But one influential compensation-advisory group, Pearl Meyer, believes that boards can maintain their bearings amid this difficult environment by “align[ing] compensation with their business and leadership strategy” and by striking “the appropriate balance between the immediate need to respond to regulatory pressures, the looming proxy season, and the longer-term initiatives that can create a strategic link between compensation programs and business outcomes.”
To help out board members, Pearl Meyer has come up with 5 compensation priorities for 2016.
- Put “total shareholder return” in its proper context. Measuring “TSR” is the best way to understand long-term value creation, Pearl Meyer said, but it may not be the best incentive-plan metric. It should be used as an alignment tool and an indicator of value creation over the long run but not as an incentive. Instead, design incentives to directly reflect business objectives and long-term strategy. Compensation committees can introduce other financial metrics that are closely related to historic TSR performance.
- Link compensation strategy to leadership strategy. Directors can get caught in the trap of designing comp programs for external consumption rather than for their people or business strategy, the firm said. Look at compensation strategy as an engagement tool within the context of an organization’s unique cultural and leadership capabilities.
- Use equity to combat short-termism. It provides a direct link between executive and shareholder interests, Pearl Meyer notes, and it is a forward-looking assessment of firm performance. This should prompt compensation committees to consider a reframing of vesting, holding, and the appropriate treatment of equity upon the departure of executives, especially at retirement, which among other things aligns late-career management decisions with compensation.
- Don’t let time run out. Model new disclosure requirements now. Last year brought a wave of SEC disclosure rules that, while not imminent, will creep up on directors very quickly. Now is the time to start planning not only for filings per se, but also for a communications strategy around how the board will deal with the new issues of CEO pay ratio requirements, clawback policies, and pay-versus-performance programs.
- Think hard about director compensation. Most boards spend too little time thinking about how to pay themselves. The landscape has been shifting, putting more external pressure on boards to defend their role in governing their organizations and delivering value to stakeholders. Among the new wrinkles is one that greater shareholder activism has brought, known as “golden leashes” that are proposed as a way to incentivize selected candidates to run for a company’s board on a dissident slate.