New Analysis: Pay Homogenization May Be An Unintended Consequence of Say on Pay

June 27, 2013

Heightened scrutiny of executive compensation by investors and proxy advisory firms combined with a mandatory say on pay vote may be leading to a "one size fits all" approach to executive pay that may not be ideal for many companies, according to a new piece by Pay Governance managing director, Ira Kay.  The piece spotlights several aspects of pay design that are increasingly coverging, such as:

  • Peer groups
  • Annual incentive metrics (pressure to use at least two metrics)
  • Long-term incentive metrics (pressure to use relative total shareholder return
  • Stock options (pressure to reduce or eliminate entirely)

The piece points out the potential problems resulting from increased homogenzation of pay programs, noting that "to minimize the potential for a negative Say on Pay vote outcome, many companies are changing their pay practices based more on potential external views than business/talent needs," which may lead companies to make changes that are not aligned with business strategy, increase incentive plan complexity, and may be less cost-effective.  The piece also highlights a new and potentially troubling trend toward companies considering granting long-term incentive awards at the end of the performance period rather than the first quarter of the year, in order to match the performance period by which ISS judges them in its quantitative pay for performance analysis.  However, the paper cautions, the decision to make such a change should not be taken lightly and companies would need to consider carefully how to make the transition, along with how to incorporate the current year's performance into grant decisions.  The paper's discussion of the growing use of TSR of an incentive metric is particularly worth reading, and discusses a number of negative factors companies should consider when considering adopting TSR.  As with all aspects of executive pay, the committee should design long-term incentives in a way that best achieves business strategy, not solely to placate ISS or other external stakeholders.