Executive compensation under the microscope

By: Steve Levine, Esq., Senior Vice President, Alliant

Executive compensation (including pay ratios of executives to employees and outcome-based compensation), non-employee director compensation and the gender pay gap continue to be hot buttons for liability according to a recent article in the Harvard Business Review and a survey of investor and non-investor corporate constituents conducted by Institutional Shareholder Services (“ISS”).

According to the Harvard Business Review, U.S. CEO’s earned 335 times the pay of the average worker in 2015. Such a high pay ration is arguably unfair and indicates the CEO is being disproportionately rewarded at the expense of other workers.

According to the ISS survey, 87% of investor respondents confirmed their organization supported the use of outcome-based measures, such as “realizable pay” (in the event of outstanding corporate performance), as part of a quantitative pay-for-performance evaluation. Only 54% of non-investor respondents supported such a measure.

Since 2012, non-employee director pay has risen from an average of $228,000 in 2012 to $260,000 in 2016.With respect to non-employee director pay, recent shareholder lawsuits have been filed which allege excessive non-employee director pay, calling into question issues a potential pattern of excessive compensation creating doubts about director independence. According to the survey, both investor and non-investor respondents prioritized excessive perquisites (direct personal benefits) as the single most important factor in considering whether a non-employee director pay program presents a governance concern. Investor respondents placed performance equity awards (2nd) and stock option grants (3rd) as the next most important factor. For the non-investor respondents, retirement programs (2nd) and performance equity awards (3rd) were next most important factors.

In regard to gender pay gap issues, 60% of investor respondents confirmed in their view, companies should be disclosing gender pay gap information. A relatively modest 17% of non-investor respondents shared such a view. ISS is the largest proxy advisory firm with over 1700 clients worldwide. ISS is a major player in executive compensation and corporate governance policy, providing both proxy advisory research and voting recommendations.