Good governance mandates alignment of practices with "best fit" and not just "best practice," driven by internal and external factors. Internal factors drive alignment of compensation strategy with business objectives such as culture, current plans, financial objectives, organization structure and senior management profile. External factors influence alignment with best governance practices: stakeholder perceptions, competitive practices, industry trends, legal/regulatory landscape, media reporting and economic conditions.
Legislative and regulatory activity is slowing down, and the Dodd--Frank Wall Street Reform and Consumer Protection Act rulemaking by the U.S. Securities and Exchange Commission continues to be much slower than expected. For example, companies have resisted CEO pay to average worked ratio disclosure as being too costly to implement. This and other Dodd-Frank rules seem to be caught in a tug of war between Congress and industry, with the SEC being caught in the middle.
With regard to the non-binding "say on pay" (SOP) vote, companies are not required to take any specific action when faced with a negative vote. However, a public company is required to disclose in its proxy statement whether or not it has failed, and if so, how the company has responded to the results of the prior year say-on-pay vote in determining compensation policies and decisions.
This has changed the landscape of the proxy statement as most companies with a failed SOP vote, or an SOP vote with less than 70 percent affirmative vote, will make a full review of their executive compensation plans and programs.
The influence of proxy advisory firms and shareholder activists has become stronger. Investors cannot review each company as there are too many to analyze, so they rely on Institutional Shareholder Services (ISS) and Glass Lewis & Co. for voting guidance. Under pressure from corporations, the SEC has compelled ISS to reach out to corporations for feedback on voting policy, which resulted in changes to peer group selection and definition of pay (e.g., "realizable pay").
Overall, pay levels are expected to continue their modest increase into 2013. Performance metrics and long-term incentives mix continues to be a primary topic of interest, with continued emphasis on the pay-for-performance linkage and the percentage of total pay tied to performance continuing to rise.
How Say-on-Pay Has Changed the Proxy Statement and Pay Disclosures
The proxy statement has gone beyond a compliance document, and has turned into a marketing and investor relations tool. Certainly, proxy statements are also getting more colorful in nature, with glossy charts and improved aesthetics. Many companies, including Weatherford International and Honeywell International Inc., are hiring professional designers to improve the look of the proxy.
It is also becoming more common to see executive summaries of the entire proxy statement, not just a summary for the Compensation Discussion...