Directorship Perspective: Joseph Sorrentino
Joseph Sorrentino is a managing director of Steven Hall &Partners, with 15 years of experience in executive compensation. His expertise includes annual and long-term incentive plan design, and he works with clients to help them communicate more effectively with the proxy advisory companies that analyze executive compensation and governance policies.
What issues are keeping your clients up at night?
The predominant issues are the state of the economy, current stock market volatility and their effects on existing executive compensation plans. Our clients are typically the compensation committees of boards of directors. The economic uncertainty creates design challenges in setting appropriate goals for senior management. There are greater percentages of underwater options and depressed values for equity holdings, so companies are increasingly focused on whether there is enough ”glue” in the form of long-term incentives on key performers.
What is the biggest challenge in correlating pay to performance?
Every client we have designs programs that are intended to align pay with performance over the long term. And, by and large, payouts are strongly correlated with performance. The challenge liesin the definition of performance. Shareholders and proxy advisory firms tend to have only one benchmark for performance: stock price. While stock price is very important to our clients as well,directors need to take a longer-term perspective. We advise companies to build compensation programs, particularly for theshort term, around those metrics that they believe will result in increased stock prices over time. So there can be a disconnect when a plan pays out for performance that is laying a foundation for future stock price performance that hasn’t yet materialized. In these scenarios, it’s critical that directors and companies make sure they tell their story in their CD&A, so that shareholders understand what they are doing and why.
What advice do you give directors who are concerned about the perception of a pay-for-performance disconnect?
Once you’ve assured yourself that the pay program is aligned with performance, it’s important to tell that story publicly. One of the things that really struck me about this most recent proxy season was the number of instances in which shareholders were able to look beyond stock price and assess pay programs and company performance in a more holistic manner. Our experience shows that many shareholders are likely to respond to a sophisticated and candid discussion of how the pay program is designed to support shareholder growth over the longer term.
What are you doing as a firm to enable clients to communicate to shareholders better?
We emphasize the critical importance of drafting clear and concise CD&As. Prior to approving changes to the compensation program, we recommend that clients draft the CD&A section and then ask themselves if the proposed modifications support the stated objectives and philosophy. We’ve found that this process helps to focus on telling the story to shareholders.
What are the latest executive compensation trends?
The impact of recent economic and stock market volatility on compensation is not yet fully understood at this point. We believe merit salary budget increases will be around 3 percent and will be the same for executives as they are for the broader population. “Big” increases in salary are viewed negatively; annual incentive target opportunities are generally unchanged. However, discretion and subjective assessments are playing a greater role in the bonus determination—a trend we expect to continue, particularly if economic uncertainty remains. A shift to performance-based vesting for long-term incentive awards and pressure to reduce or eliminate vesting that is based on service only continue. And, as you would expect in this climate, benefits and perquisites continue to decline.