Q. This year our CEO was given a sizeable bonus on top of a generous options package. Normally, I wouldn’t think twice about his take-home pay but our stock is down 20 percent – and I know shareholders are paying more attention to compensation. How can I gauge what (or if) the Street is thinking about my CEO’s pay?
A. If you haven’t had any questions from the Street on your CEO’s compensation package, chances are it isn’t too concerned about the issue. But you could ask some of the analysts covering your stock how they factor compensation into their ratings. Alternatively, you could poll a sample of analysts and investors who cover or hold your stock to find out their views on compensation. This is a bit more costly than just picking up the phone, though.
In preparing for your annual meeting, you should probably talk to your CEO about your concerns over his current compensation. Most proxy advisors say executive pay will be the most contentious issue in the next proxy season so you might want to convince him to forgo some (or all) of his bonus in 2004.
Q. I keep hearing and reading that executive compensation is a hot-button topic with institutional investors. Who on the buy side is looking at this and how is compensation factored into buy and sell decisions?
A. Most buy-side portfolio managers look at a company’s compensation policies when reviewing the corporation’s governance structures. There are lots of studies that show a direct relation between corporate governance and institutional trading though it’s difficult to say how compensation affects decision-making. But executive pay likely impacts on decisions when it’s out of proportion. For example, if the stock is down and the CEO’s pay has skyrocketed, a portfolio manager might be moved to sell.
But public and state pension funds are the ones most concerned about excessive executive pay on the buy side. They tend to be long-term holders and in many cases the funds are indexed so they’re unlikely to dump your stock because your CEO gets paid too much. But they will make their voices heard at your next annual meeting if they think compensation is out of line.
Pension funds are actively calling attention to this issue and mutual funds, which now have to disclose their proxy votes, might feel pressured to take a stance. If they get serious about compensation, the issue will really take off.
In the UK, large investment institutions have become extremely vocal in their criticism of bad local governance practices, including compensation issues, which has resulted in more than one shareholder revolt. According to one recent survey, UK executive pay raises finally hit the brakes earlier this year, and are now scraping below inflation levels.
Q. As an IRO, what can I do to address the compensation issue with investors without making my CEO or CFO uncomfortable?
A. Compensation is a very touchy subject for IR professionals because you are, basically, discussing your boss’s paycheck. But shareholders – especially public and state pension funds – want more information about a company’s compensation policies. You should tell your CEO and CFO that it’s important to be upfront in disclosing information about compensation. Investors will appreciate getting the information before they ask for it.
They are likely looking for basic information like the process by which compensation for a company’s top five executives is determined. Is it tied to the performance of the stock, for example? They also want to know the finer details about what, exactly, these executives are getting. Options, cash bonuses, real estate and expenses are often part of what top management receives and IR professionals might be queried about these perks.
