Robin Ferracone, CEO of Farient Advisors, says companies should work to get out in front of compensation issues
When it comes to executive compensation disclosures, there are three major issues of concern for public companies: pay-for-performance disclosure, clawback policies and CEO-to-median-employee pay ratio. Robin Ferracone, CEO of compensation consulting firm Farient Advisors, says companies should continue working to get out in front of these compensation issues, particularly as she fully expects the SEC to issue draft rules on pay-for-performance disclosure in 2014.
According to Ferracone, research conducted by Farient Advisors shows most companies are already working some information about these compensation issues into their proxy statements. ‘The vast majority of companies have pre-empted clawbacks and have put some kind of clawback in place,’ she says, estimating that ‘at least three quarters of the companies out there’ have done so.
Regarding pay-for-performance discussion in proxy statements, Ferracone says: ‘Some companies are addressing it very directly, taking a stab at trying to define realizable compensation and trying to say how it is linked to performance. They are taking a stab at pre-empting [the rules].’
When it comes to CEO-to-median-employee pay ratio disclosure, however, Ferracone says the vast uncertainty about how to calculate the ratio and the fact that companies won’t have to actually comply with the rule until 2016 at the earliest has led most companies to leave discussion about it out of their proxy statements for now. ‘That one seems so remote people aren’t even touching it,’ she says.
For 2014, she predicts the SEC will release draft rules on pay for performance, but will likely not issue rules on clawbacks or CEO-to-median-employee pay ratio disclosure.
‘I fully expect the SEC to come out with draft rules [on pay for performance] this year and that’s going to be a big deal,’ she expands. ‘One thing investors look at is pay-for-performance alignment, and it’s the strongest predictor of the say-on-pay vote. How those rules are written and how much latitude companies have in defining pay for performance is going to be a big deal. I think, at minimum, until those rules come out, we will continue to see an increase in some kind of pay-for-performance discussion in the proxies with companies trying to pre-empt the rules a little bit and get out in front of them.’
Ferracone says it’s less likely rules for clawbacks will be handed down in 2014 because there are so many more details that have to be worked out in order to make them suitable for all companies. Determining how companies should define when they would need to claw back and how much are just a few of the obstacles.
For CEO-to-median-employee pay disclosure, Ferracone predicts: ‘We are going to get very little discussion around it because it is so uncertain. The SEC got a lot of commentary around it in its comment period and what it does with that and when the next round of rules comes out is uncertain.’
Additionally, as disclosures wouldn’t need to go into proxies until 2016, she says: ‘In 2015 we will begin to see companies starting to socialize the topic among their investors, possibly publicly in the proxies…. It will be very interesting to watch.’
