"Paying for 'the Right' Performance" from Corporate Board Member/Compensation Advisory Partners reports on a recent survey of 258 US public company directors on how boards measure performance and incorporate those measures into the company's executive compensation incentive plans. Notably, in addition to traditional performance pay-related benchmarks, the survey homed in on two trending hot topics: non-financial metrics - specifically, Diversity & Inclusion, and non-GAAP pay adjustments, with these share-worthy findings:
- Diversity & Inclusion Metrics: 52% of respondents say that diversity and inclusion metrics should be incorporated into the executive incentive plans; however, fewer than 10% currently do so.
Although seemingly dramatically inconsistent, the report explains why this is not necessarily the case:
This does not suggest, however, that directors and executives are not considering a company’s practices around diversity and inclusion when making compensation decisions for top executives. Companies can incorporate diversity considerations into individual or “strategic” performance assessments. After all, employees with diverse backgrounds can provide diversity of thinking to an organization, contributing to innovation and financial success. Similarly, leaders with diverse backgrounds can provide perspectives that may be more reflective of the needs of customers, employees and stakeholders.
- Non-GAAP Adjustments: Nearly 90% of respondents believe directors should focus on adjusted results either in combination with GAAP results or on their own. The items most commonly deemed acceptable for adjustment purposes are changes in accounting rules (81%), changes in tax law (74%), gains/losses on sales of business (46%), and technology breach/cybersecurity (37%). Less favored for adjustment purposes are litigation gains/losses (31%), asset impairments (30%), currency fluctuations (27%), mark-to-market hedging (13%), compensation costs (7%), and restructuring costs (6%).
Responses varied on how share buyback effects should be considered for pay plan purposes, with 35% saying that the company should exclude the impact; 26% opting to exclude the impact to the extent actual share buybacks differed from plans; 26% indicating that the impact of share buybacks on performance should be included; and 13% saying the company should exclude the impact to the extent they fall outside a range or corridor around planned buybacks. The report notes that - as a practical matter - most companies consider buybacks in their budgeting and goal-setting processes and thus don't adjust for actual buybacks at the end of the performance period unless they are substantially higher or lower than planned.
See the release - which includes additional key findings, and additional information & resources on our Executive Pay and Pay for Performance pages. This post first appeared in the weekly Society Alert!