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Executive Compensation

The “Buy-Side” View on CEO Pay – from Rivel CGIC and Stanford GSB

The “Buy Side” View on CEO Pay – Stanford Closer Look Series

By David F. Larcker, Brendan Sheehan, and Brian Tayan
September 1, 2016


Executive compensation is a highly controversial topic. Seventy percent of Americans believe that CEO compensation among large publicly traded corporations is a problem. Twenty-five percent of directors believe that CEOs do not receive the correct level of pay based on the expected value of awards when they are granted; and 30 percent of directors believe that CEOs do not receive the correct level of pay based on what they actually realize when those awards vest. Journalists, governance commentators, and proxy advisory firms also criticize pay levels and practices.

Editorialists at The Economist call executive compensation “neither rigged nor fair,” arguing that while pay is a function of market forces, those forces are not efficient in setting pay levels relative to
managerial value creation and average worker pay. The head of a university corporate governance center believes that there is a “bias toward escalating pay each year, which … further decouples pay from performance.” Proxy advisory firms Institutional Shareholder Services and Glass Lewis routinely recommend that shareholders vote against the proposed compensation plans of large U.S. companies as part of the annual “say on pay” voting process.

The “Buy Side” View on CEO Pay – Full Article

Linking Pay To Performance

Linking Pay to Performance: What Do Investors Look For?

Good news: 48% of proxy voters interviewed state that Executive Compensation practices have improved in recent years.

Well, it’s crystal clear and of no surprise to anyone. Proxy voters believe that management pay should be linked to company performance. It’s the single most important criterion on which compensation packages are judged. However, although this is not news to companies, it is concerning that only 25% of investors say companies usually do an adequate job of this. Most believe the major shortcoming is a perceived lack of downside risk being attached to management pay packages.

Exec Comp Blog Post 8-29-16 2

Critically, the pay‐for‐performance link matters most when the metrics used are those over which management a) has control and b) cannot easily manipulate.

  • Stock price does not pass the test
  • Earnings per share does not pass the test
  • Total shareholder return comes closer but still does not quite pass the test

The king of financial performance metrics?  Return on invested capital; it stands heads and shoulders above any other financial performance metric, highly rated by 77% of respondents.

Tying compensation to capital allocation strategy (disclosing unique goals and progress in achieving them) is also valued very highly by investors (by 63%).

The three latest studies on the perceptions and expectations of Executive Compensation of North American proxy voters and investment professionals are available in full to all members of the Corporate Governance Intelligence Council:

  • Hallmarks of Superb C-Suite Compensation
  • Linking Pay to Performance
  • Board Oversight & Incentives

Latest Proxy Voter Study Released to Corporate Governance Intelligence Council Members

The latest CGIC study on the perceptions and expectations of proxy voters has been released to Council members.

Hallmarks of Superb C-Suite Compensation: What Do Proxy Voters Look For?

Overall, proxy voters believe executive compensation practices are improving – perhaps reflecting changes spurred by shareholder activism:

  • 48% believe these practices have gotten better versus 15% who see a decline
  • The remainder perceive no change or are uncertain

Capture New

According to proxy voters, equity should not make up a majority of an executive’s pay package, although most expect it will comprise a greater percentage than base salary and cash bonus.

For more information on the study, please contact David Bobker.

New CGIC Proxy Voter Study Coming Soon

The first of our latest three-part CGIC proxy voter study is due to be released later this month for CGIC members – Hallmarks of Superb C-Suite Compensation: What Do Proxy Voters Look For?

“Too lucrative. They are too lucrative and too easy. They are not based on the right metrics. They go through the whole formula, and then they say, ‘You didn’t earn it, but you worked hard so we’ll give it to you anyway.’ There are so many aspects that push me across the line where I can’t support it at all.” – comments from North American proxy voter when discussing reasons for not supporting management