3 executive compensation myths holding your board back
Compensation for top leaders is one of the many things that a publicly traded company needs to disclose to regulators and shareholders. But if you and your board treat executive compensation as just another line item, you need to think again.
Shareholders increasingly demand transparency and insight into a company’s executive compensation strategy, including the rationale behind pay calculations, and proof that this strategy supports overall company competitiveness and resilience. Meanwhile, regulations like Dodd-Frank have heightened the scope and sophistication of what companies are required to disclose.
Here’s the bottom line: Independently calculating, analyzing and disclosing executive compensation is more complicated than it used to be. Yesterday’s measures form only part of the picture. To bring executive compensation strategies into the present day — and the future — companies and their boards need more data and more analysis, and they need it more quickly.
But before you start overhauling your entire strategy, it’s time to consider some common executive compensation myths, and how technology can help craft compensation packages that satisfy executives and stakeholders alike.
Myth 1: We already have a compensation consultant. We don’t need more help.
Outside consultants play a key role in executive compensation plans. They contribute valuable expertise and can provide a fresh, objective eye.
But your compensation consultant might not have access to all the information you need in today’s business environment, like voting data or internal metrics on your company’s performance.
And they might not have the latest tools, like a compensation modeling platform that accelerates and sharpens analysis.
By having access to your own data solution, you can augment your consultant’s findings and promote a more effective collaboration.
Myth 2: Only huge companies with controversial executives need to worry.
Finding the right mix of pay and benefits to recruit the best talent, reward performance and meet shareholder expectations is easier said than done.
There are thousands of data points to analyze across many moving parts. such as:
- Stock options
- Market-based performance awards
- Granted compensation
- Realized compensation
It’s a time-consuming exercise for teams who already have a full to-do list. Add in activist red flags like one-off retention awards, and you could have a proxy contest on your hands.
Even in smaller companies, executive compensation is too big of an issue to operate in a silo. To withstand investor scrutiny and support business sustainability, you need access to the latest data, trends and reputational insights. The ability to analyze and share your findings quickly and effectively is also crucial.
Myth 3: PVP is NBD (no big deal).
Your company’s started including Pay Versus Performance (PVP) disclosures on your proxy statement, as required by the SEC since the beginning of 2023. But are you using the right metrics and format? Even more importantly, will shareholders find adequate the amount and type of information you’re disclosing?
The SEC designed PVP to make life easier for investors and proxy advisors. But that doesn’t mean it will be easy for you and your board. Now more than ever, you’ll need to be able to justify your organization’s compensation decisions. This will be more work on your end, with more risk of fines, misaligned shareholder expectations or even the potential of a proxy fight.
PVP requires a level of disclosure that is new to many publicly traded companies. Facilitating such an “apples-to-apples” comparison as the rule intends will require significant research and data collection on your end.
Internally, you’ll need to gather information from across your organization: legal, finance, HR, investor relations and so forth. Externally, you’ll need research into:
- Market and industry standards
- Relevant peers
- Compensation benchmarks for your industry
- Benchmarks for company performance, like net income and total shareholder return relative to peers
Where can you find all of this data? How will you be able to analyze it at the speed of business, evolving regulatory requirements and stakeholder scrutiny?
Diligent gives you the full executive compensation picture
You don’t have to spend weeks manually tracking down data or working tirelessly to craft executive compensation strategies.
By using Diligent Market Intelligence, you get a comprehensive view of corporate governance and shareholder engagement across publicly available sources, plus the ability to track all of these metrics with exclusive intelligence and analytics. This includes:
- Research on the executive compensation strategies of your peers and industry best practices
- Supporting data you can’t get anywhere else, like Glass Lewis voting recommendations and market intelligence on investor sentiment
- Benchmarking tools that enable the same analyses used by investors and proxy advisors
- The ability to perform in-depth customized analyses against a wide variety of performance metrics
To help you put everything into context, Diligent Board & Leadership Collaboration offers a secure, easy-to-use online portal for collaboration, as well as customizable reporting templates and dashboards for timely information-sharing. What’s more, submitting your disclosures ahead of time will put you in good stead with proxy advisors and investors, building further confidence, trust and goodwill as you prepare for proxy season and your next AGM.
Get your executive compensation strategy up to date and future-ready. Request a demo of Diligent Market Intelligence and Board & Leadership Collaboration today.
