Executive Compensation—What Matters Most to Activists?
Executive compensation is a perpetual hot-button topic and one that activist investors frequently use to court shareholder support for their proposals. In a recent BoardVision video, Semler Brossy managing directors Roger Brossy and Blair Jones talk with Ken Bertsch, partner at CamberView Partners, about the following questions:
- What compensation practices are red flags for activists?
- What happens when an activist investor, or their representative, joins a board?
- What are some practical considerations for boards and compensation committees?
Here are some highlights from that conversation.
Roger Brossy: [Activists have] $200 billion under management in various funds. We could see, at current pace, as many as 700 campaigns in corporate America led by activists. Blair, what does executive compensation have to do with this?
Blair Jones: It certainly is not the primary issue that an activist is using as they pursue a company, but it is a hook to engage other investors and also to engage the public at large if it’s a very public fight. The kind of thing they’re looking at is the magnitude of pay. So they would look at the “how much is too much?” question. They might look at certain elements of pay, like retirement or special supplemental retirement benefits, that only executives get. They love to look at pay and performance. Their favorite chart is a pay level that stays steady or even goes up, contrasted against a performance level that’s going down. That’s one of their key areas of focus and interest. They like to look at whether the metrics that they care about are included in the compensation programs, and they also look at say-on-pay votes. And if the company has a pattern of lower say-on-pay votes, it’s often an indication that there may be other governance problems underlying some of the decision-making at the company.
Brossy: Ken, we’ve engaged with activists who are very, very thoughtful about executive pay and have a very reasoned point of view about what the structure of programs ought to look like. But we’ve also been in situations where it felt like stagecraft, and we weren’t sure there was a lot of conviction. Maybe it was more just sort of a point to embarrass or try to curry favor with others. How do you see this fitting in?
Ken Bertsch: Well, I saw both things happen. This is a bit of a campaign—a political campaign—and people use things in campaigns that may make people look bad, which might not always be authentic to what’s going on. On the other hand, I wouldn’t want to overstate that, because I think executive pay does often get to, or is linked to, underlying strategy. Blair talked about discussion of metrics and what makes sense. If the investor has a view on what’s going wrong at the company and the pay strategy fits into that, that’s going to be a useful—and in some ways illuminating—piece of the campaign. So I think it’s both things, and it makes it hard to deal with.
Brossy: So what is your advice for boards?
Bertsch: Number one, be as clear as possible about executive pay. Disclosures have gotten a lot better in recent years, and I think that’s very important. Why are people being paid what they’re paid, and what’s the strategy behind it? How does it link to the company strategy? A lot of the investors who are not activists but [are] potentially voting on activism, that’s what they care about. So you want to be logical about what you’re doing. I think you want to avoid some of the practices that tend to get a lot of criticism. I think, also, you want to listen to the activists, to your shareholders, and try to hear if there is merit in the arguments being made.
Brossy: Blair, when we’ve had boards take activist slates into the board, obviously a very unusual and interesting environment ensues. People who might have been in sort of antagonistic public stand[off]s with each other are now looking to find a constructive way forward, and there may be a variety of points of views or degrees of willingness to have that happen. What should compensation committees do at that stage as they’re taking new members onto the board and potentially onto the compensation committee?
Jones: I think that’s a great question, and one of the most important things is to get a clear articulation of the philosophy of the compensation program. It’s important for the new board members to hear the history of how you got to where you did, but it’s also important for the whole board to talk about where the program is and to either affirm where they are or say there are some things that need to change. They do that as a group where they’re revisiting it. I think that’s job number one.
I think job number two is to … think about the people and the talent. Considering we’re in the situation we’re in, do we have any talent out there that we need to shore up and ask to stay and work with us through the process of taking this company into the next era? That may mean looking at things like severance arrangements so people feel like they have some protection. It may be selective retention or special programs that have new measures related to whatever the objectives of activists’ campaign were.
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