Complexity Rising in Line With Trend On Performance-Based Pay, ISS Group Says

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By Yin Wilczek

May 26 — The move to performance-based pay is one of the most significant compensation trends of 2015, according to ISS Corporate Solutions.

In the 1,200 public companies in its Incentive Lab database, ICS found that performance-based pay comprises more than one-half of total compensation for chief executive officers, and the trend continues to grow.

However, the shift in pay design presents new challenges, including that it adds complexity, said Jack Zwingli, ICS's head of ISS Compensation Business, writing in the May edition of the 2015 ExecComp Insights monthly roundup.

“Changes to award designs that are intended to achieve desired outcomes can end up adding to complexity without any measurable improvements,” Zwingli said in the publication, issued May 21. “The added complexity also reduces the ‘line of sight' on whether the performance award design will provide the intended management incentives.”

ICS is a wholly owned subsidiary of Institutional Shareholder Services Inc.

Performance Awards 

According to ICS, so far in the proxy season, 80 percent of companies with long-term pay have a performance award in place, compared to 73 percent in 2014.

ICS also noted that more than 60 percent of companies with long-term performance awards now use relative metrics, compared to 44 percent in 2010.

Total shareholder return (TSR) is the top metric used for long-term performance awards overall, ICS continued. Fifty-eight percent of companies use TSR in 2015, compared to 51 percent in 2014.

In terms of complexity, ICS found that:

• about 60 percent of companies change performance metrics every year, which creates confusing “multiple performance measures” that are “in play simultaneously”;

• the number of performance metrics used continues to increase;

• the use of “conditional” or “modifier” metrics has tripled in the past few years, with one-third of companies now using them.

 

In a rule proposal to show the relationship between executive pay plans and corporate performance, the Securities and Exchange Commission would require companies to disclose, among other factors, their total shareholder return as well as that for peer companies. 

Observers have criticized the proposal as “unduly complicated”.

CEO Pay 

Meanwhile, CEO pay continues to rise, with pension adjustments driving the pay even higher. ICS' analysis of 1,860 Russell 3000 companies' pay disclosures found that the median grant-date CEO pay package increased by 8.2 percent.

According to the Bloomberg Pay Index, a daily ranking of executive compensation, the top five most highly paid executives in public companies as of May 26 are:

• Nicholas Woodman, CEO of GoPro Inc., whose pay is currently valued at $245.8 million;

• Michael T. Fries, CEO of Liberty Global PLC: $157.5 million;

• Martin E. Franklin, CEO of Jarden Corp: $127.3 million;

• Elon R. Musk, CEO of Tesla Motors Inc.: $114.8 million; and

• Angela J. Ahrendts, senior vice president of Apple Inc.: $108.5 million.

 

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The report is available at http://hosted.verticalresponse.com/305059/3064eb3d38/TEST/TEST/.