Compensation plan design has always been tricky—and it’s only gotten more so in recent years. One key reason is that today’s compensation committees are charged with far more than measuring and rewarding performance.
“The role is expanding,” John Borneman, managing director at Semler Brossy Consulting, told directors who gathered for a peer-to-peer discussion at Corporate Board Member’s Building Better Boards Committee Series. “Some [recent concerns], such as how to monitor and review gender pay equity, clearly fall into compensation. But more and more boards are putting things like succession planning, leadership development and culture-related items on the agenda.”
In fact, the scope has shifted to the point where many companies either have or are considering changing the name of the committee to reflect its redefined role. “I’ve got compensation leadership development committees and human capital management committees—most of my clients have had a specific conversation about changing the name or the mandate,” says Borneman.
“My sense is that the committee’s role is expanding well beyond what you would historically think of as compensation to focus on matters related to human capital,” agreed Tim Bentsen, a board member at Synovus Financial.
Increased regulatory scrutiny, stakeholder activism and fallout from the high-profile Wells Fargo incentive debacle were all cited by participants as contributing to the broadening role. The traditional challenges of meeting SEC guidelines and benchmarking pay against industry peers pale in comparison to these new imperatives, noted several directors.
DXC, for example, has been contending with vocal activist investors who agitate for changes. “It’s folks like Elliott who are demanding changes, pushing you in a direction you don’t want to go—that’s a big shift I’ve seen in the last 18 to 24 months,” says Mukesh Aghi, CEO, who described a constant struggle to balance investor demands with the long-term interests of the company and its employees. “They come in with big guns and operate on the fear factor, so you have to work with the comp committee and also with management to do what’s right for the organization. If you get swayed, bullied, then you are not doing your job.”
While noting that the investment world encompasses a broad spectrum of activists, not all of which are laser-focused on short-termism, Semler Brossy’s Borneman also cautioned against succumbing to pressure from activists advocating for changes to employee-retention incentives. “You’ve got to be very thoughtful about how you structure the incentive plan so that it doesn’t over-rotate on short-term decision-making,” he said.
Charged to Change
The 2017 tax reform act has also prompted companies to rethink their approaches to incentive programs. “We had completely reworked our short- and long-term incentive plans and put a different metric on it,” noted Dallas Kayser, chairman of City Holding Company, whose company adopted a return on assets-based plan with a total shareholder return multiplier. “So, we’ve taken something fairly simple and made it really complicated.”
Pressure is also coming from within, noted Gillian Moldowan, partner in Shearman & Sterling’s executive compensation and corporate governance group, who pointed out that employees at all levels of the organization are becoming change agents. “That’s been part of the conversations I’ve been in—how we have to think of our employees not just as employees but also advisors back to management, who are making commentary,” she said. “You see companies in the news where their employee base has said, ‘These choices are not the choices of a company we want to be part of.’ That can impact compensation and also how you think about retaining and recruiting and the feedback you get as a board member.”
Participants were largely sanguine about the mandated pay ratio disclosure that went into affect this year, viewing it as a much-hyped issue that largely fell flat.
“When disclosure started… I thought there would be more discussion not only of the comparison between CEO pay and that of the median employee, but just personal employee reactions to discovering they were above or below the median employee,” said Moldowan. “That didn’t seem to happen. I think some of that had to do with the fact that for global companies, so much of the U.S. population were finding themselves above that median employee so that concern about being below the middle didn’t arise.”
However, the relationship between public policy objectives—environmental, social and governance goals (ESG)—and executive compensation programs has been a rising concern for employees and other stakeholders. “[ESG] is a much stickier trend,” noted Aghi. “Employees are saying, ‘What are you doing for society, for the environment?’ That’s been more of an issue than the pay ratio.”
“That comes out in some of those employee engagement/employee satisfaction surveys,” agreed Bentsen. “They feel good. ‘I belong to an organization that’s doing well, doing good things in the community and for our fellow citizens.’”
Acknowledging that trend, several participants reported tying incentive pay to employee satisfaction. At DXC, 20 percent of incentive compensation is tied to employee satisfaction—a practice that “is not very much liked by institutional investors,” said Aghi. “They say, ‘Take that 60 percent tied to financial up to 80 percent.’”
More broadly, as the compensation committee’s role expands, the lines between its responsibilities and those of other committees are beginning to blur. In recognition, boards are seeking to strengthen communication between committees and even come together to work on issues where there is overlap. “A few of my clients have agreed to hold joint committee meetings on specific topics,” noted Borneman. “When they’re talking about succession planning, for example, they intentionally get together and do that as a joint rather than separate session.”
“There are areas, particularly with nom/gov, that can fall into either,” agreed Beryl Raff, CEO of Helzberg Diamonds and a board member at Michaels Stores, Larry H. Miller and Helen of Troy. “Communication is always important, but it’s now really critical to have clarity on the responsibilities of each committee.”