Views on improving the integrity of global capital markets
27 December 2011

New Year’s Resolution: Better CEO Compensation Disclosure in 2012

Last week GovernanceMetrics International (GMI) published its 2011 CEO Pay Survey highlighting changes in compensation levels for CEOs of U.S. companies in 2010. In the days following the survey’s release it was hard to avoid headlines decrying high CEO pay in a time of economic hardship. As companies brace for another year of “Say on Pay” scrutiny by shareholders, here is a look behind some of the numbers.

First, look at returns of the Russell 3000 for the last few years (does not include dividends):

2007: 3.39 percent

2008: -38.70 percent

2009: 25.46 percent

2010: 14.75 percent

2011: 0.20 percent (YTD)

Next look at the change in total compensation of Russell 3000 CEOs versus the previous year (from the GMI report):

2008: -6.38 percent

2009: -0.28 percent

2010: 27.19 percent

Facts are facts. Pay decreases rarely, and only modestly, in poor earnings years. And it increases, often dramatically, under the cover of “up” years. Here, the preliminary analysis shows there has been no change since 2008 in earnings levels, with markets /stock levels still far below 2008 levels. Yet compensation is up by 20 percent in that time. Seems companies have some explaining to do.

We all agree that the debate on executive compensation should not be driven by outliers. But broadly, “Pay for Failure,” as it’s called, is a damning indictment of a board and compensation committee that seem to only heed the annual, short-term encouragement of officers and consultants to stay the course and reward mediocrity.

Need for Analysis versus Hasty Judgments
An alternate analysis of the numbers makes me think that companies in 2010 were catching up from events in 2009, when the Russell 3000 increased over 25 percent but total pay was slightly down. I’m guessing board compensation committees felt better in 2009 about clamping down on CEO pay when we were still debating whether the U.S. had entered a depression. By 2010, companies in the U.S. were more confident that they had not only avoided a depression but were coming out of the recession with modest but solid growth. Whether management had any control over the compensation process and whether the pay increases were warranted are questions any compensation committee should thoroughly examine and answer in the company’s Compensation Discussion and Analysis (CD&A) in the proxy statement.

Corporate America clearly has a PR problem on its hands when reports like GMI’s come out. All signs point to shareowner focus on executive pay continuing, with dozens of U.S. companies facing investors after a failed Say-on-Pay vote in 2011. However, to be fair, shareowners must look behind the broad statistics and drill down to the numbers on a company-by-company basis before picking up their torches and pitchforks. Meanwhile, companies would be best served by telling their compensation story in a clear and concise manner. Fifty pages of obfuscating lawyer-speak in the CD&A is not going to win friends or influence investors.

The 2012 Proxy season is just around the corner. With Say on Pay the law of the land, and shareholders fuming over fresh pay statistics from GMI and others, here are five easy steps for corporate secretaries, IR teams, and board compensation committees to help make 2012 a happier new year:

  • Start working on your compensation messages — like two months ago.
  • Use an investor-friendly approach to communication, such as the CFA Institute CD&A template.
  • Talk to your largest shareholders and check their temperature on compensation issues, their concerns, and what they see as best practices.
  • Make sure what you pay matches what you say are long-term strategic goals.
  • Keep messaging short and concise.

With investors, the media, and the public watching, the spotlight is on companies for better compensation practice and disclosure in 2012.

Are they up to the task?

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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