Executive compensation in the US is changing in response to shareholder demands, according to the National Association of Corporate Directors' 2015–2016 Public Company Governance Survey.
The survey compiles benchmarking data on governance trends and practices from more than 1,000 public company corporate directors and governance professionals. It offers new analysis on engaging with activists, shareholders, and cyber-security oversight practices.
Survey respondents were asked: what are the most common public-company board responses to shareholder pressure? For the second year in a row, the most common board responses to shareholder demands were the expansion of compensation explanations in the proxy statement (36 per cent), the revision of executive compensation plans (28 per cent), the alteration or implementation of dividends and stock buybacks (18 per cent) and revised director compensation (13 per cent).
John Egan FAICD from Egan Associates, a company specialising in remuneration and governance, says remuneration issues of concern are also common from proxy advisers and institutions in Australia.
"Shareholder concerns include poor communication, along with poor explanation of incentive payments, inappropriate performance hurdles in relation to long-term incentives and short time-lines, that is, vesting progressively after one, two and three years."
Other concerns expressed have related to the use of fair value for the purpose of increasing awards under long-term incentive plans without disclosing the award implications of that practice, including in their description of the relative weighting of fixed remuneration, annual incentives and long-term incentives.
Egan added: "The questions we are being asked to address from clients in preparing responses and Q&As for AGMs relate to why annual incentive payments are close to 100 per cent of the maximum and well above target, given recent share price performance," he says.
"This reflects, in one sense, a disconnect between the foundation for the determination of annual incentive payments and investor returns."
He said annual incentive payments primarily reflect profit growth and the achievement of operational and strategic initiatives that have not sheltered the company from the recent share market volatility, or particular industry sentiment where share prices may have fallen up to 25 per cent.
Egan points out that another challenge boards face is a lack of explanation in relation to annual incentive payments. Shareholders are advised of the value of an award under the annual incentive program, yet are given no explanation as to how it was determined and what the performance criteria were.
For more information, visit the NACD's website.
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