Market Pricing in the Time of Say on Pay

With so many companies embarking on their first year of a say-on-pay vote, it is important to be thinking now about the things that may trip up a vote. Aside from best practices in compensation, the most important thing to focus on is effectively conveying your process. Effective communication encompasses how well you explain your process, as well as how and when you deliver the message to shareholders, not just in the proxy but, if possible, by creating opportunities to interact well in advance of the annual meeting.

Aside from pay for performance, the types of things that Occidental Petroleum, Motorola and Keycorp reportedly got voted down on include tax gross ups, lack of succession planning and the rate of increases and stock grants relative to company performance. In my recent conversations with many compensation professionals, it seems that trying to predict equity grant values is like staring into a crystal ball.

Now more than ever, properly market pricing can help. Conversations with peers at other organizations can be anecdotal and certainly not the most scientific process to explain in a proxy. In such volatile times, the combination of solid timely surveys, a good compensation consultant and comparison to a well-selected peer group that utilizes proxy data certainly seems the best way forward, rather than trying to reuse established plans that perhaps are not working out so well lately.

We are seeing people who are getting more creative in setting their performance measures based not purely on TSR or using relative measures rather than straight market performance. This of course makes proper selection of your peer group even more important. Some issues to keep in mind in this process is to properly consider size metrics, scopes such as numbers of lines of business, and international versus national presence, geography, business development stage and strategy. Also consider both areas where the company competes for talent and capital as well as sales. Often incorporating all of these elements can create a peer group that is too small, so consider the possibility of using regression to expand the possible pool of candidates or to use multiple peer groups if your company is operating in multiple business lines.

Hewlett Packard, for example, uses a six-tier screening approach that incorporates market cap, revenue, inclusion in a series of S&P or Dow Jones indexes, industry, global scope and complexity, and, in the case of companies used for CEO pay, a "lack of anomalous pay practices."

American Express notes that it "selected companies with a strong brand, relevant business model, similar size and international presence, as well as those that are competitors for senior executive talent. We also included certain companies that are direct business competitors and excluded several companies to prevent overweighting of non-financial industries."

If you have CompAnalyst Executive available to use, one of the interesting things you can do is to go into the CD&A reports and see a 360-degree analysis of a peer group if you are having trouble finding matches. This tool allows users to easily look at who their peers are linked to as well as their peers peers and who is linking back to them. It is a dynamic process that can speed the review and quickly and effectively make suggestions.

However you choose to tackle your market pricing, there is a world of data at your fingertips to choose from. Don't limit yourself to one survey or just proxy data and take the opportunity to talk with your peers.  Perhaps at NASPP on September 20th? Maybe I will see you there!