Realizable and Realized Pay: A new world order - Hay … and realized pay.pdfRealizable and Realized...
Transcript of Realizable and Realized Pay: A new world order - Hay … and realized pay.pdfRealizable and Realized...
MATTHEW KLEGER AND TONY WU
Realizable and Realized Pay:
A new world order
APRIL 29, 2013
2© 2013 Hay Group. All Rights Reserved
Agenda
Introduction: Why is this important?
Optimizing disclosure: What are the considerations?
What’s on the horizon: What to expect in 2013
Q&A
1
2
3
4
Presenters
Matthew Kleger, CPA, CECP
Hay Group, Philadelphia
Senior Consultant, Executive Compensation
Office: 215.861.2341
Email: [email protected]
and
Tony Wu
Hay Group, Metro New York
Consultant, Executive Compensation
Office: 201.557.8431
Email: [email protected]
5© 2013 Hay Group. All Rights Reserved
About Hay Group
85Offices in 48
countries
2600Employees
worldwide
9000International clients
Hay Group consults with
9,000 clients worldwide in a
wide variety of areas,
including:
Organizational
effectiveness
Managerial and
executive assessment
Compensation
and benefits
Performance
management
Executive remuneration
and corporate governance
Employee and customer
attitude research
WE HELP ORGANIZATIONS WORK
6© 2013 Hay Group. All Rights Reserved
Introduction
Driven by the advent of “Say on Pay”, corporate issuers, investors (shareholders) and
proxy advisory firms are trying to answer the following key questions:
WHY ARE WE TALKING ABOUT REALIZABLE / REALIZED PAY DISCLOSURES TODAY?
PAY-FOR-
PERFORMANCE
LINKAGE?
Support compensation philosophy?
What is pay?
Support business strategy?
Shareholder
communication?
Does the pay program and design support the
philosophy and pay levels / mix?
Does the pay program align / support the
business strategy?
How do we disclose in
the proxy statement?
How do we define pay if
not SCT?
7© 2013 Hay Group. All Rights Reserved
Introduction
Focus on pay-for-performance becoming more acute
Companies are starting to change the way they speak to their shareholders about it
Realizable / realized pay is an alternative to the SEC disclosure rules
Counterpoint to ISS’ pay-for-performance methodology
A realizable / realized pay analysis is a “snapshot” of estimated actual / potential pay
delivery over a select time horizon (not accounted for in the SCT)
Attempts to measure the value of the largest pay element over the selected time
horizon
WHY USE REALIZABLE / REALIZED PAY DISCLOSURES?
So what’s the problem?...misalignment between performance period
(TSR) and the amount of compensation which will actually be delivered at
a future point in time!
8© 2013 Hay Group. All Rights Reserved
Introduction
WHO WILL UTILIZE REALIZABLE / REALIZED PAY DISCLOSURES?
Utilization of
realizable /
realized pay?
Shareholders
Proxy Advisory Firms
(ISS, Glass Lewis, etc.)
9© 2013 Hay Group. All Rights Reserved
Introduction
CalSTRS is one of the largest and most influential pension funds, and very progressive
on this issue
CALSTRS POSITION ON REALIZABLE / REALIZED PAY
In the future, CalSTRS hopes we will see more companies include additional
tables which describe pay that was actually realized by the executives in an
effort to demonstrate a better alignment. In the end, you can’t take Black-
Scholes to the bank. As a long-term shareholder, reviewing thousands of
proxies each year, we believe it is important for issuers to provide data that is
easily understood by shareholders and can be compared across companies and
industries. CalSTRS believes there is an opportunity for the marketplace,
issuers and shareholders, to work together in the development of a realized pay
model. After all, without standardized models and calculations these types of
figures would only add complexity to what is already a very cumbersome
process.”
Excerpted from CalSTRS’ white paper - “Lessons Learned: The Inaugural Year of say-on-pay”, emphasis added
10© 2013 Hay Group. All Rights Reserved
Introduction
According to the 2012 Hay Group / Wall Street Journal CEO Compensation Study,
almost 15% of companies provided some form of realizable / realized pay disclosure,
up from almost none in 2010
Some of these companies include:
COMPANIES CURRENTLY USING REALIZABLE/REALIZED PAY DISCLOSURES
12© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
Plenty of disclosure flexibility today
What tells the most effective story to
shareholders?
Guidance being delivered from all relevant
parties potentially creating more confusion and
approaches
Proxy advisors (i.e., ISS, Glass Lewis)
Compensation consultants
Internal HR
PRESENT FLEXIBILITY
Proxy Advisors
Hint of a standard may emerge at the
conclusion of the 2013 proxy season
At this time, there is no “right” answer
– the right answer for some companies
may be non-disclosure
But, for those companies brave enough to
disclose, a series of decisions await…
13© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
The definition of “pay” continues to be a widely debated topic
SCT values was considered the most widely recognized and accepted definition of “pay”
– and it still is, but…purely theoretical in nature and not ideal for pay-for-performance
MARKET GUIDANCE
Base SalaryAnnual
Incentives
Grant Date Fair Value of Long-
Term Incentives
Total Direct
Compensation
A disconnect is evident in the LTI
portion – the largest and most
critical portion of pay!
Realizable / realized pay attempts to redefine and revalue the LTI piece to better
reflect and convey what is earned or could be earned based on current / actual
performance
14© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
Some early guidance from the experts…
MARKET GUIDANCE CONT’D
ISS Compensation Consultants Public Companies
Cash Compensation
Base Salary Base Salary Base Salary
Annual Incentives Annual Incentives Annual Incentives
Long-Term Incentives (for awards granted during the measurement period)
Time-Vested Full-Value Awards
Current value of outstanding
awards
Time-Vested Full-Value Awards
Current value of outstanding
awards
Time-Vested Full-Value Awards
Current value of outstanding
awards
Stock Options
Gains realized on options
exercised
BS value of outstanding options
Stock Options
ITMV of outstanding options
BS value of outstanding options
Stock Options
ITMV of outstanding options
BS value of outstanding options
Gains realized on options
exercised
Performance-Based Awards
Current value of earned awards;
and
Current value of outstanding
awards at target
Performance-Based Awards
Current value of outstanding
awards at target
Performance-Based Awards
Current value of outstanding
awards at target
Current value of expected awards
earned
Current value of pro-rata
outstanding awards at target
Ge
ne
ral A
gre
em
en
tV
ary
ing
Op
inio
ns
15© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
External guidance is helpful (but also causes confusion)…but before you begin to craft a
disclosure, let’s ask ourselves the following:
Does a realizable / realized pay disclosure make sense? For the company? For
shareholders?
If yes, then consider the following primary inputs:
Absolute vs. relative
Measurement period
Performance context
Comparison to SCT / GDFV
Pay elements
Additional consideration may be given to select inputs as certain challenges / pitfalls
exist based on decisions made
IS NOW THE RIGHT TIME?
16© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
Additional consideration should be given to other factors that may impact the validity of
the initial pay-for-performance results
DISCLOSURE CONSIDERATIONS
Primary Inputs Overview Additional Considerations
Absolute vs. Relative Measuring realizable / realized pay
against yourself or against proxy peers
Relative disclosure may require intensive analyses
Lag in reporting of peer pay data prevents a
“current” disclosure
Measurement Period 1-, 3-, or 5-year period – a period that
reflects a “longer-term” outlook may be
appropriate
A measurement period that aligns with the
company’s business strategy may be considered
Consider alternative ending periods / dates for
TSR calculations
Performance Context Inclusion of TSR at a minimum or
performance implied by realizable /
realized pay levels relative to SCT / GDFV
Broadening the performance context may provide
a “fuller” performance picture as operational and
strategic performance may not always show up in
stock price performance
Comparison to SCT /
GDFV
Comparison of realizable / realized to
SCT / GDFV pay would be consistent with
ISS’s approach
Usually included if electing to disclose a more
“basic” disclosure
Pay Elements A more comprehensive pay disclosure or
isolation of LTI
Adjustments to LTI may be made to ensure a
balanced approach
Valuation?
Grant timing?
17© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
EVOLVING DISCLOSURES – ACM
2011 Approach Highlights:
4-year absolute comparison to
GDFV
Includes TDC and LTI
Includes stock price
performance
Equity valuation based on each
fiscal year’s closing share price
Hybrid approach to valuing
performance-based equity
(earned and at target)
Realizable pay also examined
vs. EBITDA and EPS
performance
Initial realizable pay disclosure
exhibits absolute TDC and LTI
over a 4-year period
18© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
EVOLVING DISCLOSURES – ACM CONT’D
In 2012, ACM transitions to an absolute 3-year look and isolates LTI
2012 Approach Highlights:
3-year absolute
comparison to GDFV
Isolation of LTI
Equity valuation based
on FYE12 closing share
price
Performance-based
equity valued at expected
payout as a percentage
of target (1st cycle) and at
target (remaining cycles)
19© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
EVOLVING DISCLOSURES – AES
AES employs a more straightforward disclosure comparing realizable pay to GDFV of
award granted over the last three years
2012 Approach
Highlights:
3-year absolute
comparison to GDFV
All NEOs
Isolation of LTI
Equity valuation based
on FYE12 closing
share price
Performance-based
equity valuation
reflects the expected
performance outcome
20© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
EVOLVING DISCLOSURES – SYMC
Symantec elects a realizable / realized hybrid as its initial disclosure
2012 Approach Highlights:
3-year absolute comparison to
GDFV
Includes all elements of TDC
Earned cash-LTIP
Equity valuation based on
FYE12 closing share price
and vesting date share price
Performance-based equity
valuation reflects the expected
performance outcome
21© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
Additional examples of first-time and repeat disclosures by early filers are provided
below for reference…
EVOLVING DISCLOSURES
New Disclosures Repeat Disclosures Type Highlights
Air Products RealizableSensitivity of absolute realizable pay based on
varying TSR scenarios compared to GDFV
Archer-Daniels-
MidlandRealizable
5-year absolute realizable pay compared to
GDFV with SP performance
Deere Realizable3-year realizable pay and TSR relative to proxy
peer group. Revised valuation of PSUs in 2012
Johnson Controls Realizable3-year realizable pay and TSR relative to proxy
peer group
Pantry, Inc Realized
Transition from 1- and 3-year realized vs target
pay graphical disclosure to 1-year realized pay
vs. target tabular disclosure
Supervalu Realized 3-year absolute realized pay compared to GDFV
22© 2013 Hay Group. All Rights Reserved
Optimizing disclosure
A realizable / realized pay disclosure may not always be a great companion to the
CD&A…
Consider the quality of the message delivered to shareholders – what are we really
trying to prove? Don’t just do it because ISS is doing it
Depending on the type of disclosure, may require time-intensive calculations
Do we want to add to an already lengthy CD&A? No regulatory requirement of such
disclosure at this time
Once you start, you likely can’t stop
DISCLOSURE CHALLENGES
While a realizable / realized pay disclosure will likely become the norm
within the next two years, public companies today have more than one
opportunity to get it “right” and continue to learn from each other to set
the market standard
24© 2013 Hay Group. All Rights Reserved
What’s on the horizon
We expect to see continuing trend, interest and discussion, and potential
legislation on this topic:
Continued momentum
Realizable / realized pay will gain further prominence in the Board room
Jumping on the band-wagon
Institutional shareholders and proxy advisory firms have already begun to consider
realizable / realized pay to determine SOP vote recommendations
Regulatory involvement
SEC to provide clarity on disclosures – a requirement under Dodd-Frank?
Uniformity of disclosures to emerge
This proxy season or next?
Lengthier CD&As
Realizable / realized pay disclosures will expand on an already extensive CD&A
WHAT TO EXPECT IN 2013
25© 2013 Hay Group. All Rights Reserved
What’s on the horizon
HOW SHOULD COMPANIES BE PREPARING FOR 2014?
1. Assess the need for realizable / realized pay disclosure
SOP issues?
Current or historical pay-for-performance concerns?
2. Educate the Board and compensation committee
Current market trends
Company pay program designs and potential risk exposure
3. Establish process for evaluating alternative pay-for-performance definitions
Partner with compensation consultants, counsel, and investor relations
Gather data inputs
4. Test alternative pay definitions to examine impact of varying inputs
Which approach conveys the “right” message and is defensible from a shareholder
and proxy advisor perspective
27© 2013 Hay Group. All Rights Reserved
Q&A
QUESTIONS
Matthew Kleger, CPA, CECP
Office: 215.861.2341
Email: [email protected]
Tony Wu
Office: 201.557.8431
Email: [email protected]