Our approach to total compensation analysis overcomes the weaknesses of the SEC’s prescribed proxy data reporting formats to understand the total compensation program offered to executives in the studied companies.
The Summary Compensation Table figures – which are the most-cited and most widely-used executive pay numbers – is a combination of actual payments, hypothetical payments, and projected future payments. Our analysis reconciles the multiple tables, and extensive narrative, of the proxy statement to answer the question “how much are they paid?”
Proxy data typically reflects Compensation Committee decisions that occurred 12 to 18 months earlier. It serves as a useful starting point for executive pay analysis, but does not reflect current market rates for executive talent. Our additional research and analysis capture more recent data.
The complexity and diversity of executive pay programs cannot be captured by standardized survey methods and automated data solutions. Variations in performance periods, performance measures, vesting periods, equity vehicle mix, ownership requirements, performance thresholds and caps, and other details of program design typically render a simplistic analysis of pay levels incomplete and misleading.
Designing incentive compensation programs that fit the business requires going beyond survey data, proxy analysis, and proxy adviser policies. These must all be considered but will not provide a solution. There is more variation across organizations than ever before, even within tightly defined industry sectors. An analysis of “what other companies do” yields a smorgasbord of design alternatives. Interesting reading, and a good overview of the possibilities, but not an answer for your organization.
Private companies have the luxury of not being subject to institutional shareholders, proxy advisers, and media scrutiny of their compensation practices. But often they have more demanding stakeholders with strong viewpoints on executive compensation – founders, partners, private investors, family members, lenders – that create unique constraints and opportunities. The most common question is how to provide a long-term incentive arrangement – either with or without using real equity.
Designing executive compensation programs in both public and private “C” corporations is challenging, but many characteristics help – availability of equity compensation tools, clear shareholder orientation, and a substantial body of competitive information on market practices. For organizations that don’t fit into those categories – S Corporations, LLCs, partnerships, joint ventures, co-ops – the rules are different. Our experience with a wide variety of these alternative forms of organizations has led us to a great understanding of the different compensation strategies required.