Download Comparing Compensation: Trends in Executive Pay

BEHIND THE STORY: AN AGENDA QUARTERLY REPORT
Comparing Compensation:
Trends in Executive Pay
www.AgendaWeek.com
S
Q2 SPECIAL REPORT
2Pension Changes Drive
19% Rise in Exec Comp
4How Engagement
Helped McKesson Achieve
Say-on-Pay Approval
6TSR Rises in Popularity
In Long-Term Performance
Plans
8CEO Pay Outpaces
Company Performance
10Flashy Exec Perks Give
Way to More Functional
Benefits
etting the CEO’s pay package continues to be one of the most important
and high-profile tasks with which a board is entrusted. Designing packages that are both palatable to shareholders and motivating to executives is
a delicate balance and one that is all too easy to get wrong. The introduction
of say on pay five years ago meant that balancing act has been elevated to
a high wire, where one misstep could be very damaging for a company’s
reputation and that of its directors.
As the 2015 proxy season gets into full swing, Agenda enlisted the help
of proxy advisor ISS and compensation data company Equilar to provide
data on the executive compensation trends at the U.S.’s biggest companies.
ISS provided data for the Russell 3000, while Equilar compiled figures for
the S&P 1500. Both data sets were based on proxies filed by early May and
included historical data for comparison.
At the beginning of the year, Agenda informed its readers of an unexpected — and, for many boards, unwelcome — impact that changes to pension
calculations would have on their executive compensation programs. The
combination of growing longevity assumptions and persistent low interest
rates, Agenda wrote, would cause a spike in the amount of money companies
would have to contribute to their executives’ pension plans. The data from
ISS and Equilar bore this trend out.
As detailed in the story by associate editor Lisa Botter on page 2, for the
482 S&P 1500 companies that had made changes to their CEOs’ pension in
2014, overall compensation increased by an average of 19%. The pension
changes accounted for nearly 80% of that increase.
Though these are one-off changes, about only a third of companies have
yet to implement them, meaning we can expect to see similar effects over
the next two years.
Say on pay was introduced to make boards more accountable to shareholders over executive compensation and improve the engagement between
directors and investors. Judging by the results of the past five years’ worth of
pay votes, it is easy to see why many believe the initiative has been a success.
So far this year, more than 90% of pay votes have received more than 80%
of shareholder approval, while ISS has backed 91.3% of pay plans.
One company that has seen both the highs and lows of say-on-pay votes
is McKesson. In an article on page 4, senior reporter Amanda Gerut looks
at how the company went from receiving just 22% support in its 2013 sayon-pay vote to 95% last year.
Elsewhere in this special issue, reporter Melissa Anderson looks at the
rise of total shareholder return as a metric in long-term incentive plans (page
6), senior reporter Tony Chapelle assesses the continued rise of overall CEO
pay (page 8) and reporter Lindsay Frost discovers how functional perks have
replaced more lavish benefits (page 10). g
Pension Changes Drive 19% Rise in Exec Comp
Big increases in pension values could create an optics problem for boards
by Lisa Botter
S
kyrocketing pension values have been the driving
force behind the 19% average rise in CEO compensation for companies reporting a change in pensions, according to data compiled for Agenda.
Much of the change has been attributed to low discount rates and a change in longevity assumptions,
meaning more spikes could be seen in coming years.
These increases have highlighted the importance of
good disclosure, experts say, but may not have much of an
impact on the design of executive retirement programs.
Data provided by executive compensation data firm
Equilar shows that of the 1,395 companies in the S&P
1500 that had filed proxies by April 30, 2015, just 482
companies reported a change in the pension value, with
the majority reporting increases. These companies experienced an average increase in compensation of 19%, and
the pension values accounted for 79.2% of the change in
total compensation.
For the larger population of companies analyzed, total compensation increased by 13.9%. However, some of
the pension changes were so large within the subset of
companies that they accounted for 47.1% of the average
increase across all S&P 1500 CEOs’ pay.
Many compensation committees have included expanded discussions in proxy statements to help explain
the increase to shareholders.
Data from ISS shows a change in pension values accounts for more than 40% of the increase in executive
compensation for Russell 3000 companies. The proxy advisory firm’s data shows that the median CEO pay raise
in the U.S., excluding the change in pension, was 8.2%.
However, when change-in-pension values are factored in,
average CEO pay increased by 12.9% in 2014.
Aaron Pedowitz, senior consultant in the executive
benefits group at Mercer, says there are three factors that
can play into changes in pension value: the discount rate,
changes in mortality tables and ongoing movement of
the plan. This year much of the increase can be attributed
to the discount rate and changes in estimated longevity.
Firstly, persistently low interest rates have resulted in
a decrease in the discount rate, which has resulted in
increased pension liabilities.
Secondly, in October, the Society of Actuaries re-
2 leased updated mortality tables that many companies use
to calculate financial obligations for their pension plans.
The new tables see the life expectancy of a 65-year-old
man increased to 21.6 years, from 19.5 years in 2000, and
a 65-year-old woman’s life expectancy increased to 23.8
years, from 21.3 years.
The life expectancy at age 85 was increased to 7.2
years for men and 8.4 years for women, from 5.9 years
and 7.4 years, respectively.
Pedowitz adds that the impact of the change in mortality tables could be delayed as the Internal Revenue
Service has not yet mandated that the new estimates
be used. Companies and auditors can still decide what
assumptions to use. “Some companies have decided to
update the mortality table now, and some will wait until
the IRS says they have to,” he says. “So we may see another year or two where that mortality issue comes up.”
Any company with a defined benefit pension plan will
not be able to get around an increase in pension values.
The ISS data shows that “old economy” industries —
such as utilities, materials, and food and staples retailing
— have a majority of companies reporting changes in
pensions this year, while “new economy” companies —
such as semiconductors, software and services, and pharmaceutical and biotech — had less than 10% of CEOs
reporting a change in pension.
John Roe, head of advisory and client services at ISS
Corporate Solutions, said in a statement that he expects
this to fuel the debate on executive retirement programs,
“especially as more and more companies consider switching from defined benefit to defined contribution plans.”
However, these increases are not expected to have
much of an impact on say-on-pay votes, unless the pension plan has been a problem in the past.
“If the organization is already looking at this being
a problem in the pension plan, or in its compensation,
these fluctuations will be the straw that broke the camel’s
back, but only when the pension has been an issue in
the past do I expect there will be more concern about
it,” says Pedowitz.
Companies with lagging performance may be worried about this. Kenneth Laverriere, partner at law firm
Shearman & Sterling, says that these companies may be
June 8, 2015 Comparing Compensation: Trends in Executive Pay
Impact of Pension Changes on CEO Pay
Pension changes accounted for 7.7% of total pay in 2014 and nearly half of year-over-year total pay increase
n 2013 n 2014
Average percentage of total pay
50%
42.2 42.1
40%
30%
20%
10%
0%
19.3 18.5
12.4 11.4
2.9
Base salary
17.4
15.2
2.4
Bonus
2.2
Non-equity
Stock awards
incentive plan
Options
awards
7.7
Changes
in pension
0.2
0.1
3.4
2.6
Deferred
All other
compensation compensation
Average percentage of pay change accounted for
50%
47.1
41.2
40%
30%
20%
10%
12.7
4.3
0%
-10%
–0.5
–1.5
Base
salary
Bonus
Non-equity
incentive plan
Stock
awards
Options
awards
–0.1
Changes
in pension
–3.1
Deferred
All other
compensation compensation
Source: Equilar analysis of S&P 1500 companies’ proxy statements
concerned with the perceived misalignment of pay with
performance, and the fact that a large change in pension
value may distort the symmetry that otherwise exists between pay and performance.
“Companies in that situation really want to explain
to their investors that there isn’t a misalignment with
performance; the changes are interest rate– and actuarially driven,” says Laverriere.
Expanding Disclosures
David Wise, a U.S. market leader who is primarily
focused on executive compensation and board issues at
the Hay Group, says the large increases will not have
much of an impact on the design of executive retirement
programs because this is largely a one-time issue.
“But I know companies are concerned about how
shareholders will react to potentially significant increases
in the pay tables when nothing has changed programmatically,” says Wise.
Companies that are anticipating big increases are taking steps to make sure shareholders understand the reason behind the increase. “This whole discussion puts a
premium on the how; companies disclose the why and
the what. It has presented companies with an urgent
opportunity to get really good at communicating with
shareholders about pay programs,” Wise says.
Boards are explaining in the proxies what the change
is, why the change is happening and in some cases what
the number would have been without the increase.
Wise says that General Electric did a good job of disclosing its pension increase. “They were careful to explain
to shareholders what the differences were,” he says.
In its proxy statement, filed in March, General Electric included a note about CEO Jeffrey Immelt’s change
in pension value in its performance and compensation
highlights. Immelt’s total compensation for 2014 was
$37.2 million, compared with $18.8 million in 2013. The
increase in compensation was primarily attributed to an
$18.4 million increase in pension value. GE attributed
52% of this pension increase to a change in the discount
rate and to changes in life expectancies in the Society of
Actuaries’ new mortality tables.
“Excluding the effect of the change in pension value,
Immelt’s compensation for 2014 was $18.8 million, down
2% from 2013 (salary and bonus increases were offset by
a 20% lower aggregate grant date fair value for his equity
grant),” the proxy states.
Pension continued on page 12
Comparing Compensation: Trends in Executive Pay www.AgendaWeek.com 3
How Engagement Helped McKesson Achieve Say-on-Pay Approval
The company lost a vote in 2013, but turned it around last year with 95% support
by Amanda Gerut
ive years of annual say-on-pay votes has laid the foundation for increased engagement among companies
and shareholders in order to hash out differences in executive compensation, board composition and leadership.
At McKesson Corp., which is ranked 15th in the Fortune 500 and has revenues of $137.6 billion, the company has dramatically revamped its approach to shareholder engagement during the past few years, mainly on
the back of say-on-pay vote results.
After weak support for its pay plans in the first two
years of voting, the company was one of 73 organizations
that failed on say on pay in 2013, receiving only 22%
support. Yet, that year the company’s total shareholder
return performance exceeded both the sector median and
the S&P 500 index. After failing to get majority support,
the board set about increasing its dialogue with investors
and modifying its compensation plan.
“In terms of our overall philosophy, it is engagement,
engagement, engagement,” says Loretta Cecil, senior
vice president in governance relations at McKesson. “It
started in 2012 and 2013 and then really exploded in
2014 for us, is the way I would describe it.”
McKesson’s journey is a symbol of what consultants
all agree is the most positive result of say on pay: boards
talking directly to investors.
“One of the best parts of say on pay is shareholder
engagement,” says Aubrey Bout, a partner with Pay Governance. “That is a positive thing any which way you
look at it.”
The SEC began requiring that companies hold sayon-pay votes at annual meetings in January 2011. Data
from ISS shows that average shareholder support for the
votes has been high since they commenced five years
ago. In the first year of say on pay, investor support averaged 91.6% among the Russell 3000. Average support has
hovered at the same level ever since; year-to-date support
has climbed to 92.1%.
For companies, obtaining say-on-pay approval is a
credibility risk, consultants say. Directors, particularly
those who oversee large-cap companies, don’t want to
be known for serving on boards that can’t get investors
to support their executive compensation plans.
Thus, yearly say-on-pay votes have largely flushed
4 out pay practices investors viewed as unsavory and have
helped pave the way for stronger independent leadership
on boards and new director recruits.
“We’ve seen a fundamental shift in how compensation is delivered to executives as a result of say on pay,”
says Russ Miller, founder and CEO of ClearBridge Compensation Group.
At McKesson, concerns about executive pay practices
arose even before the company held its first say-on-pay
vote, which ISS noted in its 2013 report on the company.
The compensation committee, chaired by Alton Irby,
had received “lukewarm support” in director elections
at the company’s 2010 annual meeting. The lingering issue that made headlines was CEO John Hammergren’s
supplemental pension benefit.
Hammergren’s pension, which is a contractual arrangement, had grown to $159 million by 2013, ISS noted, an increase that was partly due to an unusual interest
rate environment. Investors had other issues with pay at
the company beyond the pension benefit, however.
Michael Pryce-Jones, a senior corporate governance
analyst in the investment group at Change to Win Federation, says there were a lot underlying, systemic problems with pay and governance at the company. McKes-
Say-on-Pay Results
Percentage of companies achieving
different levels of shareholder support
78.1%
80%
Percentage of companies
F
70%
Median 95.7%
Average 91.8%
60%
50%
40%
30%
20%
10%
0%
0.7%
2.6%
1.5%
< 50%
50-59%
60-69%
5.2%
70-79%
11.9%
80-89%
90-100%
Voting results
Source: Equilar survey of the 269 say-on-pay votes at S&P 1500
companies as of April 30
June 8, 2015 Comparing Compensation: Trends in Executive Pay
son was relying too heavily on earnings per share (EPS)
in both the short and long term, he says.
Plus, the board needed new directors, adds Pryce-Jones,
who has been involved in engagements with the company in recent years and helped lead a “Vote No” campaign against its directors. He and other investors were
concerned that the board had become too deferential to
Hammergren, and had allowed a “founder mentality” to
creep into its interactions with the CEO.
“How does the board sleepwalk to a $159 million pension liability?” Pryce-Jones says.
The McKesson board was aware of investors’ concerns
and had taken steps to address them.
The 2012 proxy states that the compensation committee had added new metrics to strengthen the link between pay and performance, including adjusted EPS, adjusted Ebitda, adjusted return on invested capital (ROIC)
and long-term earnings growth and adjusted operating
cash flow (OCF). The board also eliminated an “individual modifier” — which allowed it to consider individuals’ contributions to performance — from its restricted
stock unit program so that awards were based strictly on
financial performance, and reduced long-term incentive
cash opportunities by 5%.
The board had also transitioned from having a presiding director that rotated out of the role every July to a
bona fide lead independent director.
It wasn’t enough. With support dwindling, the board
decided it was time to chart a new course.
Cecil says the crescendo in shareholder engagement
following the 2013 vote was helped by centralizing efforts across the company. Cecil’s position was created in
January 2014, and she was charged with driving the engagement initiative.
From January through July 2014, lead independent
director Edward Mueller and longtime director and chair
of the governance committee Jane Shaw began meetings with key investors that focused on executive compensation, says Cecil. Shaw brought the feedback to the
compensation and governance committees and directors
began the process of reworking the compensation plan
alongside a new consultant, Semler Brossy.
That spring, Mueller held another series of meetings with investors, says Cecil, before another round of
changes in May and June. The company filed its proxy
in June, and held its annual meeting in July. All told, the
company conferred with 26 of its largest institutional
investors, as well as ISS and Glass Lewis, in 31 meetings
held at shareholders’ offices and 15 phone calls.
ISS Say-on-Pay Support Rate
Percentage of Russell 3000 companies receiving
“for” ISS recommendations
100%
95%
91.3%
90%
88.0%
87.1%
87.1%
87.4%
2012
2013
2014
85%
80%
2011
2015*
Source: ISS
*As of May 8
The 2014 proxy, which includes new graphics covering board composition details and executive pay, along
with a tightly written accompanying narrative, carefully
lays out the new changes ushered in after the meetings
with investors, which Cecil notes isn’t by accident.
“Our board was instrumental in creating an intentionally different look and feel for the proxy statement and
CD&A in 2014,” she says.
First up was Hammergren’s pension benefit. The board
reduced it by $45 million, fixing it at $114 million, a
change Hammergren voluntarily agreed to. His total direct compensation dropped from $27.5 million in 2013
to $25 million in 2014, even while TSR was 65%.
The board adopted new metrics in its compensation
plan, replacing OCF with adjusted ROIC in its cash plan,
and replacing its performance restricted stock unit longterm equity incentive program with a total shareholder
return unit (TSRU) plan. The company now relies on
relative TSR, with the S&P 500 Health Care Index as its
performance metric in the TSRU program. Long-term incentive plans now have performance or vesting periods
of at least three years, the proxy states.
In the area of governance, the board expanded the
lead director’s responsibilities further and appointed
new committee leaders. Shaw was named chair of the
compensation committee and Wayne Budd took over as
chair of the governance committee.
The board also appointed a new director, Anthony
Coles, and has since appointed Donald Knauss, executive chairman of Clorox, and Susan Salka, CEO and
Say on Pay continued on page 12
Comparing Compensation: Trends in Executive Pay www.AgendaWeek.com 5
TSR Rises in Popularity in Long-Term Performance Plans
Increasing use of TSR shows impact of shareholder pressure on comp committees
by Melissa J. Anderson
R
elative total shareholder return continues to rise in
popularity as a metric for long-term performancebased awards, according to proxy data provided to Agenda by ISS.
The use of returns as a metric also increased in popularity between 2013 and 2014, while the use of earnings as a
metric in long-term performance-based awards decreased.
The prolonged rise in TSR usage illustrates the continued influence that shareholders have had on board decisions in recent years. As Agenda covered in its last Behind
the Story quarterly report, once-detached institutional
shareholders are taking a cue from activists and demanding more time and attention from boards on governance
matters. The data shows executive compensation is no
different, as the prevalence of incentive compensation
in general — and the use of TSR, its most shareholderfriendly metric — continues to rise.
“There’s been a very strong movement toward performance metrics being dialed in and being made clear
to shareholders,” says Kay Koplovitz, CEO and chair
of Koplovitz & Company, senior managing director of
Brock Capital Group and the former chair and CEO of
USA Networks.
According to the ISS data, the percentage of companies with some form of performance-based award has
increased steadily. Just over half (53%) of 2009 proxies
from the companies that ISS surveys disclosed use of performance-based long-term awards. That share increased
to 80% of the 2014 proxies that ISS has analyzed so far.
Koplovitz, who has served on a number of public
company boards including Oracle and is now a director
and compensation committee member at Kate Spade &
Company, CA and Time Inc., says setting performance
metrics is one area where the compensation committee
comes into play very strongly.
“How do you set the metrics? Are the metrics realistic?
Are they achievable? Is there a reach?” she asks. “It’s a
big part of the discussion, because if you set the wrong
metrics, or they are so far out of line that they are not
achievable, then you haven’t done anything to motivate
Financial Metrics Used
Percentage of companies using each type of metric in long-term performance-based awards
n Cash flow n Earnings n Earnings per share n Returns n Return on equity
n Return on invested capital n Sales n Total shareholder return n Other
70%
60%
50%
40%
30%
20%
10%
0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: ISS Incentive Lab universe of approximately 2,000 companies
6 June 8, 2015 Comparing Compensation: Trends in Executive Pay
2010
2011
2012
2013
2014
your executives or the people working for the company.”
Besides shareholders, proxy advisors and politicians
are also concerned with performance metrics and how
these metrics are communicated. The SEC’s recently
proposed pay-for-performance rule, mandated by DoddFrank, will require companies to add another table to
their proxy filings, noting compensation “actually” paid
to the CEO, the average compensation actually paid to
named executive officers, the company’s TSR and the TSR
of the company’s peer group.
While the SEC is recommending that companies use a
market-cap-weighted TSR for the disclosure, rather than
the more commonly used relative TSR, the rule is expected to drive the use of TSR as a long-term performance
metric up even higher.
TSR is already by far the most popular metric for
long-term performance compensation. In 2006, 34% of
companies in ISS’s database used TSR as a long-term performance metric. By 2014, that share had risen to 58%,
and that group of companies is expected to continue to
grow. Equilar research on long-term incentive metrics at
S&P 1500 companies is similar: 46.9% of these companies
used relative TSR in long-term incentive plans in 2012,
which rose to 55.7% in 2014.
“It’s a good barometer of the performance of a company relative to [other] investments, so that’s why it appeals to investors,” says Erin Bass-Goldberg, principal at
the compensation consulting firm Frederic W. Cook &
Co. Glass Lewis and ISS are also fond of the metric, she
adds, and it’s easy to compare across industries.
That said, TSR is not without its detractors. Because it
measures a company’s shareholder returns relative to a
peer group, critics say a company’s relative TSR can sometimes have more to do with external factors than executives’ behavior. Others say it can be a backward-looking
metric as opposed to one that drives the performance of
the management team.
“TSR is perhaps the most important measure to
shareholders — what did I earn on my stock this year
— and as a board and compensation committee member, you have to be aware of that in terms of whatever
decisions you come to,” says David Kollat, president
and founder of retail and consumer goods consulting
firm 22 Inc., lead director at Wolverine World Wide,
chair of the compensation committee at L Brands, and
a member of the compensation committee at Select
Comfort Corporation.
But it doesn’t include factors that delve into the
health of the company and other measures of perfor-
mance, like earnings growth, revenue growth and various measures of return on investment, changes in market
share, R&D expenditures and other factors, Kollat says.
This is one reason more companies are using multiple
measures, or using relative TSR as a modifier on existing
measures, Bass-Goldberg says. Fifteen percent of relative
TSR awards used relative TSR as a modifier, according to
2014 research by FW Cook on 250 top companies. In
59% of those companies using relative TSR as a modifier,
the modifier adjusted the final performance award payout
up or down between 15% and 25%.
For those companies that don’t want to use TSR as a
performance metric at all in their compensation plan,
experts say, it all comes down to communication — with
shareholders and the proxy advisory firms.
“The proxy advisors aren’t going to tell you which
metrics to use; they just want to know why you use the
metric. It’s critical to explain in the CD&A why a metric
was selected and how it fits in the overall vision and strategy of the company, and how it supports that strategy,”
says Stephen Pakela, a partner at Pay Governance.
Pakela says many companies are increasing the number of metrics they are using to determine long-term
incentive pay. This is made possible, he says, because
companies are also increasing the weighting they are
giving to performance-based pay. A few years ago, that
weighting was 40%, and today many are going higher
than 50%, he says.
Equilar’s research shows an increase from 17.8% to
19.2% in the share of S&P 1500 companies using return
on capital or return on invested capital to measure longterm performance over the past three years. Meanwhile,
the use of earnings per share has decreased from 24.8%
to 23.7% in the same period.
The use of other metrics like Ebitda, cash flow, return
on equity and absolute TSR increased slightly between
2012 and 2014, while the use of revenue, operating income or margins and net income decreased slightly.
“I think basically managers like to be paid many different ways because at least one of them is probably going to deliver some money to them,” says David Yermack, a professor of finance and business at NYU Stern
School of Business.
Yermack is skeptical of the increase in the use of multiple performance metrics seen in recent years.
“The objectives of investors have not changed; they
simply want to make money, and the only metric that is
important is ‘Have you increased stock price?’” Yermack
TSR continued on page 12
Comparing Compensation: Trends in Executive Pay www.AgendaWeek.com 7
CEO Pay Continues to Outpace Company Performance
Proxies reveal comp committees use high rates of above-target cash bonuses
by Tony Chapelle
C
EOs at the largest companies continued to see their
pay bumped last year, and most saw it rise at a faster
clip than improvements in their companies’ share price.
While the median total compensation for S&P 1500
company CEOs increased by 16.3% last year, those companies’ share price index rose by just under 11%. The
data comes from proxies filed before April 30 and was
prepared by compensation consultant Equilar for Agenda.
Meanwhile, in data supplied by ISS, CEOs at Russell
3000 companies saw their average total compensation
rise by 14.7% over the same period that the index rose
11.5%.
One outlier trend last year was that a number of execs
saw higher pay through individual incidences of CEOs’
receiving one-time special pay awards.
Another noticeable trend was that more major company CEOs beat their performance goals. In a good year for
the stock market, more of those executives exceeded their
minimum goals and received above-target cash bonuses
in 2014 than in the previous year. According to compensation consulting firm Farient Advisors, two thirds of
S&P 500 CEOs reeled in 116% of their projected targets.
Overall, says Mike Meissner, a partner in the executive comp practice at law firm Squire Patton Boggs, the
main trend he noticed was more focus on performancebased compensation. About half of CEO pay now is composed of long-term incentive pay (LTIP), with base pay
and short-term cash bonuses making up the other two
quarters, Meissner says. Formerly, the three elements
were typically split in equal measures.
Boards’ strategy, Meissner says, is to inch up base
salaries only a few percentage points while increasing
equity portions significantly. “Comp committees want
executives to benefit or suffer to the same extent as shareholders by making sure they’re large shareholders in the
company,” Meissner says.
Don Delves, a director in executive compensation
consulting at Towers Watson, sees an increasing number of comp committees basing managers’ long-term
incentive pay on comparisons between the company’s
performance and relative metrics such as a market index.
Delves doesn’t like that trend.
The relative metric — usually total shareholder re-
8 turn (TSR) — seems a safe way to align CEO pay with
performance, Delves says. Indeed, boards are anticipating just how the SEC will finally set its long-awaited
rules required by Dodd-Frank on calculating and disclosing CEO pay for performance. Yet Delves, who once cofounded a group known as the Independent Directors’
Executive Compensation Project, says relative TSR isn’t
the answer.
“Relative TSR is good to create overarching shareholder alignment. But there are other things we’re trying to do when creating comp plans,” he says. The additional elements he cites are manager accountability and
engagement. “TSR plans don’t motivate managers to do
anything; they can’t improve their relative TSR. The purpose of incentive plans is not to be safe; it’s to motivate
people.”
Sean Egan, managing director at Egan-Jones Ratings,
also took issue with comp committees for that. Egan observes that corporate chiefs often complain that they’re
not evaluated on the right performance metric.
“CEOs will say they can’t control the stock market,
that they should be assessed on what they can control,
which is operating income,” he says. “In that case, they
only increased operating income by a median of 5.6% in
2014. But they’re lucky. They got paid based on the stock
market being up last year.”
CEOs Bring Home More Bacon
Average CEO pay among S&P 1500 companies
$7.7M
n 2013 n 2014
$8M
$6.8M
$7M
$6M
$5M
$4.0M
$4M
$4.4M
$3M $2.3M $2.5M
$2M
$1M
$0M
$0.4M
Total cash
Source: Equilar
June 8, 2015 Comparing Compensation: Trends in Executive Pay
Total equity
$0.8M
Total other
Total compensation
One-Time ‘Specials’
Robin Ferracone, a comp committee member at pet
insurance company Trupanion and founder and CEO of
Farient Advisors, says one noteworthy trend she has spotted is a rise in special one-time grants. Most of these are
equity-based. In some cases, these are new-hire bonuses
such as the $59 million performance-shares grant that
Microsoft paid Satya Nadella last year after he succeeded
Steve Ballmer as CEO. Nadella’s award will be stretched
over a five-year cycle.
Meanwhile, Qualcomm paid dearly to hire a new
CEO and to keep the old one in a board position. The
telecommunications equipment company doled out a
new-hire grant of $50 million to incoming CEO Steve
Mollenkopf, according to a filing in January. The package included $30 million in front-loaded, restricted
shares that vest over five years, plus $20 million worth
of restricted stock units that will vest between the third
and fifth anniversaries of the grant date. Qualcomm also
retained executive chairman Paul Jacobs by agreeing to
pay $45 million in restricted stock grants over five years
when he stepped down from the CEO role. Both men had
been courted by Microsoft in its CEO search.
“These are big numbers,” Ferracone says. “Right now,
the economy is pretty good and companies want to
hang on to executive talent. So I’m sensing that with
the frothy market, the war [for] talent has increased and
companies are trying to lock in their execs and encourage ownership.” In addition, she explains that when the
market is hot and boards are willing to venture into more
mergers and divestitures, they’re also likely to offer more
special awards as success incentives.
Yet she warns that proxy advisors have their antennae attuned out of concern that these could turn into
two- and three-time awards. For instance, Glass Lewis
issued criteria to evaluate the rationale for such awards,
whether they’re performance-contingent, and whether
they are really one-time.
While Ferracone says this is an outlier practice, she
recommends that comp committees watch to see whether it increases in prevalence in 2015.
Aaron Boyd, director of governance research at Equilar, writes in an e-mail that he’s noticed the so-called
“specials” too. Yet he points out that he hasn’t seen a
huge spike in their usage. “The Satya Nadella example
is a promotional award, which is fairly common when
someone is promoted or brought in from another company,” he writes. On the other hand, Boyd agrees that the
number of very large awards — including at Qualcomm
Sources of Increased CEO
Compensation in 2014
Percent of compensation increases by source
across Russell 3000 companies
1.5%
7.7%
5.6%
114.7%
100%
2013 pay
Increases
in cash
Increases
Increases in
2014 pay
in equity change of pension
Source: ISS, percentages are rounded
and Yahoo — appears to be increasing. “But it’s hard to
quantify that,” he adds.
Binding U.K.-Style Say on Pay?
Bernhard Gilbey, a London-based partner and head
of the tax practice at law firm Squire Patton Boggs, says
boards should keep an eye on whether American regulators will follow the U.K. approach to say on pay on
compensation.
Gilbey makes the commonly held point that the U.S.
is the world leader in a great many corporate governance
practices. On executive remuneration, however, the U.K.
has taken the lead. In the U.S., shareholders get only an
advisory vote on executive comp packages. But in 2013,
the U.K. gave shareholders the right to have two votes.
Every year, shareholders get an advisory vote on last year’s
package, and at least every three years they get a binding
vote on the upcoming pay policy for executive comp.
“Having to put up with a binding policy is pretty unpleasant and wouldn’t appeal to U.S. comp committees,
which want to maintain maximum flexibility,” Gilbey
says. “No boards would want to tie their hands that way;
they’d want to react to market conditions.”
Gilbey calls any new practice that would have U.S.
boards setting CEO comp based upon a formula that’s
preapproved by their investors “almost anathema to
[their] method of operating.” In addition, a U.S. board
would have to constrain itself on how much it would
pay a new CEO. But he says there isn’t a groundswell of
public opinion or calls from the SEC for this yet. g
Comparing Compensation: Trends in Executive Pay www.AgendaWeek.com 9
Flashy Exec Perks Give Way to More Functional Benefits
Perquisites are increasingly being used to monitor execs’ well-being
by Lindsay Frost
P
erquisites that allow executives to be more effective
in their job and aid their health and well-being have
taken the place of more lavish, non-business-related
perks, which shareholders increasingly view as egregious.
But overall, executive perquisites continue to fall in
value, according to an Equilar analysis of S&P 1500 company disclosures, prepared for Agenda.
“It’s ... not the highest-focus area in the grand scheme
of executive compensation relative to other areas, and
[companies are] rightfully more focused on the total
package, more than perquisites,” says John Borneman,
managing director at Semler Brossy, an executive compensation consulting firm. “But that doesn’t mean they
haven’t been under pressure. There’s clearly a trend of a
slow and incremental decline in the frequency of various
perquisites.”
The Equilar data shows that of the 1,395 companies
that filed their 2014 proxies by April 30, 2015, the average amount classed as “all other compensation” dropped
by 12.6%, to $201,028. For the companies with the highest spend in this category, the majority was on tax reimbursements and gross-ups.
Pharmaceutical company Endo International awarded
its CEO, Rajiv de Silva, more than $12 million in tax reimbursements after the company’s acquisition of Paladin.
Fellow pharmaceutical company Perrigo’s CEO, Joseph Papa, was awarded more than $10 million in tax
reimbursements after the company’s acquisition of Elan.
The company wrote in its proxy that the payment “did
not result in a financial gain to the named executive officer and was intended only to place them in the same
position as other equity compensation holders after the
Elan acquisition.”
Neither Endo nor Perrigo lists tax reimbursements as
perquisites under its disclosures; however, other companies view them as being in that category.
Dennis Chookaszian, former CEO and chair of CNA
Insurance and a director at Allscripts Healthcare and
CME Group, says the disappearance of perks has to do
with their taxable nature and the push for better corporate governance.
“There’s been a tremendous shift in the focus of
perks,” he says. “They were used primarily as an attrac-
10 tive way to give executives something of value. But over
time, as the IRS questioned compensation, incentives
were taken out of the perk category. Perquisites have been
in a downward spiral and they are virtually gone.”
CEOs are busier than ever, says Eric Hosken, a partner
with Compensation Advisory Partners. Thus, perquisites have shifted focus from lavish club memberships to
maintaining the well-being of the executive, while allowing them to maximize their work time.
“[Perquisites] tend to be what the company can provide rationale for, like car assistance or an allowance
so the executive doesn’t have to spend time on maintenance, or providing a driver so that the CEO can be
working during their commute,” Hosken adds.
Executive physicals have also increased, Borneman
says. The cost of an executive physical, according to SEC
filings, ranges from $2,000 to $5,000, and they could occur anywhere from monthly to annually.
Dollar Tree CEO Bob Sasser received almost $30,000
in perquisites in 2014, including executive physicals.
“Several companies have mandatory executive physicals. It’s clearly in the interest of the board to have executives be checked out by a doctor on a highly regular
basis,” Borneman adds.
Hay Group senior principal Brian Tobin says these
physicals include an exhaustive battery of tests that
many shareholders view as a “proactive step” to ensure
their CEOs are active, healthy and able to focus purely
on the business.
Companies have differing policies on jet use, a perk
that often raises criticism from shareholders. Many companies reason that personal private jet use is for business
purposes to make travel more efficient for executives.
Many companies with jet perks allow the executive to
have personal use of it as long as they reimburse the company for fuel and other jet-related expenses.
Personal jet use to avoid the hassles of airport security
helps free up time for CEOs to work, says Kristine Bhalla,
principal at ClearBridge Compensation Group.
“Especially when it comes to traveling and working
in different locations, it’s of strong value to not have excess focus elsewhere to help run the business smoother,”
Bhalla adds.
June 8, 2015 Comparing Compensation: Trends in Executive Pay
Food service provider Aramark had the most expensive jet perquisite in 2014. The company disclosed in its
proxy in April that it spent almost $800,000 in jet use for
its CEO, Eric Foss.
Foss’s total perk package in 2014 was $1.1 million,
with the rest including dividends on stocks and a car
allowance. According to the Bloomberg Pay Index, jet
use at companies is up 22% since 2013. The index tracks
the 100 highest-paid executives that appear in regulatory
filings for U.S. company stock exchanges.
“I personally find the executive personal use of an
aircraft offensive,” says Charles Elson, director of the
governance center at the University of Delaware and
director at Bob Evans Farms and HealthSouth. “I think
it’s an ego thing; I find it troubling that they would request that for security.”
Hosken says most companies are trying to manage
the cost of jet use by keeping it within a certain range,
although it is still considered legitimate for security and
productivity reasons.
Security-related perquisites, other than aircraft use,
can extend to bodyguards and expensive home security
systems, and well-known executives that frequently face
the media receive extensive security plans.
Computer technology company Oracle’s CEO, Larry
Ellison, topped the list for most expensive security measures in 2014. His residential security program cost the
company $1.5 million.
“We require these security measures for Oracle’s ben-
Perks Drop as Proportion
Of Overall Pay
Average amount defined as “other compensation”
across S&P 1500 companies
n Median n Average n Percentage of total pay
$250K
5%
$229,987
$201,028
$200K
4%
3.4%
$150K
$100K
2.6%
$66,467
$73,723
$50K
$0K
Source: Equilar
3%
2%
1%
2013
2014
0%
efit because of Ellison’s importance to Oracle, and we
believe these security costs are appropriate and necessary
business expenses,” the company writes in its proxy. “Ellison paid for the initial procurement, installation and
maintenance of the equipment for this system, and we
pay for the annual costs of security personnel.”
CEO of Twitter Richard Costolo received more than
$127,000 in residential security and a protective detail in
2014. ExxonMobil CEO Roy Tillerson’s perquisites in
2014 included more than $77,000 for residential security.
Target’s perquisite policy, according to its proxy,
states that its CEO, Brian Cornell, “is only eligible for
perquisites that support his safety, health and well-being
— reimbursement of home security expenses, on-site
parking, executive physical, on-site exercise room and
personal use of company-owned aircraft for security reasons.” Cornell’s 2014 perquisite expenses totaled more
than $165,000.
Another increasingly common perk — company-paid
tax advisors and financial planning — helps executives
free up time for the business as well, Tobin says.
“In recent years, financial planning [for the executive] has become understood as a best practice. From a
tax-filing perspective, it’s important that [the company’s]
team is up to date on the growing complexity of financial
instruments and changing tax laws,” Tobin adds. “[Companies] don’t want executives focusing on that.”
Despite steps many companies are taking in disclosing
and curtailing perks, there are some that shareholders
still frown upon — including tax gross-ups, club memberships, the matching of charitable donations and private
jet use.
Television programmer Discovery Communications
in early April revealed in its proxy that its general counsel, Bruce Campbell, was reimbursed more than $60,000
in travel expenses and tax gross-ups for his family of six
when the company called him back from a Christmas
vacation for urgent business.
Hosken says the common view of shareholders is that
executives are paid enough so that they don’t necessarily
need perquisites, which has put pressure on companies
to get rid of them.
“Most directors are in the view that companies are not
in the situation of putting in new perquisites, and over
time they are either going to completely go away or companies are routinely asked to provide justification on why
they provide the perks they have,” Hosken says.
“It’s not where a lot of the action on executive compensation is.” g
Comparing Compensation: Trends in Executive Pay www.AgendaWeek.com 11
Pension continued from page 3
Say on Pay continued from page 5
Steve Seelig, senior compensation consultant at Towers Watson, says this increase in pension values is not an
unusual occurrence when interest rates are fluctuating.
He recommends that comp committees mention the
change in pension value prominently at the beginning
of the compensation discussion and analysis section of
the proxy, so that there is no question for readers over
what is driving what appears to be a large change in
executive compensation.
According to Equilar’s data, Prudential Financial experienced the largest increased pension value in the S&P
1500, recording a $20.34 million change in pension value
in 2014. This pushed CEO John Strangfeld’s total compensation up to $37.5 million in 2014, compared with
$16.7 million in 2013 and $30.7 million in 2012. Strangfeld also had a large pension increase in 2012, amounting
to $15.6 million.
The company highlighted the increase in the executive summary of its proxy statement, explaining that
pension accruals are determined by a formula and do
not involve a board decision.
“For the CEO, roughly half the 2014 increase in pension value is a result of the plan benefit formula, and
half is driven by changes in actuarial assumptions, primarily updated longevity (or mortality) estimates as well
as use of lower interest rates to value the plan liability,”
Prudential’s proxy states. “For next year, we expect the
change in the benefit amount accrued to Strangfeld to be
substantially lower.” g
president of AMN Healthcare Services. Shaw retired at
the 2014 annual meeting.
On June 1, the board announced it had approved a
proxy-access bylaw amendment, which will take effect
immediately if shareholders approve it at the 2015 annual meeting.
For its efforts, McKesson received investor support of
95% in 2014. McKesson has also been named as a finalist
in the NYSE’s 2015 Governance, Risk and Compliance
Leadership awards for its shareholder engagement efforts.
Cecil says the company continues to invest in engagement. “There’s no pulling back,” Cecil says. “In fact,
we’re building on the program from 2014.”
Pryce-Jones says continued efforts are warranted. ISS
also noted in its 2014 report that “distinctively high executive compensation levels remain” and “close monitoring of the new pay program is advised.”
Indeed, Pryce-Jones says the board should work to
further link the company’s no-action process with its
shareholder engagement so that lawyers don’t attempt
to obtain no-action relief while the board is engaging
with investors. He’s also still concerned about succession
planning in the absence of an independent chair, and the
pension benefit — even with the reduction — because it
represents a board that “took its eye off the ball.”
“McKesson has traveled a great distance,” he says,
“but they still have more road to travel here in reforming
their governance. The vote in 2013 was a wake-up call,
and we’re still seeing where this is taking this board.” g
TSR continued from page 7
Koplovitz says 10% to 20% of the performance incentive should be driven by non-financial metrics. These
might include customer perception of the company’s
brand, as well as diversity and environmental goals, depending on the direction the company wants to move.
That nuance is important, suggest veteran directors
Koplovitz and Kollat. After all, performance metrics are
designed to influence the behavior of executives toward
larger business goals. It’s up to the board to determine
how performance metrics shape that behavior and what
those larger goals should be.
“The kind of performance metrics that you use should
be geared or tailored to the specific business in question,
and the strategy of the business, and the circumstances
at that point in time,” Kollat says. g
says. “But I would say the imagination of consultants and
lawyers at thinking up new ways to present data and compensation to managers is pretty much without limitation.”
Meanwhile, a number of experts say they expect to
see an increase in qualitative performance metrics in
coming years.
Yermack anticipates growth in performance metrics
tied to sustainability and social issues like the treatment
of labor, while Pakela is seeing an increase in strategic
metrics, such as whether a certain plant was built, an
initiative was completed or a business unit was successfully reorganized. According to Pakela, these are typically
short-term-focused.
Comparing Compensation: Trends in Executive Pay www.AgendaWeek.com 12