THE WALL STREET JOURNAL / HAY GROUP 2014 CEO COMPENSATION STUDY

Transcription

1 THE WALL STREET JOURNAL / HAY GROUP 2014 CEO COMPENSATION STUDY Cooking up a better pay mix: Active shareholders as a new ingredient Marty Somelofske and Greg Kopp August 2015

2 CEO PAY CONTINUES TO RISE AS SHAREHOLDERS SAW COMPANIES ACHIEVE SOLID PERFORMANCE GAINS 2

3 AGENDA PRESENTATION OVERVIEW Overview of findings What did another year mean for CEO pay in 2014? Paying for performance Was there a strong relationship between CEO pay and company performance in 2014? Examples of changing programs How did companies respond to Say-on-Pay votes and shareholder outreach? What s next? What will be 2014 s lasting impact on executive pay in the United States? What will we see in 2015 & 2016? 3

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5 ABOUT THIS STUDY Hay Group s eighth year partnering with The Wall Street Journal on the study 300 U.S. public companies: Median FY 2014 revenues of $18.3 billion Proxy filings between May 1, 2014 April 30, 2015 CEO pay for FY 2014 FULLY ONLINE AND INTERACTIVE Full database can be found at wsj.com / execpay 5

6 2014 STUDY METHODOLOGY Base pay As disclosed in the Summary Compensation Table (SCT), not annualized for new executives Annual incentives / bonus Bonus + annual non-equity incentive plan compensation Long-term incentives Grant value as disclosed in the SCT (where unclear, Hay Group determined value) May include stock or options if deferred from a bonus All other compensation & change in pension value / NQ deferred comp earnings As disclosed in the SCT Performance data (source: S&P Capital IQ) 2014 Net Income and total shareholder return, annualized total shareholder return 6

7 COMPONENTS OF COMPENSATION IN THE STUDY COMPENSATION COMPONENTS Base Salary + Annual Incentives = Total Cash Compensation + Long-Term Incentives = Total Direct Compensation + All Other Compensation + Change in Pension Value + Non-Qualified Deferred Compensation Earnings = Total Compensation 7

8 Total Compensation ($MM) SNAPSHOT CEO PAY AND REVENUE BY INDUSTRY Our sample shows that larger company CEOs generally make more than that of smaller companies $18,000 $16,000 Financials Consumer Goods Oil & Gas $14,000 Health Care Industrials $12,000 $10,000 Utilities Basic Materials Full Sample Consumer Services $8,000 $6,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 $22,000 $24,000 Total Revenue ($000) 8

9 HEADLINES Shareholders score again as financial results climb While it was difficult for companies to best a record year in 2013 where total shareholder return (TSR) was 34.6%, shareholders continued to earn a very solid TSR of 16.6% in 2014 Companies were also profitable in 2014 as net income continued to exhibit solid performance of 6.6% year-over-year growth Higher bonuses and long-term incentives drive meaningful gains in total direct compensation levels Solid performance drove total pay increases of 4.6%, driven by healthy bonus and long-term incentive increases of 4.3% and 5.6%, respectively While long-term incentive grants are up from 2013, companies continue to show restraint in light of another strong TSR year Realized pay jumps significantly Continuously strong stock price growth fueled material gains in realized pay from stock option exercises, and vesting of restricted stock and performance equity 9

10 HEADLINES CONT D Companies continue to eliminate executive perquisites Following a number of years when they cut perks, mostly across the board, companies last year selectively targeted certain perquisites for elimination Emphasis on long-term performance plans have begun to stabilize Shareholder groups continue to articulate their support of such programs as evidence that companies are trying to make the pay-for-performance connection While prevalence continues to increase, companies are cautious not to place too much focus on such programs at the expense of retention Top performing CEOs have a good year The difference in pay between the top- and bottom-performing CEOs grew in 2014, indicating that bonus plans had stronger pay-for-performance alignment. That said, size of the gap itself is still fairly small, particularly when considering the huge differences in performance Over the long-term, the gap in realized pay between top- and bottom-performing CEOs becomes much wider, demonstrating a much stronger alignment between pay and performance 10

11 HEADLINES CONT D Top 10 CEOs pay have increased to their highest levels ever Year-over-year median and average top 10 CEO pay have increased 45% and 35%, respectively Liberty Global s CEO had the largest gain as pay in 2014 more than doubled from 2013 (~$111 million vs. ~$46 million) Responsiveness to shareholders continue to further shape pay mix Companies are engaging with, listening, and responding to shareholders more than ever as pay mix continues to be rebalanced towards performance Pay mix changes have been observed over the past 5+ years and continued in 2014 under the watchful eye of shareholders 11

12 US COMPANY PERFORMANCE IN 2014 MORE BALANCE BETWEEN SHAREHOLDER PERFORMANCE AND FINANCIAL PERFORMANCE WAS DISPLAYED IN 2014 Companies demonstrated solid year-over-year top- and bottom-line growth (median revenue growth of 4.5% / median net income growth of 6.6%) with the market responding to these levels of performance Shareholders had another strong year, with companies in our sample achieving a median TSR of nearly 17% That improved profitability resulted more from increased efficiency rather than from growth GDP and wage growth in the US were fairly modest, with low inflation Companies that had issued debt at historicallylow interest rates and had made capital investments in their core businesses began to reap some of the benefits in improved operating efficiency, managing to 'do more with less' 12

13 MEDIAN CEO COMPENSATION INCREASES AND VALUES As a result of performance, bigger bonuses and LTI grants drove meaningful increases in total direct compensation, which increased 4.6% over 2013 pay levels Base Salary $1,235,693 Annual Incentive $2,510,988 Total Annual $3,674,628 LTI $8,103,758 Total Direct $11,798, % 4.3% 4.1% 4.6% 2.0% Base Annual Incentive Total Annual LTI Total Direct Note: Individual values represent medians that should not be added. 13

14 REALIZED LONG-TERM INCENTIVE INCOME BY INDUSTRY High grant levels of recent years combined with a bull market continued to propel significant gains in realized ('take home') LTI values as median realized LTI rose 36.7% to $8.2 million Median CEO $8,210 Basic Materials $6,038 Consumer Goods $8,085 Consumer Services $12,653 Financials $8,655 Health Care $11,406 Industrials $7,160 Oil & Gas $5,199 Technology $8,430 Telecom $10,558 Utilities $5,459 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 Median Realized LTI ($000) 14

15 SNAPSHOT MEDIAN CEO TOTAL COMPENSATION Total compensation comes in at $13.6 million $16,000,000 $14,000,000 $12,000,000 $2,113,696 $242,786 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $8,103,758 Pension Value Chg All Other Comp LTI STI Salary $2,000,000 $0 $2,510,988 $1,235,

16 MIX OF ELEMENTS MEDIAN CEO In the US, long-term incentives always maintain the heaviest emphasis within CEO pay which is very different from the practices in other parts of the world TDC 14% 22% 64% Salary STI 4% LTI All Other Comp TC 11% 19% 56% 10% Pension Value Chg 0% 20% 40% 60% 80% 100% 16

17 CHANGE IN CEO PAY MIX 2013 VS Pay mix has remained steady year-over-year 2013 TDC 15% 22% 63% Salary STI 2014 TDC 14% 22% 64% LTI 0% 20% 40% 60% 80% 100% Percentage of Total Direct Compensation 17

18 INCENTIVES AS A % OF BASE Annual and long-term incentive payout percentages exhibited meaningful increases 700% 600% 500% 400% 300% 600% 625% 200% 100% 182% 196% 0% STI % LTI %

19 MIX OF ELEMENTS INDUSTRY CEOS (TOTAL DIRECT COMPENSATION) All sectors emphasize long-term incentives, with minor differences in overall mix. Sectors with longer time-horizons tend to weight LTI more heavily than others Median CEO 14% 22% 64% Basic Materials 12% 22% 66% Consumer Goods 14% 22% 64% Consumer Services 15% 23% 62% Financials 15% 27% 58% Health Care Industrials Oil & Gas 12% 12% 16% 19% 19% 21% 69% 69% 63% Salary STI LTI Technology 21% 22% 57% Telecom 8% 17% 75% Utilities 13% 22% 65% 0% 20% 40% 60% 80% 100% Percentage of Total Direct Compensation 19

20 CHANGE IN CEO LONG-TERM INCENTIVE MIX 2013 VS The emphasis on performance awards increased to their highest levels ever, as emphasis on stock options continues to decline over time 2012 LTI 28% 24% 48% 2013 LTI 27% 24% 49% Stock Options/SARs Restricted Stock Performance Awards 2014 LTI 25% 24% 51% 0% 20% 40% 60% 80% 100% Percentage of LTI 20

21 MIX OF LONG-TERM ELEMENTS INDUSTRY CEOS Every sector continues to emphasize performance plans over any other vehicle Median CEO 25% 24% 51% Basic Materials 33% 14% 53% Consumer Goods 29% 20% 51% Consumer Services 32% 27% 41% Financials 16% 29% 55% Health Care Industrials Oil & Gas 27% 34% 22% 20% 17% 32% 53% 49% 46% Opt RS Perf Technology 22% 28% 50% Telecom 31% 69% Utilities 8% 24% 68% 0% 20% 40% 60% 80% 100% Percentage of Long-Term Incentives 21

22 HISTORICAL VIEW: TOTAL DIRECT COMPENSATION MIX Over the last five years, emphasis on performance awards has gradually increased (and appears to have begun to steady), while emphasis on base salary has declined % 29% 18% 14% 21% % 27% 19% 13% 24% % 23% 16% 15% 30% Salary STI Options % 22% 17% 15% 31% RS Perf % 22% 16% 16% 32% 0% 20% 40% 60% 80% 100% Percentage of Total Direct Compensation 22

23 HISTORICAL VIEW: 'FIXED' VS. PERFORMANCE PAY Over time, the balance continues to shift from 'fixed' or 'time-vested' (base + options + restricted stock) to the performance-oriented (annual incentive plans + performance-vested LTI) % 50% % 51% % 53% Fixed % 53% Performance % 54% 0% 20% 40% 60% 80% 100% Percentage of Total Direct Compensation 23

24 CHANGE IN CEO LONG-TERM INCENTIVE PREVALENCE ALL INCUMBENTS Performance awards continue to reign as the most widely-used vehicle, with the biggest jump in usage. However, every equity vehicle increased in prevalence Performance Awards Restricted Stock Stock Options/SARs Number of Companies 24

25 USE OF LTI PORTFOLIOS The most widely-used 'portfolio' includes use of all three LTI vehicles, with over 80% using more than one vehicle. Over a three-year period, the biggest increase has been seen in RS + performance awards, while the biggest drop has been in options + RS Note that anything involving stock options has declined All three Opt + Perf RS + Perf Perf Only Opt + RS RS Only No Usage Opt Only

26 CEO LTI PORTFOLIO MIX Companies taking a 'portfolio' approach emphasize performance plans over the other vehicles, while restricted stock has the least emphasis within the portfolio Options, Restricted Stock & Performance Awards 26% 23% 51% Options & Performance Awards 32% 68% Stock Options Restricted Stock & Performance Awards 30% 70% Restricted Stock Performance Awards Options & Restricted Stock 52% 48% 0% 20% 40% 60% 80% 100% Percentage of LTI 26

27 PERQUISITES Nearly every perk in our study declined year over year. The biggest drops were seen in supplemental life insurance and tax gross-ups, while only personal aircraft use and financial planning remained in over half of companies 80.0% 70.0% 76% 75% 60.0% 50.0% 57% 54% 40.0% 30.0% 46% 47% 41% 42% 40% 39% 41% 35% 20.0% 10.0% 23% 23% 20% 18% 18% 15% 14% 13% 13% 13% 14% 9% 0.0% Pers. Use of Aircraft Financial Planning & Services Company Car Security Physical Exams Supplemental Spousal Travel Life Club Memberships Supplemental Disability Entertainment Tickets Matching Tax Gross-Ups Contributions

28 9% 10% 9% 15% 14% 13% 13% 18% 21% 24% 23% 35% 35% 40% 38% 42% 39% 47% 46% 54% 52% 58% 66% 75% PERQUISITES Looking over a 6-year period shows just how far perquisites have fallen. Tax gross-ups, clubs, and spousal travel have declined the most substantially, while personal aircraft use, personal security, supplemental life, and supplemental disability have actually increased 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Pers. Use of Aircraft Financial Planning & Services Company Car Security Physical Exams Supplemental Life Spousal Travel Club Memberships Supplemental Disability Entertainment Tickets Matching Tax Gross-Ups Contributions

29 PERQUISITES PERSONAL AIRPLANE USE Median values of the personal airplane use perquisite increased modestly from $105,281 in last year s sample to $119,399 in 2014, and held almost flat in prevalence Median CEO Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials $119,399 $109,111 $113,783 $132,680 $91,457 $102,976 $145,832 Oil & Gas $50,966 Technology $172,620 Telecom Utilities $71,792 $0 $50,000 $100,000 $150,000 $200,000 Median Airplane Use $ Value 29

30 TOP VS Six CEOs appeared in the top 10 in both 2013 and 2014 nearly all of whom run media companies that now routinely sit a the top of the list in pay levels. Their pay positioning is in large part due to their size, scale, operating complexity, talent profile, and pay volatility in the sector Company Executive TDC Company Executive TDC Oracle Lawrence J. Ellison $78,060,229 Liberty Global Michael T. Fries $110,607,895 CBS Leslie Moonves $64,358,386 Microsoft Satya Nadella $84,296,026 Liberty Global Michael T. Fries $45,530,779 Oracle Lawrence J. Ellison $65,720,985 Viacom Philippe P. Dauman $36,778,696 Qualcomm Steven M. Mollenkopf $60,619,442 Disney Robert A. Iger $33,352,517 CBS Leslie Moonves $53,013,427 Time Warner Jeffrey L. Bewkes $32,374,826 Viacom Philippe P. Dauman $43,788,679 Estee Lauder Fabrizio Freda $30,941,918 Disney Robert A. Iger $42,592,600 Aetna Mark T. Bertolini $30,429,180 Actavis Brenton L. Sauders $36,558,642 ExxonMobil Rex W. Tillerson $27,641,625 Time Warner Jeffrey L. Bewkes $32,469,657 McKesson John W. Hammergren $27,164,283 Liberty Interactive Gregory B. Maffei $32,149,260 Median $32,863,672 Median $48,401,053 Average $40,663,244 Average $56,181,661 30

31 02 PAYING FOR PERFORMANCE 31

32 PAYING FOR PERFORMANCE HIGHLIGHTS HOW MUCH DID ANNUAL AND LONG-TERM PERFORMANCE DRIVE PAY OUTCOMES IN 2014 Strong annual performance drove higher bonuses, but weaker performance didn t necessarily drive lower bonuses While more pay disparity was observed in 2014 between top and bottom performing CEOs, significant declines in profitability for bottom performing CEOs only translated into a -4% decline in cash compensation levels This trend continues from 2013, where strong annual performance didn t drive significantly higher bonuses for top performers However, the data suggests that the overall pay-for-performance state has improved in 2014 as the spread in change in TCC % between top-, middle-, and bottomperforming CEOs are more appropriately differentiated Long-term performance, however, continues to drive the clearest differentiation we have seen between the various levels of performers 32

33 PAYING FOR PERFORMANCE CHANGE IN CEO TCC VS. CHANGE IN NET INCOME The top-third of performers saw strong increases (+14.0%), middle-third saw modest increases (+4.7%), but bottom-third companies saw only modest declines (-4.0%) despite big differences in profitability however, differentiation in TCC % change has improved year-over-year 40% 38.2% 30% 20% 14.0% 10% 0% 6.6% 4.7% -10% -4.0% -20% -30% -26.7% Top Third Middle Third Bottom Third % Change in Net Income % Change in TCC 33

34 PAYING FOR PERFORMANCE CHANGE IN CEO TCC VS. CHANGE IN NET INCOME BY INDUSTRY Utilities showed the largest increase in profitability, but only a modest increase in cash, while financials performed well and saw no increase in cash. Telecom s significant declines in profitability did not seem to translate into similar declines in cash compensation % Change in TCC % Change in Net Income Median CEO Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Technology Telecom Utilities -16.3% -1.9% -1.4% -2.2% -0.2% -4.0% 4.1% 6.6% 1.3% 3.8% 0.0% 7.5% 2.4% 5.2% 8.7% 4.8% 3.8% 4.9% 11.3% 11.5% 18.8% 23.1% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Percentage Change 34

35 PAYING FOR PERFORMANCE REALIZED CEO LONG-TERM INCENTIVE INCOME VS ANNUALIZED TOTAL SHAREHOLDER RETURN Looking at long-term performance, however, we saw strong alignment between longterm TSR performance and realized LTI in 2014 Realized LTI ($000) $14,000 $12,000 $14,214 3 Yr TSR: 35.0% $10,000 $8,000 $6,000 $4,000 $8,102 3 Yr TSR: 21.2% $5,554 3 Yr TSR: 9.5% $2,000 $- Top Third Middle Third Bottom Third 35

36 PAYING FOR PERFORMANCE WHAT DOES THIS TELL US? Annual performance benefits top performers, without really hurting bottom performers as long as companies continue to deliver solid TSR performance While TSR is typically not a classic consideration in paying bonuses, the fact that the proxy advisory firms use it to assess annual performance may have given some Compensation Committees desired flexibility Given the emphasis on performance-based LTI grants and a more volatile LTI portfolio, significant realized pay gaps between top, middle and low performers should continue to be displayed The vesting of performance awards increasingly drove realized LTI in 2014, in part because so many such plans use relative TSR to trigger payouts, coupled with consecutive years of strong TSR to fuel share price and option exercise patterns It s clear that in today s pay program, TSR remains a driver of pay outcomes both in the short- and the long-term 36

37 03 EXAMPLES OF CHANGING PROGRAMS 37

38 EXAMPLES OF CHANGING PROGRAMS COMPANIES RESPOND TO SAY-ON-PAY VOTES AND SHAREHOLDER OUTREACH In 2014, shareholder outreach intensified as companies engaged investors throughout the year to identify and discuss pay issues that mattered most to them Following those meetings, companies often listened to the expressed concerns and recommendations of shareholders, with many adopting substantial changes to their pay programs In particular, companies have made pay mix changes that will be reflected immediately in 2014 and going forward The most common types of changes seen in 2014 involved the following four areas: Adopted performance-based equity vehicles Enhanced emphasis on performance-based equity vehicles at the expense of time vested equity vehicles Redesigned STI and LTI programs with new performance metrics Enhanced disclosure and presentation in CD&A We have seen pay mix evolve over the past 5+ years, but more so in 2014 as shareholders stepped up their involvement in the pay process 38

39 EXAMPLES OF CHANGING PROGRAMS COMPANIES RESPOND TO SAY-ON-PAY VOTES AND SHAREHOLDER OUTREACH CONT D Company New LTI Vehicle Increased Emphasis on Perf-Based LTI New Perf Metrics New Incentive Caps Perf Period / Goal-Setting Adjustment STI Redesign Target Enhanced Proxy Disclosure Merck Hess Republic Services Huntsman Manpower Group Corning Aetna Avon Products Most pay program changes in response to shareholders observed within our sample included increased emphasis on performance-based LTI and new performance metrics 39

40 EXAMPLES OF CHANGING PROGRAMS COMPANIES RESPOND TO SAY-ON-PAY VOTES AND SHAREHOLDER OUTREACH CONT D Company Historical SOP Support Pay Program Change Shareholder Engagement? Target 2014: 77.9% 2013: 52.1% Introduced PBRSUs 100% of LTI mix tied to performance Added ROIC to PSU plan Redesigned STI program by adding new performance metrics Merck 2014: 96.6% 2013: 88.8% Introduced a new PSU program with rtsr and OCF, measured over a cumulative 3-year period (rather than three distinct 1-year periods) Streamlined company scorecard to focus on critical performance metrics revenue, EPS, and pipeline Hess 2014: 97.2% 2013: 71.4% Decreased weighting on time-based RS Increased weighting on PSUs, raising the performance-based component from 50% to 80% Re-introduced stock options Republic Services 2014: 59.7% 2013: 88.2% Decreases weighting on time-based equity / replaced options and cash LTIP with performance shares Added rtsr metric Enhanced CD&A disclosure, particularly around goal-setting process 40

41 EXAMPLES OF CHANGING PROGRAMS COMPANIES RESPOND TO SAY-ON-PAY VOTES AND SHAREHOLDER OUTREACH CONT D Company Historical SOP Support Pay Program Change Shareholder Engagement? Huntsman 2014: 75.2% 2013: 83.8% Instituted PSUs that vest upon achievement of rtsr Capped aggregate payout under STI program with adj EBITDA performance Modified Executive Chairman STI award opportunity so that increased portion (80%) tied to increased achievement of financial metrics Enhanced proxy disclosure and presentation, specifically in CD&A Manpower Group 2014: 96.2% 2013: 80.6% Return to 3-year performance period for PSUs Replaced Economic Profit with ROIC Increased emphasis on PSUs to represent over 60% of long-term equity grants to NEOs Corning 2014: 95.9% 2013: 70.7% Increased emphasis of CPUs from 50% to 60% Updated performance metrics in STI and LTI plans -- STI measures become core EPS and core net sales, and LTI measures changed to OCF and core net sales Increased the CPU performance period from a one-year with two additional years of vesting to a threeyear performance period based on average of three oneyear periods Capped payouts under STI plan to 150% of target (from 200%) with addition of negative TSR cap 41

42 EXAMPLES OF CHANGING PROGRAMS COMPANIES RESPOND TO SAY-ON-PAY VOTES AND SHAREHOLDER OUTREACH CONT D Company Historical SOP Support Aetna 2014: 88.4% Avon Products 2013: 88.3% 2014: 57.5% 2013: 56.5% Pay Program Change Lengthened the vesting period for PSUs from 24 months to 36 months, using a two-year adjusted EPS growth goal changed from two one-year periods Replaced MSUs with SARs for senior executives Beginning in 2015, lengthened the PSU performance period from 24 months to 36 months Performance period for performance RSUs adjusted to two years with three-year vesting Incorporated new TSR performance metric and negative TSR cap Capped annual incentive awards at 150% of salary (from 200%) Eliminated individual performance component in STI now 100% based on company financial goals Eliminated committee discretion within performance ranges in STI, replaced with fully formulaic measurement using a performance curve Shareholder Engagement? 42

43 EXAMPLES OF CHANGING PROGRAMS COMPANIES RESPOND TO SAY-ON-PAY VOTES AND SHAREHOLDER OUTREACH CONT D Companies continue to refine their pay programs based on feedback collected through shareholder outreach efforts Depending on the shareholder outreach effort and the level of response through the right changes to the pay program, SOP voting outcomes will continue to be strong and may even be dramatically enhanced In the Say-on-Pay era, shareholders have been most influential on pay program design in 2014 Pay-for-performance continues to be a key theme and a desired philosophy by shareholders as some changes to the pay program are likely 'right' from a business perspective, while other changes simply 'check the box' from a shareholder perspective By engaging with shareholders often to discuss the pay program in light of the business context, certain pay practices may be easier to rationalize and even challenge proxy advisors on 43

44 04 WHAT S NEXT? 44

45 WHAT S NEXT? LOOKING BACK AT 2014 Most companies continue to receive strong shareholder support for their pay programs Shareholders spoke and companies listened Pay mix continues to evolve as companies enhance their pay for performance reinforcement Performance share plans continue to be the enabler for the new, more shareholder friendly, compensation mix. Some companies are going farther than the 50% standard design Shareholder outreach continues to pick up steam with no slow-down in sight Outreach activity continues to intensify and should carry into 2015 Companies are working hard at improving pay program disclosures More explanation and rationale on pay decisions and structure are becoming the norm within the CD&A More depth can be found today with respect to annual incentive and performancebased LTI disclosures 45

46 WHAT S NEXT? ISS ISS continues to be the dominant proxy advisory firm While the majority of large institutional shareholders continue to follow them, some have developed their own pay 'playbooks' ISS has become more flexible and continues to improve its approach ISS has refined its approach to evaluating pay programs in each of the last three years and so far changes have generally been viewed favorably by corporate issuers and compensation consultants Biggest pay related change for 2015 was a change to how ISS evaluates equity plans ISS adopted a 'scorecard' model that considers a range of positive and negative factors rather than a series of 'pass' or 'fail' tests to evaluate equity plan proposals ISS has made strategic acquisitions to enhance its rigor in evaluating pay programs ISS acquired Incentive Lab in the Fall of 2014 to bolster its ability to benchmark performance-based compensation and assess the rigor of performance targets 46

47 WHAT S NEXT? REGULATORY CHANGES 2014 was another slow year for executive pay legislation and regulatory efforts While many had anticipated that the SEC would finalize some form of its September 2013 proposed rules on the CEO pay ratio disclosure, nothing has been released as of the date of our study The SEC moved on in 2015 to other aspects of Dodd-Frank legislation in its rulemaking In February, the SEC proposed rules that would require companies to disclose whether their any employee or director may hedge their companies stocks In late April, the SEC proposed rules to address the 'pay-versus-performance' disclosure, which defines performance as TSR and pay as a version of realized pay Further intensifies the already-heavy focus on TSR, which may start showing up in some annual incentive plans By defaulting to TSR, the SEC missed an opportunity to advance the discussion around performance measures that truly reflect a company s strategy execution Rules provide a standard pay-for-performance table that may eliminate the need for alternative supplemental pay disclosures (i.e., realized / realizable pay) In the meantime, still waiting on SEC rulemaking around 'claw-back' provisions 47

48 WHAT S NEXT? STAYING AHEAD OF SAY-ON-PAY Shareholder outreach seems to be working in optimizing pay program support This is much easier to do with shareholders during consecutive strong TSR years The poor TSR year has not yet happened in the era of mandatory SOP Building a close relationship now with your largest shareholders can help make the conversation easier when the market takes a downward turn The effectiveness of shareholder outreach efforts will really be tested in a poor TSR year Aligning pay and performance will be a 'two-way street' between companies and their shareholders Companies have listened to shareholders and gave them a nod with respect to making pay programs more about performance in 2014 However, aligning the pay program with the intended business strategy will require some trust on the part of shareholders as not all pay program changes should be about 'checking the box' 48

49 QUESTIONS? Marty Somelofske T: (201) E: Gregory Kopp T: (703) E: e w b blog.haygroup.com 2015 Hay Group. All rights reserved. ABOUT HAY GROUP We believe that it s people who make change happen. So, while we operate on a global scale, we keep the individual at the very centre of our thinking. We re world-sized: 4,000 employees, 87 offices, 49 countries. We draw on management data from over 125 national centres. We work alongside more than 8,000 organizations in the private, public and notfor-profit sectors, across every major industry, in virtually every corner of the earth. We re focused: on people who they are, why they do what they do, and how they can be inspired and enabled to perform better at every level. Confident of the knowledge and methods we ve originated over 71 years in business, we remain enthusiastic about new ideas that prove their worth. We transform: we help managers to become leaders, and leaders to perfect their skills. Because when people are at their best, your strategic vision is ready to grow into business reality. Facebook.com/HayGroup