Current trends for compensation committees: a mid-year look at the issues with which Compensation Committees are wrestling.

Author:Shaw, David
Position:SPECIAL FOCUS: BOARD CONSULTANTS 2016 REPORT
 
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At mid-year, 2016 remains something of a puzzle for Compensation Committees. Key questions surround the state of the economy. Will it continue to slog along, revive more strongly, or dip into recession? How will the Presidential election in November affect the regulatory and legal environment around CEO and senior executive compensation? And how should the Committee continue to prepare for implementing the Dodd-Frank mandate to disclose the ratio of CEO pay to the median compensation of a company's employees in 2017?

To get a deeper look at the outlook for Compensation Committees, we spoke to Rose Marie Orens, senior partner at Compensation Advisory Partners. She laid out three areas of continuing focus for the Compensation Committee: pay-for-performance, CEO pay ratios and the risk environment surrounding compensation.

Pay for Performance

While Compensation Committees have done a lot of work around aligning executive pay with performance, "it's been a tough year in which to set goals," Orens says. "For the board, the issue is how they will be able to align pay if the rest of the year is more difficult than anticipated."

Orens notes that Compensation Committees have made progress around goal setting and tying compensation to strategic plans, working to develop ways to compensate executives around those strategic plans. "It's more difficult to set specific objectives around strategy," she says. And this process continues to be critical. "But if one year is tough to project, three years is even tougher!"

CEO Pay Ratios

While CEO pay ratios won't appear in proxies until next year, Orens observes that some companies have already begun to present these metrics. "The major theme as we move toward pay ratio reporting requirements is increased sensitivity to what we're doing for rank and file employees. How is the company overall treating its employees? The Compensation Committee should ask how the executive compensation program resembles what's being done for everyone else."

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She doesn't see relief in sight on the backlash against high CEO pay, even after several years of Say on Pay. "When a below average Say on Pay vote is 92% in favor, that tells us that shareholders are not that upset with CEO pay, because clearly they wouldn't have voted the way they did if they were. But there's a disconnect. If Say on Pay was supposed to be something that was going to reduce compensation for CEOS, it hasn't."

But even with shareholder...

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