6 Tips for Selling Your Comp Plan to Investors
With proxy season upon us, board compensation committees find themselves having to defend the exec pay choices they made over the past year, and prove that they’re really “paying for performance.” Too bad so many boards and companies do such a poor job of telling this comp story. What are some of the biggest boners CEOs commit when selling your exec pay plans — and how do you avoid them?
March 17 2014 by Ralph Ward
For starters, some of the tools U.S. corporations are required to use in explaining pay to investors cast shadows rather than light. “The proxy statement is a bit of an apples and oranges comparison,” observes Eric Hosken, a partner with Compensation Advisory Partners. In particular, the Summary Compensation Table (SCT) and the Grants of Plan Based Awards table (GPBA) can obscure things. Such disclosures distort the pay received by execs, jumbling together bonuses, options, performance shares and restricted stock grants in ways that make long-term potential look like short-term payouts. “Work with your comp consultant to come up with the best way to present your pay story,” advises Hosken. Second, do you want comparisons based on the summary compensation table, or your target pay program? Also, “think through what time period you want to look at, and whether you’ll be comfortable with it in future years.”
“Realized” and “realizable” pay disclosure are the hottest concepts in comp disclosure today, but also controversial. While boards complain that standard comp disclosures give investors a false picture, some activists and regulators say that standards for defining realized/realizable pay are still too loose. Both “realized” and “realizable” pay look at comp values several years down the road, primarily salary and bonus. The difference shows in their treatment of equity awards. Realized comp shows actual pay received upon vesting and exercise. “Realized pay has more sensitivity,” says Hosken, “It’s more volatile, and could go way up in a given year.”
Further, these two pay definitions, while similar, differ enough to each paint a varying (and sometimes negative) comp picture. CA Partners looked at 2013 disclosures, and found that 9% of Fortune 500 companies disclosed realized pay, 7% realizable, and 1% offered both. This disclosure trend is upward, too – an Equilar survey finds that, among the top 100 US companies, 35 discussed realized/realizable pay in 2013, versus just 9 in 2009.
Realizable pay uses the same base elements, but presents the value of the equity based on actual stock performance at a set future date. “Realizable pay is less volatile,” notes Hosken. “If your measures include Total Shareholder Return (TSR), you’ll see realizable pay align more with stock price movement.”
Each of these measures have their plusses and minuses. New CEOs, for instance, will have summary pay table figures that outstrip their realized pay for a number of years. Thus, the wise comp committee will work with its pay consultant to gauge the optics of its exec pay plan under each of these formulae.
Disclose as much as required, but avoid overdisclosing to try selling a particular pay story. Make sure that your pay plans can withstand scrutiny by playing the devil’s advocate role that directors are supposed to take on. And on a related note, if you find yourself having to busily juggle the numbers to make the CEO’s pay look palatable… maybe that’s a sign your comp plan isn’t as effective as it should be.
Ralph Ward (www.boardroominsider.com) is the author of “Boardroom Q&A,” The New Boardroom Leaders,” “Saving the Corporate Board,” Improving the Corporate Board,” and “The 21st Century Corporate Board.” He also publishes Ralph Ward’s Boardroom Insider, a monthly newsletter for directors, CEOs, those who work with corporate and nonprofit boards. He can be followed on Twitter at