CII Contract with Equilar a Positive Step But More Needed to Address Pay Issue

Equilar, the leading provider of executive compensation benchmarking and research solutions, announced the release of its Pay-For-Performance Analytics suite yesterday, along with the fact that the Council of Institutional Investors (CII), whose members hold $3 trillion in assets, has signed on as the first client. According to the press release:

By combining an innovative market-based algorithm to identify peer companies with a realizable pay methodology using long term incentive payouts, Equilar’s best-in-class model accurately reflects real-world conditions when benchmarking executive pay and company performance…

Unlike traditional peer group selection methods that rely on company size and fixed industry classifications, Equilar’s new market-based peer group development methodology is based on publicly disclosed relationships, algorithmically linking thousands of companies to create a network of the strongest peers. Factors that determine connection strength include: direction of peer relationships, similarity between peer groups, number of connecting paths between two companies, and distance of connecting paths between two companies.

“Selecting the right peer group continues to be a challenge for both investors and corporate issuers,” said Brian Sohmers, EVP and General Manager, Equilar. “By using the collective knowledge of the market, Equilar is setting a new standard for creating independent peer groups to be used for pay for performance analysis.”

From my understanding, Equilar does have the largest database and having access to that data will help Council members make a better determination if boards are actually proposing to pay CEOs and other NEOs based on actual performance. That’s a plus, but it does nothing to address the constant ratcheting up of pay based on the Lake Woebegone effect… almost every board imagines their CEO to be above average… unless they’re in the midst of terminating the CEO. See the USPX Shareowner Guidelines for Say-on-Pay Voting.

Until we address that issue, companies will continue to award a greater and greater proportion of their profits to CEOs and other NEOs, denying both other employees and shareowners their fair share. That winner take all model is unsustainable when it comes to building the larger society, especially a democratic one. If business doesn’t develop a more democratic model for its own governance we will live in a more and more divided society… with all the associated problems – from increasing rates of obesity, asthma and autism to increased crime, from educational failure to stress and mental illness, from drug addition to violence and a weakening of the social fabric.

At least in the UK there has been more discussion of the issues. The High Pay Commission released its final report last fall, Cheques With Balances: why tackling high pay is in the national interest. Their report made the following recommendations:

  1. Pay basic salaries to company executives. The High Pay Commission believes pay packages have become increasingly complex, damaging relations with shareholders, creating misperceptions and encouraging confusion and obfuscation. We therefore call for executive pay to return to first principles. We recommend executives should be paid a basic salary, with remuneration committees electing to award one additional performance-related element only where it is absolutely necessary.
  2. Publish the top ten executive pay packages outside the boardroom. The High Pay Commission believes that lack of transparency in pay directly below board level hides both the impact of ballooning top pay on other executives and its link to performance. We therefore call on all companies to publish an anonymised list of their top ten highest paid employees outside the boardroom.
  3. Standardise remuneration reports. The High Pay Commission has found remuneration reports to be complex, making pay packages and awards opaque and unclear for shareholders and the public. We recommend that remuneration reports should be presented in a standardised format, incorporating and moving beyond best practice. As part of this we recommend that all companies publish a figure for the total remuneration package received by each executive and a methodology for how it has been calculated.
  4. Require fund managers and investors to disclose how they vote on remuneration. The High Pay Commission acknowledges that, while the current model allows shareholder absolute oversight of the executive through voting rights at the annual general meeting, some investment fund managers fully disclose how they vote on corporate governance while other only disclose this information to clients. We therefore call on all investments fund managers to fully disclose how they vote on all issues including those of remuneration.
  5. Include employee representation on remuneration committees. The High Pay Commission has found remuneration committees to be a closed shop, made up largely of current and recently retired executives. This model has failed, leading to spiralling pay. We believe that greater engagement with employees may help restrain executive pay and help mitigate negative impacts on morale as well as encourage a greater engagement with the workforce. We therefore call for employees to be represented on remuneration committees as a first step to better engagement and accountability.
  6. All publicly listed companies should publish a distribution statement. The High Pay Commission has found that many shareholders have a low level of engagement on issues of executive pay. It is important now to encourage greater engagement through improved disclosure, which takes greater account of the company context. We therefore recommend that all publicly listed companies publish annually a statement of the distribution of income over a period of three years, importantly showing percentage changes in total staff costs, company reinvestment, shareholder dividends, executive team total package, and tax paid.
  7. Shareholders should cast forward-looking advisory votes on remuneration reports. The High Pay Commission has considered recommending making shareholders’ advisory votes on remuneration reports binding, but it was felt that a preferred option at this stage would be to make the vote forward looking. We therefore recommend that shareholder votes on remuneration are cast on remuneration arrangements for three years following the date of the vote and that these arrangements include future salary increases, bonus packages and all hidden benefits, giving shareholders a genuine say in the remuneration of executives.
  8. Improve investment in the talent pipeline. The High Pay Commission has found that the growing trend in hiring from outside the company is having an escalatory effect on executive pay. We recognise that seamless succession is not only important to company performance, but has a positive limiting effect on pay. We therefore recommend that companies implement a defined and structured talent pipeline to ensure suitable and qualified successors are promoted from within the company where possible.
  9. Advertise non-executive positions publicly. The High Pay Commission recognises that the makeup of non-executive directors, who determine executive pay deals, may have an inflationary effect on pay. Even looked at positively, these nonexecutives are drawn from a relatively small pool of individuals. We believe the recruitment of non-executives should be openly advertised, making remuneration committees open to a wider group, encouraging diversity and ending the closed shop culture of appointments.
  10. Reduce conflicts of interest of remuneration consultants. The High Pay Commission has found that, despite codes of conduct, remuneration consultants are found to cross sell services to companies, giving them a direct conflict of interests. This may be having an inflationary effect on pay. We therefore recommend, in the first instance, that companies publish the extent and nature of all the services provided by remuneration consultants, acknowledging this is only the first step if cross selling is seen to continue.
  11. All publicly listed companies should produce fair pay reports. The High Pay Commission believes that it is essential that the pay gap between highest paid and the company median should be open to scrutiny, including how the ratios of highest to median pay has changed over a three-year period. If companies produce a fair pay report it will allow them to state their principles in relation to pay, encouraging pay to be considered across the company when setting executive pay, as is required by the UK Corporate Governance Code. We recommend that all publicly listed companies should publish fair pay reports as part of their remuneration reports to build trust in pay policies.
  12. Establish a permanent body to monitor high pay. Our investigations have found that escalating high pay is having a negative impact on company performance, the wider economy and trust in business. We have been shocked at the limited information available to the public, the consequent lack of informed public debate and the deep sense of unfairness that this lack of openness engenders. We recommend that a permanent body be established on a social partnership basis, much like the Low Pay Commission by government to:
  • monitor pay trends at the top of the income distribution
  • police pay codes in UK companies
  • ensure company legislation is effective in ensuring transparency, accountability and fairness in pay at the top of British companies
  • report annually to government and the public on high pay.

In some of these areas we are already further along than the UK but in many we are not even having the conversation. Of course, the US will need to go a separate path but at least we should start talking more seriously about pay, both with regard to specific companies and the larger society. The “occupy” movement in the US is symptomatic. As Broc Romanek notes this morning in his blog at

We certainly ended the year with a bang, as the 44th company to fail to receive a majority vote for say-on-pay only obtained 6.4% of the votes cast in favor. 6.4%! As noted in its Form 8-K, American Defense Systems had many more votes voted in opposition (51%) or abstention (43%). The only director up for election had even more “withheld” votes than were cast against the company’s say-on-pay.

If we don’t start addressing the pay issue there may be many more such votes, as well as more uncivil action in the streets.

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