The current industry downturn is already impacting compensation programs and will likely also impact the upcoming Say on Pay season. Based on our research, the market decline will cause an increased number of energy companies to trip a key ISS test in 2016. Fortunately, it’s easy to spot now so companies can anticipate the issue … Continued
Description Performance shares are performance-contingent pay denominated in common stock and earned over a performance period if certain performance goals are attained. Often, performance share plans provide for a payout matrix under which performance shares are paid at differing levels (e.g., threshold, target and maximum) based upon achieved performance. Key Features Performance Period Performance period … Continued
The Basics Overview In 2006, the SEC dramatically changed proxy disclosure requirements. Six required tables provide a quantitative picture of companies’ executive pay in the prior one to three years. Companies must generally disclose compensation amounts for the top five highest paid executive officers, including the Chief Executive Officer, the Chief Financial Officer and the … Continued
Description Restricted stock is an award of employer stock that is subject to vesting requirements and transferability restrictions (generally at no cost to the employee). Key Features Dividend and Voting Rights Restricted shares typically have voting and dividend rights. Dividends may be paid currently or may be paid upon satisfaction of vesting requirements. Vesting Time-based. … Continued
Description A stock appreciation right (SAR) entitles an employee to the appreciation in value of a specified number of shares of employer stock over an “exercise price” or “grant price” over a specified period of time. Key Features Base Price The base price generally is equal to the underlying stock’s fair market value on the … Continued
The fundamentals of good compensation committee governance have evolved over the years as executive compensation has become more complicated, more visible and more controversial. The goals of such processes are to ensure that the following goals are met: Enough time is provided to consider proposals in full, from multiple angles; Appropriate competitive information and analysis … Continued
Description Performance units are performance-contingent pay denominated in dollars and earned over a performance period if certain performance goals are attained. Often, performance unit plans provide for a payout matrix under which performance units are earned at differing levels (e.g., threshold, target and maximum) based upon achieved performance. Key Features Performance Period Performance period typically … Continued
Description Restricted stock units (RSUs) are an award of units that correspond in number and value to a specified number of shares of employer stock that typically are subject to vesting requirements and transferability restrictions. Units do not represent any actual ownership or equity interest. Dividend and Voting Rights RSUs have no voting or dividend … Continued
The majority of long-term incentives arrangements utilize shares of company stock as a mechanism for driving employee behavior and aligning compensation to shareholder value creation. The use of shares does not create a cash expense; however, it does have a cost to shareholders through dilution of earnings and voting power of existing shareholders. (See separate … Continued
It is good governance to establish in advance a Compensation Committee Calendar for the full year. Topics and timing should be pre-determined and agreed-upon. Following is a sample calendar. Executive sessions are presumed to take place at each meeting. First Quarter Approve merit budgets, salary increases and other changes to pay opportunities Evaluate CEO and … Continued
The Basics Companies conduct executive compensation benchmarking for a number of reasons, mainly to provide the compensation committee with an objective evaluation of the competitiveness of the company’s compensation levels and programs. Peer groups can be useful in helping compensation committees understand the amounts of target pay opportunity and actual pay delivered to executives at … Continued
The Basics What is the rule? The corporate tax deduction of compensation to certain employees is limited to $1 million per year. The rule applies to the compensation of the executive officers named in the proxy (except, by a statutory quirk, for the CFO), who are employed as of the last day of the taxable year. The … Continued
Qualified Retirement Plans A qualified retirement plan is a funded plan for which organizational assets irrevocably have been set aside, outside the reach of general creditors of the company. These funds pay for benefits as they become due. Companies obtain tax deductions for contributions made to qualified plans at the time the contributions are made. … Continued
The primary purpose of an annual incentive plan, also called an annual bonus plan, is to drive and reward behaviors that have an impact on the operating success of the company. Following is information on how such plans are typically designed, including participation, payout opportunities, performance metrics and payout curve. Participation At most U.S. companies, … Continued
Description A stock option is a right to purchase employer stock at a fixed price (e.g., an “exercise price”) during a specified period of time. Key Features Exercise Price The exercise price generally is equal to the underlying stock’s fair market value on the date of grant. Vesting The most typical type of vesting is … Continued
The Basics What are change-in-control arrangements? Executive change-in-control arrangements generally refer to any severance, payments or special benefits that are provided to an individual in connection with a change in control (CIC) of the company. A CIC is typically defined to include such transactions as a merger in which the executive’s company is the smaller … Continued
The Basics What is compensation benchmarking? Compensation benchmarking is the process of comparing a company’s compensation levels and practices against those of other companies (i.e., the “market”). In order to benchmark compensation, you must define, value, analyze and summarize market data and compare the market data against the target company. The output of compensation benchmarking … Continued
The Basics What are executive severance arrangements? General executive severance arrangements generally refer to any severance, payments or special benefits that are provided to an individual due to a termination from the company. General severance is provided for terminations not related to a change in control (“CIC”). CIC-severance arrangements are a separate topic. Typically, general … Continued
The Basics The exchange of services for equity creates an accounting expense that must be recognized in the income statement. ASC Topic 718 (formerly SFAS 123R) is the rule that governs expensing of all stock-based compensation. The expense realized is based on a “fair value” determined at the date of grant. This fair value is … Continued
Long-term incentives (“LTI”) are forms of variable (“at risk”) compensation based on the achievement of longer-term performance and objectives. Primary objectives are to: Align executive interests with shareholders and align executive pay with company performance and strategy. Balance annual incentives with focus on long-term (3- to 10-year) results. Retain executives. Facilitate long-term executive stock ownership. … Continued
Overview A nonqualified deferred compensation plan represents an unsecured promise by an employer to pay compensation to an employee at a future date. Such a plan is not subject to the complex rules under ERISA that are applicable to tax-qualified retirement plans (regarding eligibility, nondiscrimination, funding, trust requirements, etc.). This gives employers significant flexibility in … Continued
The Basics The Compensation Discussion and Analysis (CD&A) is a required part of a company’s annual proxy statement. Its purpose, per SEC rules effective in 2006, is to “provide material information about the compensation objectives and policies for named executive officers” and “put into perspective for investors the numbers and narrative that follow it”. The … Continued
The Basics What are stock ownership guidelines? A stock ownership guideline is a policy created by the compensation or governance committee which establishes the level of stock ownership that is expected for the executives or outside directors of a company. A majority of public companies in the U.S. and Canada now have ownership guidelines for … Continued
The Basics What is the rule? Section 16 imposes restrictions on when and how a corporate “insider” may buy and sell shares of company stock. Who does it apply to? “Insiders”, defined as officers, directors, and more than 10% shareholders are covered by the rules. What is the impact of Section 16? An insider is … Continued
Linking value creation, business strategy and underlying goal setting is arguably the linchpin of executive compensation, where the pay-and-performance “rubber” meets the road. For compensation committees, focusing on the basics can help cut through to the heart of the matter, and lead to better incentive goals. The Basics Value creation is about two things—return on … Continued
The Basics Selecting the optimal performance measure(s) for executive compensation or other business purposes starts with an understanding of the most common measures and their respective strengths and limitations. The Most Common Types of Performance Measures There are two broad categories of performance measures most often used in executive incentive plans: financial measures and market … Continued
The Basics Many companies promise contractually to make special payments or provide special benefits to executives at the time of, or upon a qualified termination of employment following, a merger, acquisition or other change in control (CIC) of the company. These payments, such as severance pay, benefits continuation or acceleration of vesting on stock incentives … Continued
There are three primary corporate filings related to executive compensation: the proxy statement, Form 8-K filings and Form 4 filings. Proxy Statement Companies must file proxy statements with the SEC in connection with shareholder meetings. The proxy contains executive compensation disclosures including the Compensation Discussion and Analysis (“CD&A”), other narrative disclosures and tabular disclosures. CD&A. … Continued
Overall Compensation Design Non-executive members of corporate boards are generally paid for their service. The overall compensation structure typically includes an annual retainer, committee meeting fees and/or retainers, and a non-retainer equity grant. In recent years, many companies have adopted a structure with a higher retainer and no meeting fees. The actual level of pay … Continued
The Basics What is the rule? Section 409A of the Internal Revenue Code establishes a complex regime for taxation and regulation of nonqualified deferred compensation. Who does it apply to? The reach of Section 409A is extensive, as it applies to employees, directors and third-party service providers of private and public companies, as well as … Continued
Selection of Market Data Sources A thorough evaluation of available market data sources is critical to ensure that market data results reviewed by the compensation committee are credible and meet the objectives established at the beginning of the benchmarking process. In some situations, a single market data source may be all that is needed to … Continued
The Holy Grail in executive compensation is to achieve strong alignment between pay and performance. In the quest to achieve this alignment, management teams and board members strive to design the perfect incentive structures, using the most appropriate performance measures for their industry and individual company circumstances. However, even the most effectively designed incentive can’t … Continued
Governance policies related to executive compensation are on the rise as a result of increased influence of bank regulators, shareholders and the Securities and Exchange Commission (SEC). These policies are intended to reduce compensation-related risk, encourage a long-term perspective and align executives with shareholder interests. Meridian’s 2015 proxy research of banks with $10 billion to … Continued
In a previous Energy Insights post, Jim Wolf discussed the impact of $40 oil prices on early 2015 compensation decisions. At the time, energy companies speculated whether we’d see a “V”-shaped or “U”-shaped recovery. After a volatile summer – doubts about China’s growth, Iran’s pending oil output, limited production declines – US energy companies now … Continued
“The key to making a good forecast,” statistician Nate Silver noted in his 2012 book “The Signal and the Noise: Why So Many Predictions Fail—But Some Don’t,” “is not in limiting yourself to quantitative information. Rather, it’s having a good process for weighing information appropriately.” For the inaugural Prognosticators of Pay event, NACD invited a … Continued
A key pillar of most compensation philosophies is to pay for performance, but how do directors know if it’s working? To answer this question, compensation committees are increasingly testing the pay and performance alignment after the payouts have been made. This feedback process is vital to ensure the continued effectiveness of the compensation programs. Rationale … Continued
Incentive plans have two primary purposes: 1) To motivate behaviour and drive performance aligned with strategy and 2) To align rewards with shareholder interests. From these two simple purposes come the most difficult work of the compensation committee and an area of increasing focus by shareholders. Choosing the wrong metrics can create unintended consequences and … Continued
Meridian Compensation Partners is an independent consulting firm advising clients on executive compensation and governance matters. While Meridian serves companies in all industries, a dedicated team of consultants specializes in assisting compensation committees for financial services companies. Meridian’s Susan C. O’Donnell and Daniel Rodda fielded questions about the issues unique to this industry. What are … Continued
As banks prepare for their annual shareholder meetings, most will have a say-on-pay vote where shareholders indicate whether they support the executive compensation program. This process has pressured companies to improve their compensation disclosures and clearly explain their pay practices and decisions. Today’s bank boards should engage with shareholders to understand their evolving perspectives on … Continued
Hiring and retaining the right hospital leaders and ensuring that they achieve the organization’s goals are among the board’s most important functions, and executive compensation plays a major role in the success of those efforts. However, preconceived notions about executive compensation may hurt hiring and retention efforts. By taking a closer look at 10 long-standing … Continued