In our paper, Pay Harmony: Peer Comparison and Executive Compensation, which was recently made publicly available on SSRN, we find evidence consistent with the presence of peer comparison influencing pay policies for executives inside firms. Our underlying approach is to measure changes in pay co-movement, disparity and productivity using a 1992 SEC ruling that mandated greater disclosure of top executive pay. We argue that this ruling led to greater awareness of pay and, hence, greater peer comparison throughout all managerial ranks, particularly in non-proximate managers who had natural information barriers prior to the ruling.

We present the results of three analyses that, taken together, support the argument that firms’ pay policies respond to peer comparison and concerns about internal equity. In general, we find evidence that pay variance within firms, pay distance between managers and division productivity all increased during this period. However, we find that these measures increased less among firms and managers that were more affected by the 1992 SEC disclosure rule. Specifically, after the new regulation, we find increases in PRS (pay-referent sensitivity)—or greater co-movement of division manager pay—and decreases in PPS (pay-performance sensitivity) in geographically-dispersed firms, but not in concentrated firms.

…continue reading: Pay Harmony: Peer Comparison and Executive Compensation

On January 4, 2013, FINRA published Regulatory Notice 13-02, proposing a new FINRA rule (the “proposed rule”) in connection with the recruitment compensation practices of member firms. [1]

Introduction

In short, the proposed rule would:

…continue reading: FINRA Proposes Disclosure of Recruitment Practices

Each year, Equilar looks to highlight critical areas that can potentially affect those dealing with compensation and governance issues in the upcoming year. The 2012 Compensation & Governance Outlook Report aims to cover a variety of emerging trends in the fields of executive and director pay, equity trends, and corporate governance, while also providing an array of disclosure examples to illustrate unique approaches to strategic matters. The majority of firms will not encounter all, or even most, of the trends in this report in the New Year; it is primarily intended as a starting point for discussions that will take place over the course of 2013.

The 2012 year can be identified by a number of unique identifiers including the presidential election, high-profile public offerings, the second year of Say on Pay, record setting stock prices as well as an unfortunate natural disaster that helped bring together a country. Reverberations for such a dynamic year will no doubt be felt well into 2013 as potential changes to government and regulatory agencies could significantly alter the business landscape causing the need for firms to adjust. Discussions between companies and shareholders will continue to drive changes as firms ensure the story they want told is communicated through a variety of mediums and methods. Concerns surrounding fairness in a number of areas including stock structure and pay will cause struggles between conflicting parties as focus continues to shift towards the decisions in the boardroom. Topics including shareholder engagement, board dynamics, Say on Pay, and pay for performance dominate this year’s report.

…continue reading: 2013 Compensation & Governance Outlook Report

Companies face a growing number of legal challenges, from patent wars to increased regulation from bills like Dodd-Frank to highly scrutinized mergers and acquisitions. With all these challenges the services of General Counsels cannot be undervalued in today’s economic climate. The General Counsel’s role has grown in dimension as companies have an increasing need for their top legal officer to set patent strategy, protect the company from harmful litigation while also overseeing increasingly complex legal aspects of M&A transactions. Although typically among a company’s leading executives, often reporting directly to the Chief Executive Officer, compensation for General Counsels is not always included in proxy statements.

…continue reading: 2012 Top General Counsel Compensation Report

Introduction

The enhanced executive compensation disclosures mandated by the U.S. Securities and Exchange Commission in 2006 have provided a significant new data set for investors and companies to analyze and benchmark pay practices across a broad set of U.S. corporate issuers.

Moreover, precisely how companies choose to benchmark their pay practices has received much attention following the outcry over Wall Street payouts and the recent promulgation of legislation requiring most U.S. issuers put their pay to a precatory shareholder vote.

Against this backdrop, Executive Pay Through a Peer Benchmarking Lens summarizes key findings from ISS Corporate Services’ study of almost 15,000 Def 14A filings over the past four years. Drawing on ISS’ executive compensation database, the focus of the analysis is on both pay levels as well as the processes by which companies benchmark their pay relative to peers.

…continue reading: Executive Pay Through a Peer Benchmarking Lens

Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires public companies to disclose the ratio of compensation between their CEO and their median employee. The Securities and Exchange Commission will propose regulations to implement this requirement later this year. In this briefing paper, the AFL-CIO Office of Investment argues why CEO-to-worker pay ratios matter to investors.

First of all, changes in CEO-to-worker pay ratios are a useful measure of growing CEO pay levels. In 1980, BusinessWeek magazine estimated that the top executives of the largest U.S. companies made 42 times the pay of factory workers. In 2010, the gap between CEO pay at S&P 500 companies and the median U.S. worker had soared to 343 times, according to the AFL-CIO’s Executive PayWatch website.

Secondly, CEO-to-worker pay ratio disclosure will help reduce CEO pay levels. Existing disclosure rules encourage setting CEO pay levels based on “peer group analysis” that has contributed to CEO pay inflation. Pay ratio disclosure will encourage Boards to also consider the relationship of CEO pay to other company employees. Companies with high pay ratios will have to explain and justify their ratio to their shareholders.

…continue reading: Why CEO-to-Worker Pay Ratios Matter to Investors

In the paper Economic Consequences of Equity Compensation Disclosure, forthcoming in the Journal of Accounting, Auditing, and Finance, we develop a novel mechanism through which a principal may signal a firm’s type to outside investors. In our model, the principal does not need to retain any of the firm’s equity (unlike standard signaling models) but may competitively contract with a manager who is informed and may or may not provide effort.

We show that the choice of effort is affected by both the level of performance-pay chosen by the principal and the quality of the firm. If contracts convey information on the firm, then our analysis shows how and why a firm’s stock price and future operating performance should be associated to the choice of a particular pay package. In this respect, the model offers a framework to tie firm performance and contracting choices, in an optimal contract setting.

…continue reading: Economic Consequences of Equity Compensation Disclosure

In the paper, Big or Small: Compensation Consultant Selection, Switch and CEO Pay, we provide new evidence showing that CEOs of firms engaging BIG6 consultants receive lower equity payments and lower total compensations compared to that of firms engaging SMALL consultants. Although most prior studies have examined the compensation consultants’ potential conflicts of interest and its impact on CEO pay, little was known about why a firm retains its compensation consultants between BIG6 and SMALL consultants and what impact of a switch between BIG6 and SMALL consultant have on CEO pay. This study is the first study to investigate the impact of a firm’s selection between BIG6 and SMALL firms on CEO pay and the impact of a switch between BIG6 and SMALL consultant on CEO pay. The expertise, “repeat business” and reputation arguments imply that BIG6 consultants have incentives to design optimal contracts for CEOs to align the shareholder’s interest with the CEOs’ interest. However, the “other service” argument predicts that BIG6 consultants will design less optimal contracts and reward CEO higher pay to win CEO’s favor since the power of approval other service rests on CEOs.

…continue reading: Compensation Consultant Selection, Switch and CEO Pay

The compensation discussion and analysis (CD&A) portion of the corporate proxy statement has been a point of frustration for both issuers and investors since its adoption by the U.S. Securities and Exchange Commission (SEC) in 2006. The compensation disclosure regime was intended to help both shareowners and boards of directors make more informed decisions concerning appropriate executive compensation practices. However, the CD&A report, in its current format, has often resulted in frustration due to its length and complexity and because such reports often focus on regulatory compliance to the detriment of conveying the company’s compensation story in a concise and understandable manner.

…continue reading: CD&A Template Will Help Issuers Improve Compensation Disclosure

As we previously discussed in our memorandum of August 2, the Dodd-Frank Act directs the SEC to amend the proxy rules to require disclosure of the ratio of the median annual total compensation of a company’s employees (excluding its chief executive officer) to the total annual compensation of its chief executive officer. For the sake of clarity, the median is the number exactly between the top and the bottom — not the average. This means that, on its face, the rule would require each of the nation’s 12,000 public companies to determine the value under the proxy disclosure rules of each element of compensation provided to each employee of the issuer on an annual basis and then to calculate the median amount of such compensation.

Based on the statute, it appears that this disclosure is required for all companies covered by the Securities Act of 1933 and the Securities Exchange Act of 1934, which includes, in addition to companies listed on a public exchange, companies with public debt and those that are otherwise obligated to file periodic reports with the SEC (but does not include foreign private issuers). Unlike other compensation-related provisions of the Act, such as say on pay, the Act does not appear to provide the SEC with express exemption authority from the pay ratio disclosure.

…continue reading: Cost Benefit Analysis of Pay Disparity Disclosure