There were nearly as many ideas on how directors would make a single change in their company's executive compensation programs as there were respondents to our annual compensation survey — which illustrates the real difficulty for boards in addressing this key and very public issue. Is there any one correct approach?
A few key themes did emerge in the comments offered by directors. The first is a love/hate relationship with the use of peer group metrics.
There are directors who want to “tie performance more closely with peers — however hard it is to establish a list of those peers.” And then there are directors who want to “make compensation less focused on peer group comparisons.”
“There's really a question of whether our peer group is relevant for comparison purposes,” added another director.
The second theme to emerge from this year's survey is a desire to make cash compensation a lower factor in determining overall annual pay. Many of our director respondents touched on this: “We need to reduce the percentage of cash compensation in our plans, and focus more on long-term value creation,” noted a director.
But even so, many directors want a strong link to real annual profit performance, with EBITDA being noted as the primary method a company should use to determine if pay levels are aligned with performance.
However, one director cautioned that the company's budgets shouldn't be factored in to this: “I want to completely eliminate any linkage to budgeted profit goals because the board is at a distinct disadvantage when assessing whether budgeted goals are sufficiently aggressive.”
As has been the case with our past two compensation surveys, directors seem more focused on refinements to executive compensation plans as opposed to advocating wholesale changes in these plans. The bull market, and increased share prices, seems to have lessened pressure on compensation committees.
But challenges remain: “We need to get our shareholders to be more thoughtful in judging executive compensation, and to stop blindly following ISS's indefensible approaches to
compensation,” a director commented.