ARLINGTON, VA, October 30, 2014 — Six in 10 U.S. public companies have conducted analyses to assess how closely their executive pay levels align with company performance. However, nearly two-thirds of those companies did not disclose the results of those analyses in their 2014 proxy statements, mostly because they are awaiting soon-to-be-released pay-for-performance disclosure guidance from the Securities and Exchange Commission (SEC), according to a new survey by global professional services company Towers Watson (NYSE, NASDAQ: TW).
The Towers Watson survey found that 60% of the 104 U.S. companies polled conducted a pay-for-performance analysis that compares both the company’s financial performance and pay positioning with those of its peers in the marketplace. Among those companies, nearly two-thirds (63%) did not disclose that they conducted an analysis or the results of the analysis in their 2014 proxies. Thirty percent of respondents disclosed the findings of the analysis, while the remaining 7% told shareholders they performed the analysis but did not reveal the details. In a similar survey two years ago, 44% of companies did not tell shareholders that they performed a pay-for-performance analysis.
When asked why they did not disclose the pay-for-performance analysis, three-fourths of respondents (76%) said they were waiting for the SEC disclosure rules to be issued, while one-third also said they were concerned about setting a precedent that will require similar disclosure in the future. About two in 10 respondents said the analysis did not yield incrementally valuable information to shareholders.
“The survey confirms that leading companies are paying close attention to pay-for-performance alignment, and are conducting comprehensive analyses using multiple definitions of pay and performance to better understand how their executive pay programs are working,” said Steve Kline, leader of Towers Watson’s Executive Compensation consulting practice in the eastern central U.S.
Interestingly, a vast majority of respondents analyze pay-for-performance alignment in ways that may be at odds with what the SEC may require. For example, among companies that conducted a pay-for-performance analysis, nearly all (96%) compared their performance to a company-defined peer group. Additionally, the majority of respondents (79%) used a three-year period to measure performance. And more than half (60%) use a definition of compensation other than that disclosed in the Summary Compensation Table, as required by the SEC.
“What’s more, about half the surveyed companies analyzed pay for performance for all their named executive officers, rather than just the CEO,” noted Kline, who leads Towers Watson’s pay-for-performance analytics team. “This additional effort shows that many companies are being thoughtful and consider how programs cascade below the CEO.”
Companies continued to make changes to their executive pay programs to further strengthen the link between pay and performance, the survey noted. More than four in 10 (43%) changed their peer comparison group, while a slightly lower percentage (40%) changed the performance measures used to determine incentive payouts. Slightly more than a quarter of the respondents used more demanding performance goals and changed the equity pay mix.
“Clearly, most companies are making an ongoing effort to strengthen the calibration of their performance goals and metrics,” said Andrew Goldstein, leader of Towers Watson’s Executive Compensation consulting practice in the central U.S. “With say on pay and increasing shareholder activism, pay-for-performance analytics are taking hold in the market as companies are more determined than ever to get pay for performance right.”
Other findings from the Towers Watson survey include:
- While total shareholder return (TSR) is the most common measure of performance that companies analyze, cited by 84% of the respondents, most assessed their performance using both TSR and a measure of operating financial performance.
- More than half (54%) of the respondents use Summary Compensation Table pay in their pay-for-performance analyses while 44%also used some form of realizable pay, which considers the value of awards granted in prior years. This was up from less than a quarter (23%) using realizable pay in a similar survey Towers Watson conducted in 2012.
About the Analysis
The Towers Watson survey was conducted in September and October 2014 and is based on responses from executive compensation executives and professionals at 104 large and midsize U.S. publicly traded companies.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 15,000 associates around the world, the company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at towerswatson.com.