CHAPTER 06 Executive Decisions: Compensation Trends In and Outside of Times of Crisis
When boards and compensation committees provide new equity grants at current depressed prices, which may be seen as an attractive way to make up for forgone salaries or share drops in the longer-term, they should heed the lessons learned after the Great Recession and be cautious to avoid windfalls – or the perception of windfalls – that could negatively affect issuers’ reputations among shareholders and other stakeholders. Long-term incentive grants should be tested for dilution and potential gains upon recovery of the stock market. It might also be prudent when establishing grant formulas to leave room for discretion or to fix caps on payouts. AN INCREASED ROLE FOR (MEASURED) BOARD DISCRETION The discretion of boards and compensation committees can be a useful tool in times of crisis. However, the exercise of discretion in making compensation decisions is likely to be scrutinized in the current climate. Some recommendations for discretionary decision-making that have arisen in recent literature include the following: 120 – Establish ongoing communication between the board or compensation committee and management with respect to performance, potential variances and the resulting pay in order to maintain transparency and avoid surprises at year-end. – Make decisions in-line with the issuer’s broader compensation philosophy.
LESSONS LEARNED FROM MANDATORY PAY RATIO DISCLOSURE IN THE UNITED STATES AND THE UNITED KINGDOM As discussed in Davies Governance Insights 2018 , both the U.S. and the U.K. have mandated pay ratio disclosure. In the years since those disclosure requirements were adopted, Canadian investors and stakeholders have had the opportunity to scrutinize the effects of disclosure in those countries. The flexibility permitted within the U.S. disclosure regime has, to some extent, undermined the usefulness of the disclosure, as it continues to result in significant variance between the disclosed ratios, even among issuers in the same industry. To date, it appears that no U.S. company has won or lost vote support on the basis of its pay ratio disclosure. 117 In 2019, both ISS and Glass Lewis stated that they would include CEO pay ratio disclosure in their proxy papers, but the ratio would not be considered in future voting recommendations. According to researchers at Equilar, Inc., data from the first three years of mandatory CEO pay ratio disclosure in the United States show a general trend of higher median pay ratios among issuers with low levels of say-on-pay support. However, the data is inconclusive with respect to whether or not lower CEO pay ratios helped to improve say-on-pay support among shareholders. 118 The U.K. regime provides less flexibility. It requires issuers to choose among three concrete methodologies to calculate the CEO pay ratio. High Pay Centre, a U.K. corporate governance think tank, has identified that the median ratio between the CEO and the lower quartile threshold of the pay distribution was 78:1 in the FTSE 350 issuer size category, and 109:1 among the more capitalized FTSE 100 companies. 119
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