There is a great deal of board-level discretion in executive pay, but at the same time, it is highly scrutinized in the media and among proxy advisory firms, regulators and shareholders alike. Publicly traded companies are required to have a “comp” committee which, at a minimum, sets the pay and benefits for corporate executives, most notably the CEO.
Recently, there has been increased pressure on comp committees to link executive pay decisions to progress on improving performance on key aspects of ESG (e.g., reduction of carbon footprint, employee diversity, employee safety outcomes, etc.). Last week, Sen. Bernie Sanders introduced legislation that would enact a tax on CEOs making more than 50 times the median worker. And, Starbucks shareholders rejected the coffee company’s executive compensation proposal, a rare rebuke.
In setting a CEO’s pay, the majority of firms use a compensation consultant and assemble a peer group including companies in similar business sectors and of comparable size and complexity. This benchmarking allows the comp committee to target the total compensation package for the CEO with most choosing to target the median level (i.e., the 50th percentile). Proxy advisory firms like Glass Lewis and Institutional Shareholder Services (ISS) have created lists of their own peer groups. It’s become a very big business. So much so that the SEC mandates disclosure and discussion of peer groups and targeted percentiles.
Worth considering is that a study found peer groups had a greater effect on pay increases than CEO performance did, and, in another study, researchers found that peer groups can be manipulated to include larger peer groups thus increasing pay.
As the scrutiny on executive compensation continues to intensify, there is a greater expectation for fairness and shared sacrifice as a result of the pandemic and its impact on employees, shareholders, and other stakeholders. Proxy advisors ISS and Glass Lewis weighed in, early in 2020, and asked companies to contemporaneously disclose changes to employment, compensation and benefits during COVID-19.
According to compensation consultant Pay Governance LLC, modifications to 2020 annual incentive plan payouts were more common among companies hardest hit by the pandemic (defined as companies with a revenue decline of 10% or more). Yet while most firms – some 60% – made some type of modifications to their FY 2020 or 2021 incentive plans as a result of the impact of COVID-19, these changes were not made for long-term incentive plans.