Planning for and Explaining Executive Compensation Decisions

Transcription

1 Planning for and Explaining Executive Compensation Decisions Society of Corporate Secretaries & Governance Professionals 2014 Western Regional Conference September 22-23, 2014 ~ San Diego, California

2 Ripped from the Headlines Coke's compensation plan is "outrageous" and "excessive": Wintergreen's David Winters By Morgan Korn April 11, :17 PM Daily Ticker Coca-Cola's equity plan: Did shareholders say yes, or no? by Paul APRIL 24, 2014, 8:18 PM EDT 'Stunned' by Coca-Cola compensation plan: David Winters Matthew J. Friday, 2 May :32 AM ET Chipotle's exec comp plan rebuked by shareholders Gary Strauss, USA TODAY5:11 p.m. EDT May 15, 2014 Staples Defends Executive Bonuses Office-Supply Retailer Says Awards Were Needed to Retain Talent By DREW FITZGERALD Updated May 26, :17 p.m. ET BUSINESSWIRE - BZX Wintergreen Advisers Renews Call for Withdrawal of Coca-Cola Equity Plan Published: Sept 15, :00 p.m. ET

3 Ripped from the Headlines the Perennials 3

4 The Quality of your Story is Dependent on your Plot Development Start with your strategy and your compensation philosophy Review the success of your prior compensation actions Step away from your disclosure from last year to open up your perspective 4

5 Allocate Adequate Time A custom compensation design that maximizes alignment and minimizes unintended consequences takes thought, feedback and iteration Many companies are trying to cross this finish line around the same time so allocating time ensures access to the best resources Quality and durability of Compensation Committee decision making enhanced with time to consider and reflect 5

6 One Size Should Not Fit All All companies are not alike therefore all compensation designs should not be alike If elements of your design are off the beaten path, not necessarily wrong Use engagement to test the design Bring candid feedback to the Compensation Committee of why different and importance and potential impact of design decision Iterate on engagement if unique design is important to align with and incentivize delivery of your strategy 6

7 Test Your Assumptions Keep informed Use consultants pro-actively Use engagement to get the best read on what is on the minds of your investors and where your compensation design fits 7

8 Monitor Developments Compensation design is not static and both internal performance and external market dynamics should be considered: Performance challenges Regulatory changes Customer changes Changes in market practices Changes in investor policies The Right Planning and Monitoring Can Improve Outcomes 8

9 Special Situations Approval of Equity plans/additional shares o Important to understand both Proxy Advisor Guidelines and Investor Policies o Start early to allow time to refine Hiring/firing of executives o Decision making still needs to fit within strategy and compensation philosophy 9

10 Sample Compensation Planning Schedule Calendar Year End Company Apr/May FY14 Jul/Aug/Sep FY14 Oct/Nov/Dec FY14 Jan/Feb/Mar FY15 Peer Group Special Projects/ Incentive Design, As Needed Other: YTD Performance Risk Assessment CC Self-Evaluation Shareholder Engagement Strategy Exec Pay Program Structure Board Pay Regulatory & Exec Pay Trends Special Projects/ Incentive Design, As Needed Other: YTD Performance CC Charter Exec Pay Levels Preview FY14 Pay/Perf Align Preview FY15 STI & LTI Perf Measures/Goals Other: YTD Performance Consultant Eval CC FY15 Planning Calendar Proxy Proposals Decisions FY14: CEO/Other Execs Performance Evaluation Incentive Payouts Decisions FY15: Salary, STI,LTI STI & LTI Perf Measures/Goals Pay/Perf Align CD&A Proxy Proposals 10

11 Special Projects/Incentive Design Special Projects Pay Philosophy Ownership Guidelines Severance/CIC Realized Pay Handcuff Analysis Peer/Broader Industry Goal Setting Practices Exec Employment Contracts Regulatory Changes Examples Incentive Design Changing Business Strategy = Incentive Design Revisions Shifted Business Focus & Impact on Design LTI Vehicle Mix Performance Measures/Weights Back-Testing Potential Changes Regulatory Changes 11

12 Communicating the Story Consider your audiences Consider appropriate tools o CD&A Executive Summary o Graphs, tables, flow charts Organization 12

13 Counter to Trends Example 1: Discretionary Assessment Mfg Co, new strategy to emphasize growth STI 75% Financial; 25% Strategic Strategic measures, deliberate intent to evaluate on discretionary basis (unclear view) Organic sales growth Structural cost reductions Acquisition process (finding, vetting, decision criteria) First two quantitative goal guidance, third qualitative Payouts: threshold = 50% of target, 100% at target, max = 200% of target 13

14 Counter to Trends Example 1: Discretionary Assessment (continued) During year, Co & CC learned costs were huge issue & some products had negative margins CC determined initial outcome for year Below threshold (0%) Organic sales growth Target (100%) Structural cost reductions Maximum (200%) Acquisition process CC decided on 125% payout on strategic Cost reduction relatively more important long-term Developing acquisition process with successful use during year relatively more important long-term 14

15 Counter to Trends Example 2: Lower Performance Goals OEM Mfg Co, component supplier, no STI payouts last three years, hard hit by exposure to European economy STI: 50% EBITDA growth/50% ROC Recent goals set to peer historical performance 10-year STI payout history 6 years 0% 2 years 75% to 80% of target 2 years 120% to 150% of target (max is 200%) Goals too hard or chronic poor performer? 15

16 Counter to Trends Example 2: Lower Performance Goals (continued) Analysis Co business 85% industrial Market A, 15% Market B Peer group 50% Market A, 50% Market B (Co desired mix) 15-year historical and 2-year prospective EBITDA & ROC performance lower for Market A than Market B Conclusion: Goals unrealistic at current business mix New goals: Same target goal, even though above Market A median Lower threshold goal (Market A 25 th P); lower threshold payout from 50% to 20% Lower max goal (Market A 75 th P); same 200% max payout because target goal unchanged and above Market A Disclosed new goals with rationale based on analysis 16