RiskMetrics 2010 Policy Updates on Executive Compensation Matters
Moving into the 2010 proxy season, companies may want to consider 2010 Policy Updates recently issued by RiskMetrics Group (PDF) and their related Frequently Asked Questions (PDF) (collectively, the "Policy Updates"). Consideration of the Policy Updates may be particularly warranted for NYSE companies because RiskMetrics and/or institutional shareholders may have increased influence this proxy season due to changes under NYSE Rule 452 (PDF) (i.e., the elimination of discretionary voting by brokers in uncontested director elections).
Under the Policy Updates there is a continued emphasis on pay for performance. For example, a company should consider whether a negative correlation exists between CEO pay and company performance. According to the Policy Updates, such a negative correlation may exist if:
- the company's one- and three year total shareholder returns ("TSR") are in the bottom half of the company's Global Industry Classification Group, and
- the CEO's total compensation has increased in the last year-over-year.
If a negative correlation exists, then RiskMetrics will assess (over a time horizon of five years) the CEO's total compensation relative to the company's TSR, with the most recent year being a key consideration.
The Policy Updates also provide that a company should ensure its compensation arrangements do not constitute "poor pay practices," which according to RiskMetrics include:
- pay that encourages excessive risk taking,
- multi-year employment contracts,
- excessive bonus payouts,
- excessive perquisites,
- excessive severance provisions, and
- gross-ups.
There are other changes to the Policy Updates that make it a worthwhile read for any compensation committee member, especially since RiskMetrics may recommend a negative vote on the re-election of compensation committee members if pay for performance is not correctly aligned or poor pay practices exist.
