INTERVIEW: Mercer Partner Susan Eichen Offers Tips to Avoid Compensation Pitfalls in 2019 – CorpGov
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INTERVIEW: Mercer Partner Susan Eichen Offers Tips to Avoid Compensation Pitfalls in 2019
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INTERVIEW: Mercer Partner Susan Eichen Offers Tips to Avoid Compensation Pitfalls in 2019

Susan Eichen, Partner, Mercer’s Executive Law & Regulatory Group

 

With more scrutiny on a wide range of compensation practices, companies are under pressure to develop a fine-tuned approach going into proxy season. Mercer Partner Susan Eichen, who recently published a list of six tips to tackle such issues, spoke to CorpGov about a range of topics from the risk of excessive director compensation to avoiding gender pay gaps. She also pointed out that while the CEO pay ratio disclosure didn’t cause a huge stir on the face of it, there remains a risk of legislation penalizing companies that don’t pay employees more fairly.

 

CorpGov: Why has the CEO pay ratio drawn such little attention since disclosures rolled out and do you think there are other measurements that investors would prefer to see?

Ms. Eichen: The response to the first year of CEO pay ratio disclosures was muted for a few reasons. First, the ratios were lower than expected. For S&P 500 companies, for example, the median ratio was 166:1. Most people were expecting ratios to be around 350:1 or more, based on highly publicized statistics that were calculated using general economic data for employee pay figures, instead of company-specific pay levels.

Second, differences in companies’ workforce structure, combined with the rule’s flexibility, limited comparability of ratios between companies, even within the same industry.

And third, companies with relatively high ratios explained how their business model and workforce structure contributed to the large gap, such as having a lot of part-time or overseas workers.

Interestingly, the ratios have drawn attention to pay inequality more generally, and investors are asking companies to provide more information on their workforce demographics and pay. And Democratic lawmakers are looking at pay inequity. As a result, some are proposing to limit stock buybacks (which return money to shareholders) unless companies improve worker pay.

Also, several state and local initiatives have piggybacked on the disclosure — proposing economic penalties on companies with large executive-to-worker pay gaps. Portland, Oregon, was the first jurisdiction to enact legislation imposing a tax on companies with high ratios.

In terms of other measurements, two come to mind. Proxy advisers look at the ratio of CEO pay to that of other proxy named executives as an indication of potential succession planning issues. And shareholders have submitted proposals asking companies to disclose the gap in compensation between male and female workers (which is already a requirement in Great Britain).

 

CorpGov: How often do pay packages require a significant percentage of equity or stock ownership and do you expect shareholders to push for more?

Ms. Eichen: This is an interesting question. Companies typically already pay the largest portion of executives’ compensation in the form of equity, and expect executives to meet stock ownership guidelines. Shareholders generally push for at least half of CEO equity compensation to be performance-based, including a preference for longer performance periods.

Stock ownership guidelines are generally expressed as multiples of pay or a fixed number of shares. Typical guidelines are 5 or 6x salary for CEOs, scaling down to 2 or 3x salary for less senior officers. They’re enforced in various ways, including restrictions on sale of company stock until the guidelines have been met and paying a portion of annual incentives in stock instead of cash.

 

CorpGov: When it comes to pay, do you find investors doing more of their own analysis and relying less on proxy advisor recommendations?

Ms. Eichen: When it comes to pay, investors use proxy advisers’ evaluations in different ways. Some follow the advisers’ voting recommendations, some use the advisers’ analyses to make independent voting decisions, and others have their own voting guidelines. There has been a lot of criticism of proxy advisers recently, including the SEC looking at their role in the overall proxy process. Large investors generally follow their own voting guidelines, but smaller investors may not have the resources to conduct their own research and are likely to continue to rely heavily on proxy advisers, absent any SEC action.

 

CorpGov: Director pay is generally a fraction of the packages received by senior management executives. Why, then, is it important for companies to monitor closely?

Ms. Eichen: Since directors set their own pay, there are greater concerns about conflicts of interest. Plaintiffs have had greater success in high-profile director pay litigation than when executive pay is attacked. As a result, attention has been drawn to a handful of outlier companies that have high director pay. And proxy advisers have begun targeting excessive director pay and looking for more disclosure of how companies determine director pay. It’s a natural outgrowth of scrutiny of the executive pay-setting process, with a perception that some directors may be too close to management, possibly clouding their perspective.

 

CorpGov: Recent studies show a steady increase in board diversity in several respects, especially gender and race. Should companies begin to consider other types of diversity such as age and professional background?

Ms. Eichen: All companies should strive for a balanced board with diverse perspectives. Many companies already consider other types of diversity in selecting director nominees, including leadership, skills, and experience in addition to gender, race and age. Since the natural board refreshment process may not be sufficient to keep up with the board’s changing needs, some companies are wrestling with issues like mandatory retirement age and term limits.

 

CorpGov Contact:

John Jannarone, Editor-in-Chief

www.CorpGov.com

Editor@CorpGov.com

Twitter: @CorpGovernor

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