WCD's Thought Leadership Council disagrees with retention pay and other findings in recent Mercer report
Executive pay continues to dominate corporate governance conversations. It is at the top of the agenda of the WomenCorporateDirectors’ newly formed Thought Leadership Council, which just released its report, Going beyond best practices: The role of the board in effectively motivating and rewarding executives.
The TLC teamed with executive pay consulting firm Pearl Meyer & Partners to pull insights and recommendations from leading directors and corporate governance experts to examine what’s working and what isn’t in executive compensation strategy.
‘It is the responsibility of the board to determine executive compensation in a manner that supports business strategy. As a consequence, compensation program designs will shift from one-size-fits-all to differentiated programs that support those different strategies,’ says Susan Stemper, a managing director of Pearl Meyer & Partners and a member of TLC. Over time, executive pay will be more closely aligned to the business strategy and performance, she adds.
Executive compensation has been improved through understanding and incorporating shareholder and public concerns, says Stemper. However, while public perception and disclosure are important,  ‘committees should consider business objectives in making those decisions and then integrate into the process how to appropriately communicate their decisions.’
Rather than build up short-term stock price appreciation to win additional proxy votes, executive pay programs should balance short- and long-term performance measures to ensure the company achieves its strategy while serving long-term investors, she adds.
Among the recommendations in the TLC report is that boards not base compensation decisions solely on competitive market data, which ignores critical factors such as individual performance and variations between companies in actual job duties for people with the same title. TLC recommends that boards ‘target the position, pay the person.’
Yet, Mercer’s recently released annual executive compensation study found that companies are trying much harder to align their pay plans with proxy advisors’ views, which are heavily based on data derived from summary compensation tables and proxy advisors’ own determination of a company’s appropriate industry peer group.
Stemper sees several pitfalls in trying to cater to proxy advisory firms. ‘Directors have a significantly deeper understanding than the proxy advisory firms about the strategic direction, needs and objectives of the companies they serve,’ she says. ‘Proxy advisory firms change their views, often after companies’ compensation plans are in place. It’s impractical for companies to anticipate changes in proxy advisory firms’ views.’
TLC notes  skepticism among shareholders and other stakeholders regarding the need for retention pay, especially when the economy is stagnant. TLC  argues retention is worth paying for because unwanted turnover in the senior ranks is costly to organizations.
Companies appear to be listening to shareholders, however, according to Mercer’s findings. The answer, says Stemper, is selective retention. ‘In the right circumstances, retention is a legitimate strategic objective for a compensation program.’
As for whether boards should use metrics that more accurately reflect senior executives’ actual contributions to company value, Janice Koors, a managing director at Pearl Meyer & Partners and a TLC member, says, ‘All businesses are subject to external forces – both positive and negative. One of the reasons we support the judicious use of discretion is to encourage directors to use their judgment when the pre-determined metrics produce results that don’t reflect the true performance of the company and its executives.’
As board gender diversity increases, might there be different approaches to calculating executive pay? Davia Temin, CEO of Temin and Company and a TLC board member, is hopeful. ‘One of the biggest benefits of having diverse voices on boards is adding new ideas to the mix. New voices can bring new solutions to long-standing governance challenges such as executive pay, instead of just applying conventional wisdom,’ she says. ‘Many women members of the TLC have courageous new takes on these issues – this is what governance today really needs, and where women on boards can add ever more value.’
