EXECUTIVE REWARDS 2014 GLOBAL TRENDS 19 March 2014
Today s Speakers James Roth, moderator Atlanta +1 404 442 3139 james.roth@mercer.com Gregg Passin New York +1 212 345 1009 gregg.passin@mercer.com Mark Hoble London +44 20 7178 5725 mark.hoble@mercer.com Hans Kothuis Hong Kong +852 3476 3817 hans.kothuis@mercer.com QUESTIONS? Please type your questions in the Q&A section of the toolbar and we will do our best to answer it. While in full-screen mode, simply use the Q&A button on the bottom right-hand side of your screen. While in half-screen mode, use the Q&A panel on the bottom right-hand side of your screen. March 19, 2014 1
What We ll Cover Today Global trends in executive rewards PLAN REVIEW COMMUNICATION & DISCLOSURE IMAGE AREA PLAN CHANGES CONFRONTING COMPLEXITIES
1. PLAN REVIEW
Executive Rewards Plan Review Why are companies reviewing their plans? SHAREHOLDER ENGAGEMENT WHY ARE COMPANIES REVIEWING THEIR PLANS? REGULATORY AND GOVERNANCE NORMS RETENTION / ATTRACTION M&A COST DESIRE FOR SIMPLICITY
Executive Rewards Plan Review What are companies reviewing? COMPENSATION PHILOSOPHY POWER TO INCENTIVIZE WHAT ARE COMPANIES REVIEWING? PEER GROUP SELECTION AND BENCHMARKING METHODOLOGIES METHODS OF ALIGNING PAY WITH PERFORMANCE COST OF OUR EQUITY PROGRAMS DETERMINING THE GRANT SIZE OF THE EQUITY AWARDS
Global Trends in Executive Rewards Discussion James Roth Moderator Hans Kothuis Hong Kong PLAN REVIEW Mark Hoble London Gregg Passin New York
2. PLAN CHANGES
Executive Rewards Plan Changes EuroPac key trends Europe Executive salary increases expected to remain fairly static in 2013/ 2014. Long-term interests alignment of bonus with performance measures, deferral, clawback. Streamlining annual incentive plans; fewer companies introducing new plans. Single LTI plan. Decrease in the use of stock options and increased use of RSUs and PSUs. TSR continues to be the most common metric, but shift from this as a sole measure and introduction of non-financial measures. Pacific Fixed pay continues to be under pressure. Short-term incentive (STI) payments increased markedly. Increased complexity in STIPs deferrals and clawback. The use of discretion over actual STI awards is an emerging trend. Companies are continuing to operate mainstream LTI designs. (Source: PWC: Executive Remuneration Trends) March 19, 2014 8
Executive Rewards Plan Changes North America key trends North America Executive salary increases in the 3% range. $1 million salary ceiling breached by larger US companies. Earnings, sales, and free cash flow are frequent performance metrics for annual incentives; individual performance is also commonly used. Clawbacks for all incentive pay has become common, as has voluntary deferral compensation. Performance shares/share units have become the most prevalent part of LTI, with a portfolio mix of performance plans, options, and time-vested restricted stock/units becoming the norm. TSR a common LTI performance measure; followed by EPS. March 19, 2014 9
Executive Rewards Plan Changes Asia key trends China / Hong Kong LTI is not uncommon. Equity to directors? Trend to RSU and PSU. Shareholder Value Transfer perspective. Insurance (not just banking) regulator starting to review ER. JAPAN Disclosure >100M Yen. Relatively low executive pay levels. Gradual shift from seniority system. Pay for performance not yet very strong. Singapore Review on TSR measure. Trend to RSU and PSU. Cash LTI plans. Better disclosures. Full board involved in ER. March 19, 2014 10
Global Trends in Executive Rewards Discussion James Roth Moderator Hans Kothuis Hong Kong PLAN CHANGES Mark Hoble London Gregg Passin New York
3. COMMUNICATION & DISCLOSURE
Executive Rewards Communication and Disclosure Key trends Europe UK Key Themes Annual statement Remuneration policy A summary of: Major decisions made in the year. Substantial changes to directors remuneration during the year. The context against which those decisions and changes were made. This will need to set out clear policy, including: Afuture policy table describing each component of the directors remuneration packages. Notes to the above table setting out explanations. Illustrations of application of remuneration policy under different performance scenarios. Annual report Subject to an advisory vote A detailed report on remuneration paid for the financial year under review. Includes a detailed disclosure of realisable pay. Includes a five year history for realisable pay for the CEO. Includes how policy will be implemented for the following year (including new salary). Europe Key Themes Shareholder rights proposals If approved, company s remuneration policy statements will need to include: How the remuneration program links to the long-term interests of the company. Minimum and maximum amounts that can be awarded. Details on each remuneration element, including performance criteria for variable pay. Employment contract terms, including recruitment and termination payment awards. The ratio between average director and employee remuneration. Information about the pay decision making process, including remuneration committee and advisor details. The annual remuneration report would be required to include: The total remuneration received by each director, the amount broken down by element with an explanation of how performance criteria were applied. The relationship between director pay, share price, and employee pay over the past three years. March 19, 2014 Remuneration on recruitment and termination. 13
Executive Rewards Communication and Disclosure Key trends Australia Australia Key Themes Governments proposed reforms in response to the CAMAC review Providing a general description of the company's remuneration governance framework; Disclosing all termination payments or 'golden handshake' payments made to key management personnel; and Clearer categorization and breakdown of remuneration, differentiating between present pay, future pay, and so-called 'crystallised' past pay, for each key management personnel. ASX reforms Disclosure of on-market purchases of securities on behalf of employees or directors. Remunerate fairly and responsibly: Is sufficient to attract, retain, and motivate high-quality directors and senior executives and is aligned to the creation of value for security holders. Disclose remuneration of EDs and NEDs and ensure differences in roles and responsibilities are effectively reflected in the level and composition of their remuneration. Have a clawback policy and disclose the summary of it at the end of each performance period whether there has been any clawback or should have been but was not and why. March 19, 2014 14
Executive Rewards Communication and Disclosure Key trends North America North America Key Themes SEC updates The SEC is currently seeking input from companies and investors on how to modernize and simplify disclosures to make them more useful to investors. Say on pay Companies must hold mandatory say-on-pay (SOP) votes and respond to demands for more transparency on pay and governance from institutional investors and proxy advisory firms. In response to proxy advisor and shareholder expectations, companies are enhancing disclosure on peer groups, shareholder engagement, realizable pay, and risk mitigation. Dodd Frank Act disclosure Proposed requirement for public companies to disclose the ratio of their CEO compensation to the median compensation of all other employees. Pending rule to disclose relationship of compensation actually paid to executives and corporate financial performance. Pending rule for public companies to adopt clawback policies to recover incentive pay from current or former executives due to a financial restatement resulting from material noncompliance with securities laws. Pending rule to require companies to state whether employees or directors are permitted to purchase financial instruments to hedge or offset any decrease in the market value of equity holdings. March 19, 2014 15
Executive Rewards Communication and Disclosure Key trends Asia Asia Current disclosure Future changes Key Themes Asian countries follow a principle of comply or explain rather than the legislative route as adopted in the West. Disclosure varies widely across the region: Singapore and Hong Kong have the most comprehensive guidance on disclosure. Since 2010, Japan has raised the bar by requiring the disclosure of executive compensation levels. China, Vietnam, India, and Pakistan recommend the disclosure of pay levels and the relationship between pay and performance. In other jurisdictions companies are only recommended to disclose their compensation philosophy and framework. It is expected that Asian companies will need to focus on more equity-based compensation in the coming years. According to Mercer s 2012/13 Asia Executive Remuneration Snapshot Survey twothirds of participating companies said they wanted to enhance their annual report disclosures. We would recommend they take the following steps to be ready for greater disclosure requirements: 1. Choose and implement a disclosure strategy before new requirements take effect. 2. Ensure the remuneration committee has experienced members and recieves data and support from relevant executive remuneration experts. 3. Identify peer groups for scale and design of remuneration. 4. Ensure performance related awards can be clearly explained and justified. 5. Review to design and value of pension and equity plans. 6. Provide complete compensation data. March 19, 2014 16
Global Trends in Executive Rewards Discussion James Roth Moderator Hans Kothuis Hong Kong COMMUNICATION & DISCLOSURE Mark Hoble London Gregg Passin New York
Executive Rewards Communication and Disclosure Enhanced disclosure practices for consideration March 19, 2014 18
4. CONFRONTING COMPLEXITIES
Confronting Complexities External forces adding to complexity Context Globalization and industry consolidation are increasing size and scale of businesses. Implications Shortage of qualified executive talent to handle complexity of today s global organizations. Global convergence of talent market. More recruiting and mobility of executives across borders. Changes in technology and social values are changing how work gets done. Aging workforce and retirement crisis is impacting talent pipelines. Regulatory environments are evolving around the globe towards greater regulation. Requirement for new leadership competencies and quicker adaptation. Succession plans are vulnerable to unpredictability. Say-on-pay is gaining steam but taking different forms; efforts to limit pay emerge. March 19, 2014 20
Confronting Complexities Compensation Committee response FOCUS ON RISK AVERSION RATHER THAN UNIQUE BUSINESS CHALLENGES COMPENSATION COMMITTEES FIND THEMSELVES IN A PARADOX Shareholder advisory group do s and don ts. Regulation and legislation. Industry practices. WHILE AT THE SAME TIME EXPANDING THEIR PORTFOLIOS TO INCLUDE A BROADER TALENT AGENDA Leadership development. Succession planning. Diversity. Talent strategy. Workforce metrics and analytics.
Confronting Complexities How to address complexities Key Strategies 1. Reorient to the global talent market. 2. Integrate executive talent planning and rewards. 3. Understand total career compensation. 4. Harness the power of data. 5. Engage and collaborate with multiple stakeholders. Implementation Ideas Look beyond home country practices. Enable comparisons across dissimilar packages. Facilitate international mobility and cross-cultural development. Expand the duties of the compensation committee. Review succession and leadership development plans in tandem with compensation. Consider realizable pay over an executive s full tenure. Analyze all elements of compensation, including benefits. Review a dashboard(s) with broad talent metrics. Include sophisticated analytical techniques such as projections, simulations, and predictive modeling. Seek input from a broad range of voices inside and outside the company. Improve collaboration between management and the compensation committee. March 19, 2014 22
Global Trends in Executive Rewards Discussion James Roth Moderator Hans Kothuis Hong Kong CONFRONTING COMPLEXITIES Mark Hoble London Gregg Passin New York
Q & A
Questions James Roth, moderator Atlanta +1 404 442 3139 james.roth@mercer.com Gregg Passin New York +1 212 345 1009 gregg.passin@mercer.com Mark Hoble London +44 20 7178 5725 mark.hoble@mercer.com Hans Kothuis Hong Kong +852 3476 3817 hans.kothuis@mercer.com QUESTIONS? Please type your questions Simply use the Q&A button on the bottom right-hand side of your screen. Or, use the Q&A panel on the bottom right-hand side of your screen. FEEDBACK Please take the time to fill out the feedback form at the end of this webcast so we can continue to improve. March 19, 2014 25