Insights For Boards Preparing 2024 Compensation Plans

Redefining the compensation committee
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When facing say-on-pay headwinds, use the CD&A proactively as a tool to provide compelling rationale and context, and to bring the reader inside the boardroom.

With the 2023 proxy season winding down, Willis Towers Watson (WTW) released its report on the 2023 executive pay votes. The findings showed that many company pay plans were met with additional scrutiny from investors.

Corporate Board Member columnist Matthew Scott recently met with Brian Myers, WTW governance team lead, North America & director of executive compensation, and with Heather Marshall, WTW senior director, executive compensation and board advisory, to discuss what boards could do to prepare their compensation plans for 2024. The following is an edited version of their conversation.

Is there any anything that could help boards avoid having a failed say-on-pay vote on their upcoming compensation plans?

HEATHER MARSHALL: The best opportunity companies have at their disposal is the disclosure they put in their compensation discussion and analysis (CD&A). That communication channel reaches a wide range of stakeholders, shareholders and proxy advisors. So using the CD&A proactively as a tool to provide compelling rationale and context to really bring the reader inside the boardroom to understand the decision-making process can be powerful when companies are maybe facing some say-on-pay headwinds. Companies should never lose sight of that and should always strive for continuous improvement in their disclosures.

The other fundamental thing boards can do, whether you’re trying to get ahead of negative votes or conducting business as usual, is to use proactive and ongoing engagement with your major investors. What we’ve seen, over the last five to 10 years, particularly among large cap companies, is that proactive and ongoing outreach has just become part of the annual cycle of good corporate governance.

So, we’re seeing annual meetings with shareholders outside of proxy season, to listen and understand their views on compensation program design, as well as broader issues. Naturally, compensation committees will be most interested in any feedback on the compensation programs. And being able to have that insight as the committee is discussing potential changes in the comp plan can be incredibly valuable.

BRIAN MYERS: The board’s opportunity to get in front of all your shareholders and the proxy advisors is through a really thoughtful, clear, concise and compelling CD&A. But that takes time to prepare. It’s not something you can just pick up, dust off, put the new numbers in and file. It needs to be thoughtful. It’s your opportunity to tell your story in your words before others put things in their words.

Boards have a year-round opportunity to engage proactively. And that could be simply reaching out to their investors and having conversations with them. Institutional investors notice these things, and some keep track of that. So, sometimes it’s noted whether you’ve come to them before and tried to engage or, you’re being purely reactive.

Are there any specific areas of concern that directors need to bring up in their conversations with shareholders to get an understanding of what they might accept or reject in a compensation plan?

MARSHALL: Before you even walk into one of those meetings, it’s expected that you are prepared. Large institutional investors publish their voting guidelines that explain what they like and what they don’t like. So, before any meeting happens, all participants — whether it’s a committee member, a board member, or somebody from the management team — should receive a briefing on those points and how the investors voted the past several years. Being prepared is critical from a credibility standpoint.

Once you’re in the meeting, it’s mostly about listening and providing a forum for an investor to come in and share their perspectives. Often, shareholders will have things that they want to share, so as a representative of the company, I wouldn’t go in with a hard-set agenda unless there are specific topics you want to probe on. I think it’s most valuable when there is an open forum discussion. And typically, the things investors raise are their preferences around specific performance metrics, or wanting to better understand the goal setting process, which can be achieved through enhanced disclosure. Lately investors have been asking whether any non-financial goals related to ESG commitments are going to be included in comp calculations. Those types of insights help the comp committee build a picture of what their investor base might approve.

MYERS: As always, the first round of talks is when you want to listen to your investors. In successful engagement processes, we often see a commitment to follow up with the investor. What boards want to do is circle back with investors and summarize some of the things that were heard. And, while making no commitment to any sort of changes or adjustments, boards can outline some of the things that they are going to consider, or want to talk about again with investors, and what some of those ideas might look like. What we’ve seen is that the opportunity to come back, re-engage and potentially discuss some things further, is typically very well received by investors. These types of talks not only uncover the issues, but also build a relationship of trust with your investors moving forward.

There has been a lot of volatility in the market since the Covid pandemic. Some companies may have a low Total Shareholder Return (TSR) as a result. Your report suggests that companies with low TSR are generally the ones that have challenges to their comp plans. How do those companies deal with their comp plans to minimize opposition from shareholders?

MARSHALL: TSR is one measure of a company’s performance and it’s heavily impacted by much broader macro, economic, and geopolitical factors. If the value of a company’s stock has declined, shareholders are probably going to be looking more carefully at your pay decisions. What you’re hoping is, your comp plan will effectively align pay and performance through multiple lenses.

So, if you’re in a situation where you have very low negative absolute, or relative TSR, yet your financial and operational goals have been paying out at a very high level, that’s when I would be concerned. If you’re showing performance-based equity investing at a low level, if bonuses are paying out below target, that may make more sense to an external stakeholder, particularly somebody who’s stock has lost value. They can see that alignment, and the outcomes are arguably working the way that they’re supposed to.

In that situation, the new pay versus performance disclosure that the SEC has put in place may actually help some companies, particularly those that are using stock options in their pay plans. As you know, depressed stock prices and negative stock price performance should translate into lower and or negative compensation actually being paid. So, what companies are saying in their CD&A will be an important consideration. And what’s appearing in their pay versus performance table could potentially point readers to something that complements the summary compensation table. Your ideal scenario is that your pay programs are working effectively, and you have financial and operational outcomes that trend in a similar direction to TSR. If you’re in a situation where that’s not the case, I think that’s where you have to start thinking, “Did we design these plans effectively? Are these outcomes warranted? And how are we going to talk about them in our external disclosures?”

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