Alright, that’s it. Say on Pay is here to stay.
GovernanceMetrics International today launched the Executive Pay Scorecard, designed to allow investors to flag those companies with ineffective executive pay packages and policies.
It’s not as if we haven’t done this before with The Corporate Library’s ratings, with old Governance Metrics’ ratings, with my Pay for Failure and Pay for Success series, but this Scorecard kind of brings all that expertise together in one place, distills it, and puts it out there.
The biggest focus of the 10 metrics that are used to assess effective compensation is, of course, incentive pay. Is it aligned? Is it too easy? Those kinds of things. But we also look at key elements of fixed pay – severance, pensions – and an internal pay equity test. It’s all explained very, very soberly in a standards document that I wrote for the purpose. For example:
Does the company only pay long-term incentives to the CEO for above median performance against a peer group?
While it would seem axiomatic for a well-governed incentive plan that executives would only receive a reward for performance if their company was outperforming at least half of its peers, incentive plan design in the US makes such a position rare. The vast majority of long-term performance-related awards have some form of payout for below median performance and such plans will receive a negative score. Companies that neither have long-term performance measurements nor measure their performance against their peers will also receive a negative score on this test.
We assessed compensation policy based on 2010 proxies initially to test the product and, based on that research, average scores are, well, average. In fact most of the S&P 500 gets an average concern rating, though there’s a big range among those averages. Around 14 percent gets a high concern, and about 15 percent a low concern, so each of these last is a relatively select group. All these details are in a special report Greg Ruel and I wrote. That report also lists the five companies that scored the worst, and it explains exactly why they scored the worst.
We’re expecting largely similar results for the coming proxy season, and we’ll be publishing scorecards that will be available to subscribers to the service for each of the S&P 500 that have filed or are filing proxy statements between January 1 and December 31, 2011. Scorecards will be available no later than two weeks prior to the annual meeting.
Enjoy!
Paul Hodgson – Senior Research Associate