Document Type
Report
Abstract
"Since the passage of the Dodd-Frank Act in 2010, US publicly traded companies subject to proxy rules must allow shareholders to submit an advisory vote on the compensation of their most highly compensated executives at least every three years (known as Say-on-Pay votes), and on how often shareholders would like to be presented with Say-on-Pay votes. Given the potential interplay between executive compensation and succession planning, as illustrated in recent Center for Executive Succession research that shows executive compensation and executive succession decisions appear to be related when it comes to the selection of internal CEO appointments, we sought to better understand how firms develop executive compensation plans and respond to sayon-pay votes. Respondents first indicated that boards sometimes consider succession plans when setting executive compensation. Additionally, executive compensation incentives are rarely tied to succession planning metrics, though this is unlikely to be a problem. In the end, however, results suggest that some boards do co-manage executive compensation and succession planning. Results also indicated that board members are perceived to be concerned with the potential for negative say-on-pay votes or negative recommendations from proxy advisory firms. This is concerning as it potentially suggests that executive compensation decisions are being driven more by the considerations of outside agencies rather than internal concerns regarding talent management or company strategy. We then sought to understand what might raise concerns regarding say-on-pay voting thresholds and how companies would likely respond to negative say-on-pay votes. Respondents most often noted that say-on-pay approval of less than 80% would be concerning, though the threshold distribution was widely dispersed. If this threshold were to be crossed, respondents indicated that changes in executive incentives would be most likely (27 instances), followed by reviews of the compensation program (19 instances), shareholder outreach (16 mentions), and compensation consultant changes (7 instances). 4 HR@MOORE The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 requires US publicly traded companies subject to proxy reporting rules to submit to shareholder advisory votes regarding the compensation of the company’s Named Executive Officers at least once every three years. These votes have subsequently been termed say-on-pay. The rise in say-on-pay, as well as growth in general shareholder activism, have also given rise to proxy advisory firms who provide data analysis, insights, and recommendations to investors regarding company policies, such as the appropriateness of executive compensation. Recent research from the Center for Executive Succession illustrates the interplay between executive compensation and executive succession planning. This research shows that when the pay disparity between the CEO and the company’s second highest paid executive officer was lower, companies were more likely to promote an inside executive to be the next CEO. Furthermore, this research found that when an inside executive was chosen, the second highest paid executive was more likely to be named CEO when the pay gap between the second highest paid executive and third highest paid executive was greater. These findings were in line with proxy advisory firms’ belief that larger pay gaps between the CEO and other executives are evidence of ineffective succession planning and an increased likelihood of having to hire the next CEO from outside the firm. They also provide an indication that executive compensation and succession planning decisions may go hand in hand in meaningful fashion, increasing the importance of managing the efforts jointly. Given the central importance of executive compensation overall, its apparent linkages to effective executive succession planning, and the growing role and power of proxy advisory firms, the 2021 HR@Moore Survey of Chief Human Resource Officers (CHROs) sought to explore issues related to say-on-pay votes and executive compensation and succession. We surveyed approximately 375 CHROs and 105 of them completed these questions for a 28% response rate. "
Publication Date
2021
Disciplines
Business
Copyright
© 2021, University of South Carolina
Publication Info
2021.