Pay-for-Performance Takes Hold in 2012 Proxy Filings

For Companies, New Urgency to Demonstrate Alignment between Executive Pay and Performance

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Apr 16, 2012, 10:00 ET

NEW YORK, April 16, 2012 /PRNewswire/ -- According to Proxy Season 2012: The Year of Pay for Performance, a Director Notes report released today by The Conference Board, early proxy filings for the 2012 meeting season have focused on properly aligning executive pay with company performance. Responding to shareholder concerns, companies are utilizing new techniques to demonstrate such alignment and challenge, in supplemental proxy filings, the pay-for-performance (P4P) analytics used by proxy advisers.

Proxy Season 2012: The Year of Pay for Performance introduces the evolving discussion around pay-for-performance (P4P) analytics and related issues, and suggests ways for companies and their boards to analyze the alignment of P4P, counter negative recommendations by proxy advisers on say-on-pay votes, and draft proxy disclosure to win shareholder support for their pay programs.

"Research shows that some early 2012 proxy filers have analyzed and presented their P4P stories in new and persuasive ways and challenged proxy advisers' P4P analytics, both in anticipation of and in response to negative say-on-pay vote recommendations in supplemental filings," said Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board. "We are seeing companies focusing on the meanings of executive pay, performance, and peer groups in their proxy filings."

"The early 2012 meetings and SEC filings for upcoming meetings clearly demonstrate that this is indeed the year of pay for performance, with more companies facing negative proxy adviser say-on-pay recommendations and publicly challenging the advisers than in 2011," said James D.C. Barrall, a partner at Latham & Watkins and co-author of the report, along with Alice Chung and Julie Crisp, senior associate and associate, respectively, of Latham & Watkins. "The good early news is that the quality of pay-for-performance analytics and debate are much better and that board and compensation committees are taking these issues very seriously. Hopefully investors will be as engaged and thoughtful."

Proxy Season 2012 reveals that more companies are including in their proxy statements quantitative, disaggregated summary compensation table (SCT) information, which state the accounting value of pay opportunities for equity and long-term incentive awards, to help shareholders understand their P4P alignment. For example, some companies have begun using "realizable pay," which estimates payouts from long-term incentives and equity awards (based on year-end stock prices), and uses these annual estimates to determine the compensation that executives would have realized at the end of each year had it been paid then. Other companies are using "realized pay," which reflects the value of compensation actually paid to the executives during the periods to determine the relationship between executive compensation and company performance over a specific period. The report also discusses the voting policies used by two of the most influential proxy advisers, ISS and Glass Lewis, to evaluate companies' P4P alignment.

For boards and compensation committees seeking rigorous support for their P4P stories in order to garner favorable say–on-pay votes, Proxy Season 2012 suggests:

Evaluating the performance of the company's incentive plans at least annually over a longer period (at least three to five years) to determine: 1) the extent to which the realizable pay generated for management is aligned with the actual achievement of business and financial objectives and creation of shareholder value; and 2) how the company's realizable pay, financial performance, and value creation align with its peers.
Performing or commissioning simulations of ISS and/or Glass Lewis P4P tests to ascertain their likely determinations and recommendations to shareholders.
Reviewing disclosures by peer-group companies on their P4P alignment.
Drafting clear, concise executive summaries in the Compensation Discussion & Analysis section of their proxies describing how pay plans are designed to drive business, financial, and shareholder return performance; and how the plans have generated realizable pay over time that is aligned with the company's performance and the performance and pay of its peers.
In the CD&A, actively anticipating any likely P4P objections by proxy advisers, in order to lay the groundwork for shareholder engagement and supplemental proxy materials that dispute the advisers if necessary.
Engaging directly with shareholders on P4P matters to the extent possible.

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. www.conference-board.org.

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