Executive Pay & Activism - NACD BoardVision 361º
Executive compensation is a perpetual hot-button topic—and one that activists frequently use to court shareholders. Roger Brossy, managing director of Semler Brossy, talks with Blair Jones, managing director of Semler Brossy, and Ken Bertsch, partner at CamberView Partners, about strategies directors can use to effectively communicate the principles that support the company’s pay practices.
Roger Brossy: Hello, I'm Roger Brossy. Welcome to today's discussion - Executive Compensation and Activism. Interesting and sometimes contentious topic. I'm joined today by Blair Jones, my college at Semler Brossy, renowned authority in executive pay, and by Ken Bertsch, a partner at CamberView, the leading advisor on Corporate Governance and Shareholder Engagement. At the risk of embarrassing Ken and Blair, I'll mention that the NACD has included both of you in the list of the nation's 100 Most Influential Leaders in Corporate Governance. Welcome to both of you.
Blair Jones: Thank you.
Roger Brossy: Activism, $200 billion under management in various funds. We could see at current pace, as many as 700 campaigns in corporate America led by activists. Blair, what does executive compensation have to do with this?
Blair Jones: Well, that's a good question. It certainly is not the primary issue that an activist is using as they pursue a company, but it is a hook to engage other investors and also to engage the public at large if it's a very public fight. The kinds of things they're looking at are the magnitude of pay. So they would look at the how much is too much question. They might look at certain elements of pay like retirement or special supplemental retirement benefits that only executives get. They love to look at pay and performance. Their favorite chart is a pay-level that stays steady or even goes up contrasted against a performance level that's going down. That's one of their key areas of focus and interest. They like to look at whether the metrics that they care about are included in the compensation programs, and they also look at say-on-pay votes, and if the company has a pattern of lower say-on-pay votes, it's often an indication that there may be other governance problems underlying some of the decision making at the company.
Roger Brossy: Ken, we've engaged in our work with activists who are very, very thoughtful about executive pay and have a very reasoned point of view about what the structure of programs ought to look like and often not conventional at all, but frankly, we've also been in situations where it felt like stage craft, and we weren't sure there was a lot of conviction. Maybe it was more just sort of a point to embarrass or try to curry favor with others. How do you see this fitting in?
Ken Bertsch: Well, I saw both things happen. This is a bit of a campaign, a political campaign, and people use things in campaigns that may make people look bad and not always be authentic to what's going on. On the other hand, I wouldn't want to overstate that, because I think executive pay does often get to or is linked to underlying strategy, and Blair talked about discussion of metrics and what makes sense. If the investor has a view on what's going wrong at the company and the pay strategy fits into that, that's going to be a useful and in some ways illuminating piece of the campaign. So I think it's both things, and it makes it hard to deal with.
Roger Brossy: Advice for boards?
Ken Bertsch: Number one is to be as clear as possible about executive pay, and disclosures have gotten a lot better in recent years, and I think that's very important. Why are people being paid what they're paid, and what's the strategy behind it? How does it link to the company strategy, which is what a lot of the investors who are not activists but are potentially voting on activism, that's what they care about. So you want to be logical about what you're doing. I think you want to avoid some of the practices that tend to get a lot of criticism. I think, also, you want to listen to the activists, to your shareholders, and try to hear if there is merit in the arguments being made.
Roger Brossy: Blair, when we've had boards take activist slates into the board, obviously, a very unusual and interesting environment ensues where people who might have been in sort of antagonistic public stands with each other are now looking to find a constructive way forward, and there may be a variety of points of views or degrees of willingness to have that happen. What should comp committees do at that stage, as they're taking new members into the board and potentially under the compensation committee?
Blair Jones: I think that's a great question, and one of the most important things is to get a clear articulation of the philosophy of the compensation program. So I think it's important for the new board members to hear the history of how you got to where you did, but I also think it's important, then, for the whole board to talk about where the program is and to either affirm where they are or to say there's some things that need to change, and they do that as a group where they're revisiting it, and I think that's job number one. I think job number two is to take the focus off of all the things that might have come up energetically and think about the people and think about the talent and to say now that we're in the situation we're in, do we have any talent out there that we need to shore up and ask them to stay with us and work with us through this process of making this company or taking this company into the next era, and so that may mean looking at things like severance arrangements, so people feel like they have some protection. It may be selective retention. It may be special programs that have new measures related to whatever the objectives of activists' campaign were.
Roger Brossy: Well, it's an interesting topic, and I think we've seen some uncomfortable activist engagement, and we've also see some very constructive engagement. I guess our closing words might be keep an open mind. Blair and Ken, thank you very much, and on behalf of NACD, thanks for joining us.
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