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January 11, 2016

Comp Committees Urged to Reconsider TSR

Compensation committees that are considering adding total shareholder return as a performance metric in incentive programs are being warned to tread lightly and not succumb to pressure, experts say. Use of the metric has skyrocketed, experts say, mainly because proxy advisory firms favor the measure due to its alignment with shareholder return. However, compensation committee members say the use of TSR is not right for every company.

Research by Cornell University ILR School’s Institute for Compensation Studies, in collaboration with consultancy Pearl Meyer, found that in 2013, 48.3% of the S&P 500 used the metric, compared with roughly 16% in 2004.

According to a survey by Pearl Meyer, 75% of respondents said that they included TSR because of peer practices, 56% said it was included in response to investor concerns and 52% said it was in response to a proxy advisory group.

Aalap Shah, Managing Director at Pearl Meyer, said this is a worrying trend because following what others do does not necessarily lead to creating a meaningful executive compensation program. He pointed to the Cornell and Pearl Meyer research, which found that while more companies are adopting TSR as an incentive metric, those that have brought it into their plans more recently are putting less weight on it.

“What this indicates is that companies don’t think it is the right thing to do, or are not sure if it is the right thing to do,” said Shah. “So what happens is that you are missing an opportunity to place a greater emphasis on a meaningful existing metric that has a potentially demonstrated correlation to value creation or adding other metrics that have that ability to add value over the … performance period.”

Shah said that once companies add TSR to an incentive program, it is hard to change it, or take it out. “You could get pressure in subsequent years if you decreased the weighting or removed the metric,” he added.

“If you currently don’t have total shareholder return in your program and are thinking about it, this is one of those things that you cut once, measure twice,” Shah said. “You will certainly be talking about it; hopefully you will decide it is best for the company and not do it because everyone else is.”

January 11, 2016

Top Concerns for Comp Committees in 2016

Compensation committee members face a daunting workload in the New Year as they prepare for incoming disclosure regulations and deal with expected scrutiny of executive pay. Here Agenda looks at issues that compensation committees will most likely be focused on in the coming year.

Experts told Agenda in October that boards should not get bogged down in the headline-grabbing pay ratio rule and should instead focus on the outcome of their pay-versus-performance analysis.

At the time, Aalap Shah, Managing Director at Pearl Meyer, said, “If I was sitting on a compensation committee, I would be more worried about pay-for-performance than the pay ratio rule.”

Shah added, “What the committee should be more focused on is the pay-for-performance rule because that really [reveals whether] they structure the compensation program effectively. Can you demonstrate to your shareholders that you have proper alignment? Is your CEO’s pay properly aligned with [investor] interest, and is that conducive to creating and maintaining a performance-orientated culture within the company?”

According to compensation data provider Equilar, 83.2% of S&P 500 companies included disclosure of pay for performance in their 2015 proxies. This was down slightly from 87.6% in 2014.

Sharon Podstupka, Principal at Pearl Meyer, suggested that compensation committees prepare early for new disclosure requirements. “Model in advance to understand what is required, as well as to understand what your company’s disclosure will look like. This will help you develop a solid rationale for your strategy-based compensation and will highlight any potential red-flag issues,” she said.

Washington Post
December 23, 2015

Why it’s a Problem That CEOs Have Such Big Piles of Unused Vacation Pay

As we say goodbye to 2015, many employees are using up their final vacation days of the year. That's especially true for employees whose workplaces have a "use it or lose it" policy, and don't allow staffers to roll over their days to the following year.

But at those companies that do let employees carry over much or all of their paid time off to the following year, all that accrued vacation time can start to add up. And nowhere is that more true than when it comes to top executives. The reason for those tallies, of course, is two-fold: the obvious one is that most CEOs have big paychecks, and some clearly aren't taking much of their allotted vacation.

"When you see these large values, in many cases all that means is the CEO is covered by the same policy as other employees," said Pete Lupo, Managing Director at Pearl Meyer.

Should companies urge CEOs to take their vacation, too? Perhaps, but the reality is many of these top jobs, particularly at major publicly traded corporations, simply don't have an off switch. "CEOs work seven days a week, it's the nature of that job," Pearl Meyer's Lupo said. "At that level, time is amorphous. This is not a 9-to-5 job, and it never will be."

November 16, 2015

Boards Urged to Prioritize CEO-NEO Pay Ratio

Boards are encouraged to pay close attention to the ratio between CEO compensation and that of other named executives, as experts say this is a more meaningful measurement of good compensation practice than the SEC-mandated pay ratio rule.

Aalap Shah, Managing Director at Pearl Meyer, says the CEO-NEO pay ratio is very important to compensation committees, and is often discussed when setting pay packages. However, Shah says, “comp committees do want some differentiation; not everyone should be paid the same…You are not going to have an organization where everyone is a high performer.”

Pearl Meyer compared CEO and CFO pay, as the CFO is typically the highest-paid executive after the chief executive. It found that for companies with revenues of $500 million to $1 billion, the median ratio was 2.5:1. Meanwhile, for larger companies with revenues between $1 billion and $2.5 billion, the ratio was 2.7:1.

“We found that although some think that may be high, the CEO compensation tends to have a greater emphasis on long-term, performance metrics,” Shah says. “The pay is more at risk.”

Bloomberg BNA
November 2015

Bloomberg BNA, Report on Salary Surveys™

Study Finds TSR Doesn’t Drive Company Performance

The use of total shareholder return (TSR) as a metric in long-term incentive plans has not been effective in improving company performance, according to an analysis by Pearl Meyer and Cornell University’s ILR School’s Institute for Compensation Studies.

Pearl Meyer and Cornell studied S&P 500 companies’ use of TSR in LTI plans over a 10-year period and whether it had an impact on the firms’ performance. The research found that there appeared to be an unclear link between TSR and business results.

“The assumption about TSR is that linking stock performance to executive compensation would lead to improved performance because, in part, it would align incentive awards with shareholder interests,” said David Swinford, President and CEO of Pearl Meyer.

Instead, the Pearl Meyer and Cornell research found little to suggest that including TSR in a LTI plan led to improved financial performance.

Institutional Shareholder Service and other proxy firms use TSR because it’s something that the shareholder can use to compare firms, Swinford said. TSR would seem to be a good metric to use over the long term. “Everyone agrees the purpose of the business is to make profit for the owners,” Swinford said.

There is nothing that could easily replace TSR, according to Swinford. “There isn’t a single good measure or pair of measures that would be a good metric for all companies. There are different drivers of value creation,” Swinford said.

Using a metric other than TSR would require some communication skills of a company, according to Swinford. If an organization decides to use another measure other than TSR, then it should have good reason to do so, he said. “It’s incumbent on every company to explain to shareholders why they are pursuing the strategy they pursue,” he said.

“Every investor wants to know what the long term strategy is and how to get there,” Swinford said. 

Re: locate Magazine
Autumn 2015

Responsible Rewards

Tighter legislation, corporate governance and public scrutiny are putting international and executive pay benefits under the spotlight as never before. Legislative developments, such as April 2015’s changes to the treatment of share options for internationally mobile employees, has remuneration professionals innovating to deal with arguably less tangible, but equally important issues.

While international pay and benefits play a key part in attracting and retaining a more diverse expatriate population, there is also demand for more robust corporate governance and responsibility, stronger links to return on investment, and fairness.

Simon Patterson, Managing Director of executive compensation consulting firm Pearl Meyer, London, and a speaker on the realities of pay governance remarks, “One of the most important trends in remuneration governance today is the sharing of best-practice ideas between countries and cultures. Some countries may be focused on transparency, while others are less so, but most countries think about the linkage of performance to corporate strategy in the same manner.”

Greater scrutiny of executive pay and governance, with the rising interest in more flexible pay options is also pulling payment from performance into greater focus. “In a complex world, executives must continuously find and execute investment opportunities that will earn more than the cost of the capital required,” Patterson notes, while dealing “with a hugely competitive business environment.”

October 5, 2015

Pay Ratio Rule Opens Can of Worms for HR

Boards and management teams are being advised to communicate their compensation philosophy clearly — for both executives and employees — before their pay ratio is disclosed in 2018, as it could have a negative effect on workplace morale.

Although calculating the rule could be cumbersome for some companies, experts say the biggest impact of the rule may be on employees, who will now be able to compare their pay to that of the median employee. This may prompt some compensation committees to begin assessing the pay of rank-and-file employees.

One way to combat this, experts say, is to communicate with employees about their pay and the ratio. “A company would be well served to start being more transparent and start communicating that they are working on the calculation and what the preliminary numbers are,” says Aalap Shah, Managing Director at Pearl Meyer.

The new disclosure may disturb the relationships between different groups of employees and the question becomes whether or not comp committees are going to feel the need to extend their reach into this workforce area.

Shah says this is unlikely. “The committees usually step back from that because they want to advise and shepherd management, not do management’s job. It may drive some committee members to ask for that information … but some are asking for that anyway regardless of the pay ratio,” Shah says.

Wall Street Journal
September 29, 2015

TSR a Growing Pay Metric, May not Be Useful: Study Finds

Executive compensation is increasingly pegged to shareholder returns as corporate boards look to align pay packages with business success. Problem is; there’s little to indicate company performance improves as a result.

More than 48% of S&P 500 companies tied compensation to total shareholder return – stock performance plus reinvested dividends – in 2013, according to a study by Cornell University and Pearl Meyer, an executive-compensation consultant. That’s up from less than 17% in 2004.

The proliferation of TSR as a compensation metric is likely tied to governance advisors, according to Peter Lupo, a Managing Director with Pearl Meyer. Those advisors typically evaluate pay packages based on TSR, which overlooks other criteria like return on invested capital.

While “TSR is a wonderful tool to understand the long-term effectiveness of linking pay and performance,” Mr. Lupo said, it is not particularly helpful in short-term compensation decisions. Many firms, for instance, use three-year-TSR performance, but it’s common for three-year TSR to often be a lagging or leading indicator of future performance.

There is no magic metric,” to appropriate compensation practices, as it varies widely between companies and industries, Mr. Lupo said. To determine the best benchmarks, Lupo told boards and investors “to do your homework” in order to know which measures are indicative of the best performance of a company, relative both to its peers and the broader market.

September 28, 2015

TSR in Comp Has Little Benefit for Investors, Research Claims

Research released today shows that the use of total shareholder return as a metric for incentive programs does not lead to improved company performance.

The study by Cornell University ILR School’s Institute for Compensation Studies, in collaboration with consultancy Pearl Meyer, found that there was not strong evidence that using TSR in a long-term incentive program had a positive influence on one-, three- or five-year TSR, return on equity or earnings per share.

David Swinford, President at Pearl Meyer, says that he is not surprised by the results that the use of TSR as an incentive metric was not associated with better performance. “[TSR] is good at aligning the executive’s total rewards with the returns of the shareholders, but it really doesn’t have value as an incentive tool,” he says.

Compensation committees do have to focus on alignment, Swinford says, “but there is so much guidance around the use of TSR… It is much harder to figure out what are the right measures to select for long-term performance and it is harder to establish the appropriate goals for the management team. So at the end of the day, many start defaulting back to what is more well known.” Swinford continues, “They know if they use TSR they will have better alignment over the long term and are going to have less external criticism.”

Swinford says that if companies have a strong sense of what it is going to take to drive future value creation and they know what levers to pull, those should be prioritized in executive comp plans.

The Cornell research was the first academic effort to address the topic of TSR as a metric.

Bloomberg Business
September 2, 2015

These Retailers Make Bank CEO Pay Look Modest

Retail executives with hefty pay packages and plenty of low-wage employees could end up looking worse than bank leaders when the rule requiring companies to report the gap between their chief executive officer and their median worker goes into effect.

The pay-ratio rule, adopted by the U.S. Securities and Exchange Commission last month, has been championed by supporters as a way of highlighting the growing wage gap between executives and rank-and-file employees. It could increase scrutiny of executives at companies with large U.S.-based workforces earning near the minimum wage, shifting attention away from managers at investment banks and hedge funds.

“Any kind of company with a large seasonal or temporary workforce or college kids with lower pay, like retailers, might be concerned with the ratio,” said Deborah Lifshey, Managing Director at Pearl Meyer & Partners, a New York-based executive-compensation consulting firm.

Bank Director
September 2015

The Executive Pay Minefield: Balancing the Needs of Shareholders and Regulators is Fraught with Challenges

Bank CEOs made more in total compensation in 2014 than in any year since the beginning of the financial crisis, but striking the right balance between the often-conflicting demands of regulators and shareholders has never been more challenging.

The composition of that pay has changed quite a bit. Perquisites are way down, and big-money deferred-pay schemes, including supplemental executive retirement plans, are out of favor. Provisions that allow companies to “claw back” bonuses from previous years if long-term goals aren’t met are hot. Long-term performance is more in vogue than ever—one thing that is accepted by both shareholders and regulatory agencies—with performance shares and restricted stock more liked than stock options. Performance-based shares are only awarded if performance metrics such as profitability and asset quality are met. Restricted stock is awarded as a grant, but only vests after conditions are met or after a certain time period.

“Investors want base salary to cover the duties of the position, but think the rest should be at-risk, so the executive only receives an award when shareholders do well,” explains Laura Hay, managing director at Pearl Meyer.

“If you want to use compensation as a competitive advantage to drive value, it has to be tied to the business strategy and culture of the organization,” Hay says.

National Public Radio
August 28, 2015

Comparing The Top Boss's Pay To Yours

Companies have long had to disclose what their CEOs make, but soon, for the first time, large companies will have to disclose how salaries at the top compare to their median compensation level for employees worldwide. It's a rule the Securities and Exchange Commission adopted as required by the Dodd-Frank financial law.

The idea was to give shareholders of companies more context for how executives are paid, but experts say this rule could lead to some unintended consequences.

Deborah Lifshey, Managing Director at Pearl Meyer, says most client companies are concerned about their workers' reactions when they find out how they fare relative to their peers.

"They're not really concerned about what the pay ratio actually is," Lifshey says. "They're more concerned about what will happen, how the media will react, what it will do with this data" — and how employees will react if they find out that they're paid less than the median for their company, or that a rival firm's median pay is higher.

The Wall Street Journal
August 22, 2015

Ann Bucked Trend By Failing Deal-Parachute Vote

Ascena Retail Group Inc. on Friday completed its takeover of fellow clothier Ann in a cash-and-stock deal, announced in May. Ann shareholders on Wednesday overwhelmingly approved the deal, but sent its management off with a thumbs down to their lavish exit bonuses.

Robb Giammatteo, Ascena’s finance chief, said it evaluated the deal with the parachute payments in mind, and determined the merger would add significantly to earnings, especially given $150 million in expected cost savings between the combined companies.

“Say on Golden Parachute” votes aren’t binding, so the only way to stop payment is to vote down the deal, which rarely happens.

“There’s less concern about failing” parachute votes, according to Margaret Black, a Managing Director with compensation consultant Pearl Meyer & Partners. While “nobody likes to fail,” companies are keenly aware of the litigation risk that comes with deal-making.

Modern Healthcare
August 8, 2015

Disclosure of CEO pay ratios could stoke healthcare industry tensions

A new rule that will shed light on the rising wealth gap between America's CEOs and average workers could put some healthcare companies with large numbers of low-wage employees in the public's crosshairs. The Securities and Exchange Commission said last week that it is moving forward with new compensation disclosure requirements under the 2010 Dodd-Frank financial reform law which will force publicly traded corporations to report the ratio of their CEOs' compensation to their median employee pay.

“Once you take into account those different levels of service outside of the acute-care setting, it could make the (pay) ratio even steeper,” said Steve Sullivan, Principal, at executive compensation firm Pearl Meyer & Partners.

Healthcare company boards also contend they need to offer large pay packages to lure top talent in a challenging and complicated industry. Investors may ultimately overlook a high pay ratio if they are still getting large returns. “As long as shareholders feel like the organization is performing and the individuals in place are sustaining that, the market will pay what the market will bear,” Sullivan said.

The Wall Street Journal
August 7, 2015

Avoiding Pitfalls of SEC Pay-Ratio Rule

Publicly listed companies will have a few years before they need to report the gap between the pay for their chief executive and that of their median employee, but smart businesses will begin now to craft a strategy to avoid the pitfalls that will come from making this disclosure.

While many companies are fearful of the time and cost of complying with the rule approved this week by the U.S. Securities and Exchange Commission, the bigger risk may come from having to communicate to employees—especially those making below the median employee—about how their pay is calculated and why they get paid what they get for the job they do, said Sharon Podstupka, a Principal at Pearl Meyer & Partners. “We can’t lose sight of the spotlight this rule is going to put on median pay and those who are closer to the median than the CEO’s pay and the attention they will pay to it,” Podstupka said during a webinar on Thursday.

Because companies won’t have to disclose the pay ratio until 2018, Ms. Podstupka said companies need to use the time between now and disclosure to “plot out your internal communications strategy, get people educated about how your company sets pay.” This includes being more transparent about what employees are told about how base salaries are set, how incentive plans and bonus pools are funded and getting human resources and managers well trained “to give the workforce comfort their pay is being set in a fair way. This is the first step and the best offense,” Podstupka added.



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