Compensation and Governance Best Practices – NACD Directorship 100 Peer Exchange Take Aways
Discussion focused on successful strategies in shareholder outreach, managing relationships with shareholder advisory services and how to properly market compensation programs in the “say-on-pay” era. Participants were very focused on the topic of shareholder advisory services, especially their lack of transparency and the perceived influence their recommendations carry. Major take aways include:
Management Say on Pay
- In the current “say-on-pay” era it is critical to tell your compensation story to shareholders. This is the best chance a company has to explain the rationale for compensation decisions that were made during the year.
- Do not assume that readers will review the entire CD&A. All critical information should be included in an executive summary.
- The Board should never be surprised by the results of a Say on Pay vote. It is important to maintain regular contact with major shareholders to discuss the plans and address any concerns prior to the annual meeting.
- Even if a company received majority support for the Say on Pay vote, a significant minority of negative votes is cause for concern and potential shareholder outreach. There was not a consensus as to what level of negative percentage is deemed significant, but participants did discuss against votes in the range of 20% to 30% as being potentially problematic.
- We discussed the varying reactions Boards have taken following poor results. Some increased shareholder outreach to explain their pay-for-performance story while others have completely rewritten their compensation programs.
- Companies are engaging major shareholders on the topic of executive compensation more than ever before. Many shareholders prefer to hold meetings well before proxy season; not all shareholders are interested in meeting.
- Investor relations executives are becoming part of the compensation planning and outreach process. In some cases they already have valuable insight on shareholder perceptions regarding executive pay and if not they can get access to the proper contacts within the major shareholders.
Shareholder Advisory Services
- General feeling among participants was that lack of transparency regarding policies and methodologies by these services was not in the best interest of shareholders or corporate governance as a whole, particularly in light of their increasing influence over compensation plan design.
- The influence of these services was questioned by several participants. The point was made that an “against” recommendation was not the “kiss of death” many companies had feared. Doing the “right thing” based on a company’s specific situation was viewed as more important than merely “following” ISS or Glass Lewis.