Chair Advisory Council and partners Farient Advisors and Gibson Dunn, this report details the issues that the advisory council—and compensation committees across the nation—will discuss in 2013. The list includes:

  • Executive Compensation and Supplemental Disclosures. In recent years, investors, proxy advisory firms, regulators, and boards have significantly increased the level of attention paid to the compensation discussion and analysis, particularly as the source of whether pay matches performance. This year, the Securities and Exchange Commission is expected to issue proposed rules on Section 953 of Dodd-Frank entitled “Executive Compensation Disclosures.” Section (a) specifically addresses the disclosure of pay versus performance.
  • Realized and Realizable Pay. A significant issue underlies the provision in Section 953(a): a lack of standards surrounding the various terms referenced. Although Dodd-Frank requires that companies disclose “pay actually received” (generally referred to as “realized pay”), many companies choose to disclose “realizable” pay. Not only do companies use a range of definitions to calculate realizable pay, Institutional Shareholder Services has begun to use its own definition when assessing compensation.
  • Peer Group Selection. Selection of peer group continues to be a highly contested and critical action. If a company’s chosen peer group is incorrect in the eyes of shareholders or their advisors, all ensuing calculations based on this selection are incorrect. Furthermore, selections that raise red flags to investors or proxy advisors may lead to negative say-on-pay votes come proxy season.

For the rest of the issues likely to be discussed by compensation committees in 2013 and related resources, download Compensation Committee Priorities for 2013.

Combatting Information Asymmetry

December 13th, 2012 | By

At any NACD education program, the discussion of directorship as a part-time profession with full-time risks is bound to arise. Yet following any corporate crisis, the question is always asked: “Where was the board?” Outside of the C-suite and boardroom, many perceive that directors should be able to foresee and avoid a crisis before it strikes.

This perception is misguided for several reasons. As a result of legislative and regulatory activity, since the 1960s corporate boards have become increasingly independent of management. Although legislation such as Sarbanes-Oxley and Dodd-Frank mandated independence at specific committees, this has extended to the entire board. Today, most publicly held company boards comprise a majority of independent directors, and often the CEO is the only executive director.[1]

The development of independent boards is not negative. In fact, it ensures that the board can effectively carry out its mission and responsibilities, and fairly hold management accountable to shareholders. However, there are a few consequences when directors are selected entirely for independence. Directorship, as noted above, is a part-time role. Inherently, directors rely on senior management for information necessary to carry out their oversight responsibilities. When outside directors are chosen for lack of ties to the corporation, they do not necessarily bring knowledge of the business or industry. Therefore, the benefit created by adding an independent director is largely tempered, as this outsider is reliant on the CEO for the information necessary to his or her oversight role.

To combat this risk of asymmetric information, NACD partnered with McGladrey to host four small gatherings of executives and directors in an effort to find ways of improving the communication and relationships between the board and C-suite. From these gatherings, the Bridging Effectiveness Gaps: A Candid Look at Board Practices white paper was created. As Bridging the Effectiveness Gaps notes, broadly, these gaps were found in the areas of strategy and risk, executive compensation, CEO succession planning, and board evaluations. By convening management and directors from different companies, the meetings fostered candid and open conversation regarding areas where communication tends to break down. However, where communication was generally the root of the problem, it was also the solution.

This report is available as a complimentary white paper on NACD’s Board Leaders’ Briefing Center.



[1] According to the 2012 Spencer Stuart U.S. Board Index.