The Innovation Gap in Executive Compensation

Executive compensation is under intense scrutiny. Part of the discussion has focused on how much executives are paid and who should decide the amount. In the UK, for example, “say-on-pay” rules attempt to ensure that rewards reflect the best interests of shareholders. Another part of the discussion involves the form compensation should take; boards in recent years have decreased the use of stock options while placing greater emphasis on long-term value creation, using metrics such as TSR (total shareholder return) and ROIC (return on invested capital). These efforts have allayed some of the concerns of shareholders and the broader public by increasing pay transparency and the likelihood that boards’ and managers’ interests are aligned.

But the current conversation about executive pay tends to obscure a critical question, one that’s especially pressing in biopharma: whether the yardsticks by which executives are rewarded reflect and advance a company’s stated strategy. Read More

Why Portland’s Drastic Move to Limit CEO Pay Will Make ‘Virtually No Impact’

Portland, Ore., is on a crusade to solve income inequality, even if only in its mind.

On Wednesday, Portland’s City Council voted to tax companies whose chief executives make more than 100 times the median employee pay. The move makes Portland the first city in the nation to impose a tax on companies based on CEO pay.

Companies with CEOs whose compensation is more than 100 times the median pay of all of their workers must pay an extra 10% surcharge on top of Portland’s existing 2.2% business income tax. Companies with CEOs who make 250 times will pay an additional 25%. Read More

Private college presidents seeing boosts from deferred compensation

Deferred compensation used to keep private college presidents from stepping down contributed to pay increases averaging almost 9 percent for leaders in office two or more years, a new analysis finds.

The Chronicle of Higher Education this evening released its latest annual look at what hundreds of private college and university leaders across the nation are paid.

It found that 39 presidents earned more than $1 million — including one who topped $5.4 million — compared with 32 who earned $1 million or more the previous year. Read More

Wells Fargo CEO Expects Scandal Fallout to Cost Tens of Millions of Dollars

Wells Fargo & Co. Chief Executive Timothy Sloan reiterated Tuesday that the bank expects to spend tens of millions of dollars to get through investigations and other regulatory matters related to its sales practices scandal.

“I think that seems reasonable today based on what we know,” said Mr. Sloan, who became chief after former CEO John Stumpf retired abruptly in the wake of the scandal. “It’s the upper end of our range from an efficiency standpoint.”

Mr. Sloan, speaking at a Goldman Sachs financial-services conference, said the scandal could affect the firm’s retail-banking results given changes in that business’s incentive-compensation program. This is meant to refocus branch bankers from product sales to service, relationship growth and product referrals. Read More

White-Collar Overtime Rule Delayed: What Business Owners Need To Know

A federal judge in Texas has dealt a critical blow to the Department of Labor’s planned change to the Fair Labor Standards Act (FLSA) overtime regulation, better known as the white-collar overtime provision. The sweeping change – which was expected to go into effect on December 1 – is now on hold.

The Obama Administration estimated approximately 4.2 million workers would see their annual compensation increase under the change, which would have required organizations to pay previously exempted employees who work more than 40 hours per week time-and-a-half overtime pay if they made less than $47,476 a year.

With a preliminary injunction now in place, the Department of Labor can still appeal the ruling. What does all of this mean for businesses? For one, it means more uncertainty about what the future may hold. Read More

Wells Fargo approved changes to co's non-employee director compensation program

* Wells Fargo & Co approved changes to company's non-employee director compensation program effective October 12, 2016 - SEC filing

* Changes provide for a $250,000 annual retainer for company's independent chairman

* Changes provide for a $100,000 annual retainer for independent vice chairman

* Amended by-laws to add new section 4.5 which provides that board shall annually elect chairman from among its independent directors

* Amended by-laws to add new section 4.5 which provides that board may elect one of its independent directors as vice chairman

* Incorporated certain conforming changes throughout by-laws to remove references to lead director role Read More

2016 Year-End Key Executive Compensation Reminders and Considerations

With the holiday season upon us, public companies should begin to prepare for the upcoming 2017 proxy season.

Although 2017 may bring significant changes to the executive compensation landscape, the following is a brief summary of the key executive compensation-related reminders and considerations that remain important for public companies to consider as we approach next year's proxy season. Read More

Sales Compensation Planning for 2017

When it comes to how businesses pay their salespeople, there’s no one-size-fits-all approach. That’s especially true for many companies with diverse products and services that include: a mix of products and services. Some pay commission based on sales, while others only pay on margin; still others blend both with incentives and special bonus plans.

Your sales management team must understand your company’s overall goals and structure compensation to align with them. In short, sales compensation should be not just a tactical focus for your organization, but a strategic one as well. Read More

U.K Proposes New Rules on Executive Compensation

The U.K. government on Tuesday published a consultative report chock-full of potential corporate governance reforms that could align the country more with executive compensation practices in the U.S.

The 59-page long document, called the “green paper,” consists of a number of proposals on improving transparency around executive pay, enhancing the role of compensation committees and “strengthening the employee, customer and supplier voice.”

It calls for disclosing the pay ratio between chief executives and company employees, giving employees more influence on company boards and equipping shareholders with more voting power. Read More

3 Key Questions to Ask When Designing an Incentive Plan

We are big fans of incentive compensation for two reasons: First, a well-designed system can motivate employees to deliver the performance you want.

Second, if you structure the compensation system correctly, you will have plenty of money to pay your employee if he or she earns the incentive, because your company will have done well.

One caution, however, is that in our experience, employees will do exactly what you incentivize them to do, and not necessarily what you want them to do. That’s reasonable. It’s unfair to expect an employee to behave in a way that will not be in his or her economic self-interest. You don’t need to look any further than the recent troubles at Wells Fargo for an example. Read More

Sales Compensation is Shifting to Include Team and Corporate Performance

A study by the Hay Group division of Korn Ferry finds that U.S. companies are putting less emphasis on individual performance and increasing the emphasis on organizational success when determining incentive compensation packages for sales roles.

The study analyzed individual contributor sales compensation data from 2010 through 2016. It found that in 2016, a full third of the companies included the company’s business unit or division performance when putting together sales force incentive compensation packages. That’s more than double the 16 percent of companies that did so in 2010.

In addition, the study found that in 2016, 26 percent of companies included a corporate-wide or team performance measure when determining compensation. That’s up from the 2010 figures of 15 percent and 12 percent respectively. Read More

Impact of 2016 Elections: Tax Code Reform and Executive Compensation

President-Elect Donald Trump’s new administration is likely to work with congressional Republicans to pursue significant changes to the Internal Revenue Code (IRC). During the campaign, Mr. Trump’s tax proposals focused primarily on

• reducing the maximum corporate tax rate to 15%,

• eliminating the alternative minimum tax, and

• simplifying individual tax brackets from seven to three and lowering the maximum rate.

If enacted, these proposals could materially affect the design of executive compensation programs. Read More

When Director May Not Be Interested In Director Compensation

Suppose that a corporation has three directors, A, B & C, each of whom is compensated by the corporation.  Is director A financially interested in a resolution fixing the compensation of director B?  Corporations Section 310(a) provides the following answer:

A director is not interested within the meaning of this subdivision in a resolution fixing the compensation of another director as a director, officer or employee of the corporation, notwithstanding the fact that the first director is also receiving compensation from the corporation.

Thus, the statute encourages the meaningless formality of “round robin” voting on director compensation so that each director votes on the other directors’ compensation while abstaining from the vote on her own compensation. Read More

FASB Proposes Changes in Accounting for Stock Compensation

The Financial Accounting Standards Board has released a proposed accounting standards update related to the scope of modification accounting for stock-based compensation.

FASB is issuing the proposed update to provide more clarity and discourage differences in practice when applying the guidance in the standards for stock compensation about a change to the terms or conditions of a share-based payment award.

A business can change the terms or conditions of a share-based payment award for a variety of reasons, FASB pointed out, and the nature and effect of the change can also vary significantly. Read More

Key thoughts on physician compensation

The way hospitals approach physician compensation is changing under the value-based healthcare initiatives. At the Becker's Hospital Review 5th Annual CEO+CFO Roundtable on Nov. 9 in Chicago, Steve Rice , area president, physician services of Integrated Healthcare Strategies, and Steve McCamy, president and CEO of Covenant Medical Group, Covenant Health in Lubbock, Texas, discussed physician pay in today's changing market.

Physician compensation contracts must fall within fair market value and support commercially reasonable rates.

Most hospitals are slowly moving toward value-based compensation as they take on more risk and develop new strategies for the changing market. Both primary care physicians as well as surgical and medical specialists maintain primarily productivity-driven compensation with work relative value units. Data from the 2016 Gallagher Integrated Survey showed 83 percent of primary care physicians, 87 percent of medical and 86 percent of surgical physicians report compensation plans that include productivity. Read More

dangerous compensation practices

Most of the impact of a Labor Department regulation to raise investment advice standards for retirement accounts hits brokers, but investment advisers also have to comply with the measure — a point that was emphasized in agency guidance this week about the rule.

In a 24-page document that covered 34 questions released Thursday, the agency answered some of the most frequent queries they're getting about the rule, which requires advisers to 401(k) plans, individual retirement accounts and other qualified accounts to act in the best interests of their clients.

Seven of the questions focus on “level-fee fiduciaries.” Read More

Don’t Stop Readying Your Pay Ratio Just Yet

Companies collecting data and crunching numbers on the pay gap between their workers and their chief executive officer shouldn’t stop just yet.

Republicans in Congress have tried for years to undo a requirement from the 2010 Dodd-Frank Act for public companies to disclose the ratio of CEO-to-worker pay, through legislative packages, standalone bills and riders to government spending measures. With control of both chambers and the White House next year, their legislation will have an easier time getting through.

House Financial Services Committee Chairman Jeb Hensarling’s bill (H.R. 5983) to scrap Dodd-Frank would repeal the pay ratio requirements. The bill may serve as a blueprint in the next Congress as to how Republicans would remove the requirements. Read More

The Growth Of TSR Plans

During the most recent energy downturn, many energy companies are considering how to best compensate executives for their performance. Compensation generally includes a base level of compensation combined with some form of incentive compensation that is tied to performance. It can be very challenging to develop a compensation program that links entity value growth with management’s performance. This is compounded when attempting to develop multiyear performance goals for management in a volatile business environment.

Companies have many alternatives for incentive compensation programs. Stock options and restricted stock have their unique challenges and there is not necessarily a high correlation between executive performance and the value the executives receive as compensation. Executives may receive value as long as the company remains viable and the recipient does not quit or is not terminated. These forms of incentive compensation are also frequently tied to a predetermined plan or budget. Read More

Tax Court Finds Compensation Paid to Sons of Company Founders Was Reasonable

The Tax Court has allowed the entire amounts of $4 million and $7.3 million paid to sons of the founders of a concrete contracting business deductible as reasonable compensation. 

In the case of H.W. Johnson, Inc., T.C. Memo 2016-95, the court also ruled a payment of $500,000 to a company controlled by the brothers was ordinary and necessary to compensate their company for securing a concrete supply at preferential prices.

Compensation must be reasonable to be deductible under section 162 of the Tax Code. The Ninth Circuit, which would hear an appeal on this case, applies five factors to determine the reasonableness of compensation: (1) the employee’s role in the company; (2) a comparison of compensation paid by similar companies for similar services; (3) the character and condition of the company; (4) potential conflicts of interest; and (5) the internal consistency of compensation arrangements. Read More

Compensation Plans That Drive Results

Compensation plans work well for those individuals who are motivated by money. Recognize that not every person is motivated by money.

Where many businesses get trapped is that they focus on the compensation itself instead of their business goals. The right incentives reward professionals for contributing to achieving strategic goals. Remember that not all business is “good business.”

Here are four areas that can help improve your compensation plan. Read More