Podcast Summary – Evaluating Executive Pay Through an Activist Lens

In this episode of the Executive Compensation Podcast, host Ryan Harvey is joined by Christina Medland and Michael Rourke to discuss executive compensation programs through the perspective of an activist investor.

Activist Investors and Compensation Programs

Christina Medland begins by explaining the dual perspective of activists regarding compensation programs. First, activists assess the alignment between pay outcomes and investor experience as a barometer for evaluating pay-performance relationships. Second, they use compensation issues tactically, seeking to leverage these as wedges to influence boards or shareholders and drive their business agendas. Activists care about executive compensation because it reflects on a company’s health and strategy. Companies should proactively address potential compensation issues, as this can moderate activist attacks and align pay more closely with performance.

Michael Rourke points out various ‘red flags’ that attract activists, such as non-performance-based pay (like excessive severance or perquisites), discretionary actions by compensation committees, and discrepancies in realizable pay compared to performance. Activists may also scrutinize the use of aspirational peer groups for benchmarking, which can skew pay outcomes.

Activists differ from compensation committees in their focus. They disregard norms like target compensation benchmarking, concentrating instead on the strong link between pay and performance. They assess performance metrics critically and evaluate the sharing of value between executives and shareholders.

Rourke highlights the divergence in goal setting between companies and activists. While companies often use a bottom-up approach, activists prefer an external comparison with peers. They scrutinize target-setting methodologies, aiming to identify goals that might be unaligned with shareholder interests or indicative of poor company performance.

Christina advises using the CD&A in proxy statements for transparent storytelling about compensation and performance alignment. She emphasizes the impossibility of pleasing all investors and stakeholders, recommending a critical internal review of compensation programs and goal-setting. However, she cautions that good compensation practices cannot fully shield underperforming companies from activist attention.

Practical Steps for Companies

1. Know Your Shareholder Base: Understand the voting patterns and preferences of your shareholders.
2. Consistent Shareholder Outreach: Engage regularly with shareholders to understand their concerns and perspectives.
3. Review Compensation Programs Historically: Look at multi-year trends in compensation, ensuring alignment with performance and shareholder experience.
4. Track Committee Discretion: Monitor and balance discretionary actions over time.

Listen to the full podcast here: Evaluating Executive Pay Through an Activist Lens – Meridian Compensation Partners (meridiancp.com)

The Executive Compensation Podcast is available on all major podcast directories including iTunes, Spotify and Google Play.