executive remuneration 2015: global … compensation matters “shareowner engagement has produced...

EXECUTIVE REMUNERATION 2015: GLOBAL TRENDS

October 28, 2014

MERCER

Today’s Speakers

Mark [email protected]

Gregg PassinNew [email protected]

Hans KothuisHong [email protected]

QuestionsTo submit a question, use the floating panel on the topof your screen and click the Q&A button:

CLICK HERE TO ASK A QUESTIONTO “ALL PANELISTS.”

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Agenda

PART 1 – GOVERNANCE– What’s on the mind of CHROs– Executive Rewards – What’s Trending?– What’s on the Agenda for 2015

PART II – GLOBAL PAY TRENDS

Q&A

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PART 1 – GOVERNANCE

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What’s on the Mind of CHROs

Will ourprogramswithstandexternalscrutiny?

How do we balancebetween compliance,governance and the needsof the company?

Is TSR the right measurefor all?

How do we address theincreasingly strong voiceof shareholders andproxy advisors?

Executive pay and incomeinequality – how much istoo much?

How do we avoidhomogenization of ourpay programs?

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Executive Rewards – What’s Trending?

Shareholder voice on pay and governance

Executive pay and income inequality

Role of TSR

“One Size Fits All” Pay Programs

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What’s Trending – Shareholder Voice on Pay and Governance

EuropeThere has beenmovement towards anEU-wide mandate, inaddition to UKmandates, requiring abinding vote on pay

North AmericaNonbinding vote onexecutive pay in the US;voluntary votes inCanada – fear ofnegative voting hasstrong influence on payprograms

AustraliaNonbinding on payhowever Two-Strikesrule adds punitiveelement to votingresults

AsiaNo mandates butownership profiledetermines typeengagement

IncreasinglyStrong Voice ofShareholders

Influencing PayPrograms

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Non-Binding Votes or No VotingMandate

Snapshot ofShareholder Say

on Pay VotingMandatesGlobally

Binding Vote Mandates

UKAustraliaUS Japan

Switzerland

Germany

NetherlandsFrance ItalyFinancial

Services only

SpainProposed

ItalyNon-financial

Services

China

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Engaging WithInstitutionalInvestors

Mercer has been conducting research on the viewpointsof non-executive directors and institutional investors onengagement, the following is what we have learned

Non-Executive Directors• Board members on the whole value this interaction

highly and would like to see increased levels

Institutional Investors• Engagement around sensitive issues should be

happening early and often so that potentially divisiveissues are not coming as a surprise

• Do not want to be treated like a sounding board –Companies should be able to develop acceptableproposals without large amounts of input

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Engaging WithInstitutional

Investors – ACase Study on

Coca-Cola

MARCH / APRIL 2014

March 7Coke files proxy; newshare request of 500M;fungible ratio of 5:1

Investor David Winterspublicly opposes plan;sees dilution near19%; provokes spiritedcorporate governancedebate

Plan supportedby ISS, GL

March 28Company issuessupplemental filingexplaining fungiblereserve; <1% annualburn rate

April 23Annual meeting:83% in favorwithoutabstentions75% withabstentions

Warren Buffett(Berkshire Hathaway)abstains; expressesconcern “in private”

Buffett positionreported in media;governance debatecontinues

April 30Company reportedlymay make changepractices to extendlife of reserve

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Engaging WithInstitutional

Investors – ACase Study on

Coca-Cola

• In a press release released on October 1, 2014, the Coca-Cola company announced that it would be adopting EquityStewardship Guidelines for the Company’s existing 2014Equity Plan

• The guidelines were issued in response to criticism fromWarren Buffett and other key shareholders

• The Guidelines:– Extend the years shares will last by using fewer shares each

year– Increase transparency about equity awards– Formalize practice of share repurchases to minimize dilution– Renew commitments and open a dialogue with shareowners

on compensation matters

“Shareowner engagementhas produced positiveresults for our Company ona variety of fronts, includingon compensation matters.Shareowner input on thisimportant topic has directlyled to the development ofthese new Guidelines,which are in line with thelong-term interests ofshareowners.”

Maria Elena Lagomasino,Chair of the CompensationCommittee for Coca-Cola

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What’s Trending – Executive Pay and Income Inequality

USCEO’s pay versuspay of medianemployee

Pay RatioProposals/Mandates

EuropeAverage directors’pay divided byaverage pay forother employees

Asia / AustraliaNo mandates

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What’s Trending – Role of TSR

What is the roleof TSR in pay

programs?

• In response to external pressure from shareholders,shareholder advisors and institutional investors, manyorganization have adopted incentive plans based on TSR

• Today, TSR is now one of the most prevalent measuresused in incentive plans globally

• Across organizations however, there is a growingsentiment that TSR–based plans are not a cure-all for thealignment of pay and performance

• For these and other reasons, organizations globally havebeen considering if the focus on TSR has skewed toohigh and if other measures of sustainable, long-termperformance are a better fit for their organization

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What’s Trending – “One Size Fits All” Pay Programs

Pressures fromregulators,

shareholders, mediaetc. have led tohomogenized

approaches to pay

• Faced with heightened scrutiny of pay programs andpractices, many companies attempt to stay ‘under theradar’ by adopting “one size fits all” executive payprograms

• Companies adopt these programs and practices becausethey require lower levels of explanation, justification andprovide lower risk of outside scrutiny

• Unfortunately, this approach can lead to suboptimalresults as it fails to support unique business strategiesand circumstances and thereby does little to stimulatereal, long-term value creation

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WHAT’S ON THE AGENDA FOR 2015

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What’s on the Agenda for 2015

Strategically engage with shareholders andproxy advisors

Prepare for pay ratio disclosure

Clarify the pay story by leveraging globalbest practices for disclosure

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Strategicallyengage withshareholders

and proxyadvisors

• Develop action plan to setinvestor expectations

• Start early to establishdialogue andcommunication

• Provide visually appealingand transparent disclosuresof executive compensationarrangements

• Understand shareholderbase and their votingpattern

• Identify and understandinvestor hot buttons, redflags, and expectations

• Disclose the engagementprocess

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Prepare for payratio disclosure

• Proactively plan for andmanage how theorganization pay ratio willbe perceived with bothinternal and externalaudiences

• Develop preliminarycalculations of the ratio

• Begin investigation of yourorganization’s readiness

• Consider improvements tothe global compensation &benefits structure needed toefficiently calculate thesetypes of ratios

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Clarify the paystory by

leveraging globalbest practices for

disclosure

• Be concise, explain the rationalefor pay decisions, presentqualitative and quantitativeinformation

• Disclose changes from year toyear, and impact of corporatedevelopments

• Make it a messaging document,tell your pay and performancestory

• Work with inter-disciplinary task-force to prepare, and giveCommittee a sense of timing andillustrative examples

• Don’t focus only on the “What”,“When”, “How”, while forgettingthe “Why”

• Don’t make the disclosure toolong and repetitive

Components:

• Objectives of the compensationprogram

• What is it designed to reward?

• Describe each element ofcompensation

• How is the amount for eachelement determined?

• How do the Committee’sdecisions fit into the company’soverall compensation objectives

• What are the performancecriteria

• Decisions taken in last year

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Clarify thepay story by

leveraging globalbest practicesfor disclosure -

Illustrations

General Electric2014 Pay elements table

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Illustrations

ExxonMobil12-page brochure “Executive Compensation Overview 2014”

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Illustrations

Chesapeake EnergyGraphics include ring for at-risk pay elements to demonstrate howmuch pay is performance-based and aligned with shareholders

2013 Target CEOTotal Compensation Mix

2013 Target All Other NEOTotal Compensation Mix

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PART II - GLOBAL PAY TRENDS

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Global Pay Trends

Europe• Base salaries are

expected to increaseby 0% to 3% in 2015

• Base salaryincreases, as in yearspast, are lower than inother regions of theworld

North America• Base salaries are

expected to increaseby 3.0% in 2015

Australia• Increases for 2015 are

likely to be lower thanthe average 3.5%increase in 2014

Asia• Base salary increases

in 2015 are expectedto be lower than inprior years whenincreases ranged from2% to 13%

• On average, executivesalaries in Asia haveovertaken those oftheir European andUS counterparts

BaseSalary

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Short-TermIncentives

Global Pay Trends

Europe• Actual bonus

payments haveincreased marginallywhen compared to theprior year

North America• Actual bonus

payments haveincreased slightlywhen compared to theprior year

Australia• Focus by shareholder

advisory firms on theuse of performancemeasures (e.g.underlying earnings)that are opaque

Asia• Target bonus

opportunities (as apercent of base) aregenerally on the rise

• Hong Kong saw ayear over year uptickof nearly 5%

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Long-TermIncentives

Global Pay Trends

Europe• Majority of companies

have an LTI plan

• Continued movementtowards simplificationwith most companiesusing only one LTIvehicle

North America• Use of performance

share plans areincreasing

• Use of stock optionsis on the decline butstill prevalent

Australia• Focus on

methodologies usedto allocate LTI awards– there is concern thatthe current approachused understatesaward value

Asia• LTI award levels are

low when compared toother marketshowever, currentlevels are increasing

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Global Pay Trends – Long-Term IncentivesLong term incentive plan vehicles

Europe United States Asia Pacific

Share Options

RestrictedStock(ServiceBased)

Performance-Based Awards

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In Conclusion

Governance = Dialogue & Trust Building• Dialogue and Engage with your Compensation Committee Members and

Shareholders• Plan ahead for possible changes such as the pay ratio and the binding vote• The process around design decisions is often iterative so listening to

interested parties and being flexible is importantExecutive Compensation = Agent of Change• Executive pay programs can be a source of competitive advantage if you

can clearly show why your company’s strategy deserves a differentapproach to compensation

To Change = To Remain the Same• Businesses are going through an extraordinary amount of change so

having a compensation strategy that stands still is untenable• Scenario plan for major changes to your business and the impact that will

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Q&A

Mark [email protected]

Gregg PassinNew [email protected]

Hans KothuisHong [email protected]

QuestionsTo submit a question, use the floating panel on the topof your screen and click the Q&A button:

CLICK HERE TO ASK A QUESTIONTO “ALL PANELISTS.”

FeedbackPlease take a minute to fill out the feedback form sowe can continue to improve. It will pop up in a newwindow when the session ends. Thank you!

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Related Resources

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