As a board leader, how much do you know about global trends in pay for performance? Board directors often understand the conventions for compensation design in their own country but may be less familiar with the varying trends around the world. Understanding differing approaches to compensation can be a helpful exercise that inspires innovative decision making in the boardroom.

To dig into this topic in depth, Women Get On Board Inc. (WGOB) hosted a virtual discussion on January 24, sponsored by Southlea Group, as part of the WGOB Speaker Series. Leveraging Southlea’s role in the Global Governance and Executive Compensation and Governance Group (GECN), the event explored a range of pay considerations from around the world and their implications on compensation plan design.

Deborah Rosati, FCPA, FCA, ICD.D, GCB.D, CCB.D, Corporate Director and WGOB Founder and CEO, introduced Amanda Voegeli, President & Managing Partner, Southlea Group and Ryan Resch, Senior Partner, Southlea Group to lead the discussion.

“We thought, let’s take a moment to pause and reflect on what we’ve learned and what we share amongst our senior practitioners about differences in pay practices around the world,” explained Amanda as she introduced the topic.

Pay for performance is multi-dimensional. At a high level, it’s about not only deciding on the incentive program, but then, over time, measuring performance to understand how well the programs are delivering on what the organization is trying to achieve.

“When you boil it down it’s about understanding the overall effectiveness of your programs,” said Ryan.

This measurement can be shared internally and externally to help stakeholders understand the outcomes of your pay design. When evaluating pay for performance, the board should consider the following questions.

1. How is it measured? Consider both the company’s performance in isolation as well as its performance when compared to peers.
2. What is measured? Companies can consider financial metrics such as revenue, earnings and profit, or market metrics such as share price, yield, TSR, or beta.
3. Over what period are you measuring? Clarify the time period, recognizing that snapshots over different timelines may tell different stories.

As part of the conversation, boards should be distinguishing between target pay and actual pay. While target pay reflects the compensation level for meeting expectations, actual pay reflects the pay outcomes for performance achieved over a given period.

What are the global trends in pay for performance right now?

As part of their analysis, Amanda and Ryan offered insights into current practices in pay for performance around the world, as well as trends on the horizon.

CEO pay mix

When comparing CEO pay around the world, the pay mix varies greatly. In the U.S. and Canada, there is greater emphasis on long-term incentives, including multiple long-term incentive (LTI) vehicles included in the typical pay design. Globally, there is a greater balance between fixed and variable pay and between short- and long-term incentives, simplifying the pay for performance relationship somewhat.

Perspectives from shareholder advisory groups

Many board members are likely aware of the tests used by shareholder advisory groups to analyze pay for performance. While they are a blunt tool, they can be used by boards to compare pay design with peers. There are two well-known advisory groups that conduct tests, Institutional Shareholder Services (ISS), and Glass Lewis (GL).

Institutional Shareholder Services (ISS): Conducts three primary tests, consisting of CEO total pay vs. median CEO total pay of the ISS peer group, 3-year average CEO total pay and 3-year TSR performance compared to the ISS peer group, and trending of 5-year CEO total pay and 5-year TSR. They also conduct a secondary test for financial performance based on economic value add (EVA) metrics.

Glass Lewis (GL): Conducts one primary test, consisting of CEO and all NEOs 3-year average pay. The performance is based on a composite of measures, such as TSR, EPS Growth, ROA, and ROE.

Each measure has its own nuances, so their analysis of the same pay programs will can be expected to vary.

“You could do well on one but not on the other, or be challenged on both,” said Ryan.

Supplementary, non-required disclosure

It is becoming more common to see supplementary, non-required disclosure of pay for performance from larger public issuers. A typical disclosure in Canada will show the movement of the share price from year to year, as well as the impact of that movement on the original intended value of the compensation. This can be a useful for understanding the way realized and realizable pay is varying over time based on actual performance outcomes and it can also provide a comparison to gauge alignment of pay with the shareholder experience.

Some disclosures also include a zone of alignment chart that allows the company to choose the definitions of performance and pay to understand how it aligns with peers. The advantage of this model when compared to the ISS or GL tests is that it enables companies to customize it based on their own priorities.

“It allows you to tell the story of what is your most important performance metric,” explained Amanda.

New U.S. disclosure rules

The U.S. has recently released a new requirement that defines very specific disclosure rules for American companies. The disclosure must include a series of metrics, including Compensation Actually Paid (CAP), which is a variation of realizable pay capturing compensation over multiple years. While Canadian companies are not required to comply with these rules, they can learn from the approach in the U.S. as they craft their own pay design and disclosures.

Other global practices

As part of their analysis, Ryan and Amanda highlighted a handful of other global practices that companies might consider using to inform their own approaches to pay for performance.

Companies in Switzerland, for example, leverage a tool for understanding over what time period the complete compensation package is earned, using a chart that compares the time period of the pay package with the risk exposure. Meanwhile, in the U.K., it’s common practice to analyze the single figure, which includes the salary, the bonus, and what has been earned in performance shares for a given year.

While these practices may not necessarily be coming to Canada in the future, it’s useful to understand what other countries are doing differently and why. Examining global trends in pay for performance is a valuable exercise for board members looking to strengthen their company’s own pay program and keep up with best practices.