New Report Shows More Companies Filing Supplemental Disclosure to Demonstrate Pay for Performance

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Sep 26, 2012, 10:00 ET

NEW YORK, Sept. 26, 2012 /PRNewswire/ -- With scrutiny of executive compensation at an all-time high as a result of the implementation of say-on-pay rules, more companies are using alternate definitions of "pay" to demonstrate their pay-for-performance alignment and to counter negative say-on-pay vote recommendations by proxy advisory firms, according to the latest Director Notes report from The Conference Board.

The report, Defining Pay in Pay for Performance, shows an emerging trend in the Russell 3000 Index, where some companies have been supplementing the summary compensation table (SCT) pay used to quantify named executive officer compensation with additional proxy filings detailing other pay measures, such as "realized" or "realizable" pay. Realized pay, in its purest form, is generally W-2 taxable pay, and includes salaries, bonuses, as well as restricted stock which vested, and stock options which were exercised during the period in question (no matter when awarded). Realizable pay is generally the same as realized pay but only includes equity awards made during the period in question (whether or not they are vested or exercised) and valued based on the price of the company's stock at the end of the period.

"The report findings suggest that the definition of 'pay' in the pay-for-performance paradigm is still up for debate, especially given the impending adoption of pay-versus-performance disclosure rules by the Securities and Exchange Commission," says Matteo Tonello, managing director of corporate leadership at The Conference Board.

"The most important single issue in evaluating the alignment between a company's stock and financial performance and its executive pay is what definition of 'pay' is used in the tests. The 2011 and 2012 proxy seasons have taught us that 'summary compensation table pay' as defined by the SEC doesn't work for this purpose, and that 'realizable pay' is emerging as the best definition," says James D.C. Barrall, a partner at Latham & Watkins and co-author of the report. "The reasons why and what other firms have done in response need to be considered by companies in designing their pay plans and drafting their proxies for 2013."

Of the 110 Russell 3000 companies that filed supplemental proxy statement materials as of September 5, 2012, 103 disputed proxy adviser negative say-on-pay vote recommendations based on alleged pay-for-performance disconnects. According to the report, 67 of the 110 companies (approximately 61 percent) objected to the use of the SCT for the purpose of defining "pay" and offered alternative definitions, either in the same proxy statement or in supplemental filings.

In addition to providing examples of this supplemental disclosure being used, the report includes recommendations on how companies designing compensation plans and drafting 2013 proxies can strengthen the pay-for-performance alignment. In particular, the recommendations cover two critical pay-for-performance issues: peer group selection and the definition of "pay" used in their pay-for-performance analytics and disclosure.

For complete details:
https://www.conference-board.org/publications/publicationlistall.cfm

To access previous issues of Director Notes, visit the archive page: https://www.conference-board.org/governance/index.cfm?id=2439.

About The Conference Board
The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. For more information, please visit www.conference-board.org

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