Getting pay for performance right: what companies that deliver sustained superior performance over time do differently.

• Author: Lippincott, Todd
• Position: EXECUTIVE COMPENSATION

AS THE SECOND YEAR of mandatory say-on-pay votes in the United States winds down, it's never been more important for companies to achieve the right alignment between executive pay and company performance. Shareholders are scrutinizing the link between pay and performance more closely than ever, and pay-for-performance "disconnects" are the leading cause of negative say-on-pay vote recommendations from proxy advisory firms. Towers Watson's continuing research on say-on-pay voting trends has consistently found imbalances between executive pay levels and company performance to be a primary cause of low shareholder support for companies' say-on-pay resolutions.

But what's the most effective way to achieve pay-for-performance alignment? And, specifically, how can companies ensure that their executive compensation programs do, in fact, support enhanced performance and the creation of shareholder value?

To assess the connection between executive pay and business performance, Towers Watson recently completed an initial study of companies that delivered sustained superior performance over time to see how their pay practices have evolved and, most importantly, to learn if their executive compensation programs set them apart in any way. This study was part of a broader effort to establish a set of guiding principles for executive compensation and governance that we plan to publish in the coming months.

The study focused on large publicly traded companies in the Russell 3000 that outperformed the index in terms of total shareholder returns on a three-, five-, 10- and 15-year basis. We then narrowed the group by selecting a cross-industry sample of companies that successfully weathered the financial crisis by posting positive, above-market levels of revenue and profit growth over that period. Our final sample of approximately 20 companies used for in-depth analysis had revenues ranging from $1 billion to $108 billion, with a median of $15 billion. We then analyzed these companies' public disclosures over the 15-year period and compared their executive pay practices to those of the broader market, based on Towers Watson's extensive research and databases of competitive pay practices.

Our analysis revealed some interesting differences in how high-performing companies approach executive pay. In short, the high performers look much like other companies in terms of the general structure and design of their executive pay programs. However, they differentiate...