Glass Lewis & Co. Updates Its Pay for Performance Model

Glass Lewis & Co. Updates Its Pay for Performance Model

July 27 2012

Earlier this month Glass Lewis & Co. announced updates to its proprietary pay for performance model used to develop voting recommendations on say on pay proposals.  The changes went into effect for annual meetings taking place on or after July 1, 2012.

Similar to the prior model, Glass Lewis will perform both quantitative and qualitative reviews when evaluating pay for performance.  The changes announced only affect the quantitative review; the qualitative review remains unchanged.

Glass Lewis made the following four major revisions to its quantitative pay for performance model:

  • Peer Group Selection – Adopted “market-based” approach to building peer groups using a company’s self-selected peers and peers of self-selected peers
  • Compensation Analysis – Named executive officer compensation evaluated over three years rather than one year
  • Performance Analysis – Reduced number of performance metrics reviewed from seven to five
  • Pay for Performance Grades – Eliminated the forced bell curve in favor of letter grades based on actual degree of pay for performance alignment relative to peer group

Further analysis of the changes can be found in our Client Alert.

Our View
These changes are a positive step for both investors and companies.  We have long been strong advocates of the use of self-selected groups.  In our experience, the self-selected peer groups are the product of considerable thought and represent companies that are competitors for sales, talent or investment dollars.  Additionally, it is these peers that companies use when conducting their own assessment of compensation practices and making compensation-related decisions.

We are also in favor of expanding the compensation analysis from a one-year to a three-year analysis.  We believe this change appropriately places greater emphasis on evaluating and rewarding long-term performance.  This change is also appropriate considering Glass Lewis’ performance analysis looks at three years of data.  Lastly, the change will help eliminate one-year anomalies such as one-time retention grants which can cause a company’s score to drop.

The elimination of the forced bell curve grading system is another positive development.  Anecdotally, we’re aware of several companies who have consistently scored well in the previous model only to be graded a “B” or “C” due to the forced curve.  In our opinion, that never seemed fair.  If a company has performed well and compensated executives accordingly, the company should receive a high score regardless of how other companies fared.

Finally, it appears Glass Lewis is making an effort to be more transparent.  Make no mistake, this new model is still a “black box,” but they appear to be making an effort to communicate more with companies, investors and governance practitioners.  This will help companies anticipate and, where appropriate, avoid making decisions which jeopardize favorable vote recommendations from Glass Lewis.