Looking Beyond Traditional Peers
We recently presented an executive compensation program review to the board compensation committee of a successful, long-standing S&P 500 industrial company. The peer group had 20-or-so comparable companies. A primary conclusion was that after six years of say-on-pay and proxy advisor voting rules, both the pay levels and program structures in the peer group were never more alike.
In the discussion that followed, there was clear concern by committee members that the “one-size-fits-all” trend among peers (and more broadly) may be overlooking areas where differentiation could provide competitive advantage. This led us to ask whether our conclusion would be different if newer, innovative, high-growth companies were substituted for traditional peers.
We responded by comparing practices that were now generally shared by the traditional S&P 500 peers to five large companies widely recognized for growth and innovation in products, applications, and markets over the last decade: Apple, Amazon, Alphabet, Facebook, and Tesla. For simplicity and objectivity, we used proxy data covering the CEOs and other named executive officers (NEOs).
Growth and Innovation Companies Have Unique Practices
Before we describe pay practice differences, it is important to recognize that the growth/innovation companies are largely shielded from say-on-pay shareholder voting concerns and proxy advisor rules that have contributed to the one-size-fits-all trend. Alphabet and Facebook are controlled by founder-CEOs with super voting shares, while Amazon and Tesla are “close to controlled” by founder-CEOs and other executives and employees. Apple had the advantage of market-leading total shareholder return (TSR) performance and size until about 2014, when it was pressured to fall in line and adopted much of the “best practice” model.
The most marked differences in executive pay practices are that real and carried-interest ownership generally drives long-term rewards, pay levels are not market-based, and performance is rarely measured against internal goals. In general, we found that:
- Cash is low, and equity is granted periodically to maintain targeted take-home / W-2 compensation value and unvested restricted stock unit (RSU) retention value.
- Leverage is from appreciation of substantial accumulated equity stakes, or in the case of Tesla, more highly leveraged stock options that vest based on development-related goals.
- Only Facebook has short-term cash bonuses with six-month discretionary earnouts for modest amounts.
- Equity is often front-loaded to further leverage performance-based pay delivery and vesting periods are longer (many cases beyond four years).
- None of the companies have plans based on multi-year financial or relative TSR performance.
- There are large annual budgets for aggregate equity to cover broad participation and substantial new-hire grants for recruiting technical talent.
- Severance or accelerated equity vesting is limited outside of a change-in-control to mitigate pay-for-failure and in recognition of high equity compensation values.
Break from the Pack if it Supports Your Strategy
The companies highlighted above offer much to consider for those looking to differentiate from the “best practice” model to support their own growth and innovation strategies. Further detail follows with provision-by-provision comparisons of general practices (Appendix 1), short-term incentive design (Appendix 2), and long-term incentive design (Appendix 3).
Appendix 1: General Practices
Appendix 2: Short-Term Incentive Design
Appendix 3: Long-Term Incentive Design
Download the Appendix here.
George B. Paulin
Chairman & Head of Los Angeles Office
George Paulin is widely recognized as an authority on strategic executive compensation program design across industries. He actively advises many of the nation’s largest and most valuable companies. George was a pioneer in the role of independent advisor to public company board compensation committees, and was instrumental in establishing FW Cook as a national leader in executive compensation consulting services. George has testified before Congress on executive compensation matters, appeared on CNBC, and contributed to most major business publications.
Kenneth H. Sparling
Ken Sparling’s assignments have been with both public and privately-held companies in various industries. His consulting engagements focus on all aspects of executive and board compensation including annual and long-term incentive programs, employment agreements and change-in-control arrangements. Ken holds an MBA from University of Chicago and is an author and frequent contributor to the firm’s technical papers and studies.