WorldatWork Total Rewards 2016 Conference Roundup
Equity Methods is a proud sponsor of the WorldatWork Total Rewards 2016 Conference, hosted this year in San Diego from June 6 to 8. We had the good pleasure of presenting in four sessions and hearing from some outstanding professionals in the field. Below are the highlights we’re walking away with.
This year’s conference theme was impact, which is different from change. Change is always happening. Impact is transformative, fast, and highly meaningful. Ann Rudy, WorldatWork’s CEO, challenged compensation professionals to look for ways to take their organizational impact to a higher level. For example:
- Build programs that drive talent
- Structure reward packages wisely; what you reward shows what you value
- Be a storyteller—always explain the story that emerges from the data you gather
Among compensation committees, impact is more important than ever. Committees continue to take say on pay very seriously, but more than ever they want to also make sure that equity awards drive the right incentives and behaviors.
The Proxy of 2020
I took part in a discussion about how the proxy will evolve. The consensus was that in four years, we’ll see more of the following:
- Density. The proxy continues to balloon in size, jeopardizing its readability and usefulness.
- Riskiness. New Dodd-Frank disclosures (CEO pay ratio and pay vs. performance) will be filed, and not just furnished, with the SEC.
- Visualization. To combat density, we expect that companies will develop better visuals and graphics that deliver more digestible insight.
- Award design pressure. The regulatory tailwinds support continued adoption of TSR awards, though we expect many companies to resist and dedicate proxy real estate to defending alternative designs that they feel are more appropriate.
- Supplemental disclosures. More than ever, the proxy needs to articulate your firm’s unique story for granting what you are. Supplemental disclosures that go beyond the required cookie-cutter tables may be one way of doing that.
You can read more about our predictions here.
Breaking Up is Hard to Do: Executive Compensation Implications of Spinoffs
Robin Colman (eBay), Tom Ezrin (PayPal), and John England (Pay Governance) provided a case study of eBay’s 2015 spinoff of PayPal. The change in corporate control created a number of compensation issues.
Issue: Some executives at eBay were “in waiting” for various roles inside the two new companies.
Resolution: Explore market ranges of pay for PayPal’s senior leadership using estimates of what PayPal’s size would be.
Issue: Employees held equity that needed to be converted.
Resolution: Implement the shareholder conversion approach for vested equity and the employment approach for unvested equity.
Issue: PayPal needed a compensation plan for its employees.
Resolution: Launch PayPal with basically the same benefits and compensation programs as at eBay (“clone-and-go”), with the expectation that PayPal would make changes after completing the transaction.
Issue: The transaction could result in the voluntary departure of experienced executives that eBay did not want to lose.
Resolution: Establish a Transition Success and Retention Program (TSRP) to encourage key personnel to stay.
Issue: eBay was concerned about getting the Board of Directors (BOD) remuneration right.
Resolution: All unvested shares held for a year or more became vested, and PayPal adopted the same BOD pay structure as eBay.
On the PayPal side, the compensation team had four key priorities. First was the retention of top talent. Next was a rethinking of the company’s peer group. Third was the development of appropriate annual incentives. Last was a suitable LTIP for employees after the transaction.
Surfing the Coming Pay Ratio Wave with Confidence
Nathan O’Connor represented Equity Methods on this panel with Ralph Barry (Compensia), Michael Shinbein (WhiteWave Foods Company), and Amy Wood (Cooley). The discussion was about preparing for the CEO pay ratio rule the SEC released in August 2015. The panel offered three key takeaways:
- The SEC offered flexibility in determining the compensation metric used to identify the median employee. Make use of it.
- While a sampling technique can make sense sometimes, you might be better off basing the calculation on your full employee population.
- Take advantage of the remaining time in 2016 to perform trial calculations and lock down key policy decisions on certain methodological questions.
Seamus O’Toole (Semler Brossy) and Camille Alexander (Gilead Sciences) joined me to talk about how homogenized compensation programs have become. It’s gotten to the point where many of them no longer reflect the unique business needs of an organization.
If you want executive compensation to be a facilitator of strategy, be different in the incentives you create. Award designs have limitless variations. We focused on the essential role of analytical modeling to evaluate and stress-test alternative award designs and decide what makes the most sense for your organization.
There’s no one model that fits all. A model is just a framework for weighing the costs and benefits of an approach. Two companies could look at the same modeling results and draw different conclusions, depending on the incentives they’re trying to create or their appetite for risk. But without a structured analytical framework, award design devolves into guesswork, and that’s a recipe for unintended consequences.
What’s Next for Executive Compensation
Blair Jones (Semler Brossy), Steve Harris (FW Cook) and Steve Halloran (Mercer) talked about changes expected in the executive compensation landscape, including:
- Shareholder outreach. Vetting compensation decisions with investors is becoming standard. Just be ready to explain how you actually used their recommendations. Also don’t be surprised if institutional investors give you conflicting requests.
- Goal-setting. Both compensation committees and proxy advisors are scrutinizing how operational stretch goals are set. They expect proof that stretch goals are really stretch goals.
- Dodd-Frank rule-making. Pay ratio is the next big wave of complexity, followed by pay vs. performance. Section 956 of Dodd-Frank, which will likely go live in 2019, applies only to financial services firms. It allows for post-grant forfeiture and clawback of an award in response to excessive risk-taking.
- Non-financial goals. Companies are exploring the use of goals such as product quality, customer satisfaction, greenhouse emissions, and so on. Be careful, however, because non-financial goals are hard to set and probably not highly correlated with total shareholder return (TSR).
- Use of discretion and adjustments to performance outcomes. These are gaining traction, but require a set of principles to apply them consistently.
Can’t We All Just Get Along?
Sandra Pace (Steven Hall & Partners), Kristin Johnson (IMS Health), Nora McCord (Steven Hall & Partners), and Silvana Nuzzo (International Flavors & Fragrances) shared their views on driving effective compensation committee interactions.
Executive compensation has become a sensitive topic. Senior management—including the executive compensation lead, the chief HR officer, and the compensation committee chair—need to communicate much more before meetings to avoid surprises. New ideas should be communicated to the entire committee, and especially the chair, multiple times.
Invest in building a robust calendar for each year that sets appropriate goals for each meeting. The sequencing of topics is important. For example, the compensation committee shouldn’t discuss performance metrics until the board approves a strategic financial plan that can be used to guide the goal-setting effort.
“Less is more” applies to preparing materials for the committee. At the same time, though, the committee wants to know that no stone was left unturned in arriving at a recommendation. So keep the executive summary punchy, concise, and actionable, but have backup available in case you need it.
Pay vs. Performance
Alan Duffy (KeyCorp), Eric Hosken (Compensation Advisory Partners), and I discussed the SEC’s forthcoming rules on a standardized proxy disclosure of a company’s pay vs. performance. This will change the proxy—and maybe even how awards are designed. Nobody knows when we’ll see the final guidance, especially since 2016 is an election year.
For now, companies are going by the proposed guidance, which requires companies to provide a table that shows their own pay against the TSRs of peer firms. There are a few quirks to this. First, the definition of pay (“actually paid”) is akin to realizable pay, but includes the fair value of options at vest and changes in pension values. Second, the disclosure boils down to showing absolute pay to relative performance. Third, it imposes TSR as the universal yardstick for gauging performance.
Basically, a one-size-fits-all framework will be imposed for evaluating performance. You’ll have a choice. You can design your awards (mainly by implementing TSR provisions) to fit within the construct so that the results are favorable under a majority of future outcomes. Or, you can prepare supplemental disclosures that explain why this yardstick isn’t relevant.
We doubt that regulation will determine the way companies design their awards. Instead, standards like pay vs. performance will continue to nudge incremental refinements. In particular, we expect to see far more hybrid awards in which TSR is a metric, but not the only one. This yields partial indexing of pay to TSR while preserving operational metrics that offer greater line of sight to recipients.
Making the Most of Interactions with the Compensation Committee
Peter Chingos (Compensation Advisory Partners) shared ways for compensation professionals to build a partnership with their compensation committee. In a fast-paced environment, it’s easy to become reactive. But long-run success comes from being proactive and managing important relationships.
For the compensation committee, every decision is fraught with consequences. ISS approval is now a must. Negative shareholder votes are something no committee wants to flirt with.
So, whenever you consider a change to your compensation program, make sure you know the following:
- What’s the compelling business rationale for the changes?
- How will the changes influence performance (as measured by stock price, performance culture throughout the firm, or other critical metrics)?
- How will the changes be perceived both externally (ISS, shareholders) and internally (layers below the NEO level)?
Second, make sure everyone’s on the same wavelength. Brief the CEO (or even other executives, if appropriate) in advance on the ideas that will be presented at the compensation committee meeting. Get the CHRO to serve as the “conscience of the organization” and provide a reality check.
Proactivity is key to making the most of compensation committee interactions. Discuss the intended agenda with the committee chair ahead of time, and follow up with him or her afterward. Also, maintain a calendar of meeting agendas, timelines, and votes. Build time into your calendar for topics that lack a defined timeframe, such as succession planning, regulatory or industry updates, and evolutions in best practices.
Be sure to engage everyone who’s tasked with implementing compensation programs or discussing them in the proxy. Beyond the CEO and CHRO, this includes the CFO, the general counsel, and the investor relations team. This is especially crucial as the proxy continues to evolve into a hybrid of a compliance document and a marketing document.