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February 07, 2011
GovernanceMetrics Publishes Executive Pay Scorecard
    by Robert Kropp

A new report studies executive compensation disclosures by S&P 500 companies in 2010, and assesses their compliance according to a series of ten compensation governance tests.

Now that the Securities and Exchange Commission (SEC) has adopted rules governing shareowner approval of executive compensation— public companies with a market capitalization of more than $75 million must provide shareowners with a vote on executive compensation at their first annual general meeting held on or after Jan. 21, 2011—the need for data to help investors cast informed proxy votes on the issue is paramount.

To address that need, GovernanceMetrics International (GMI) published today an Executive Pay Scorecard Report, which assesses compensation policies at S&P 500 companies based on their 2010 proxy reports.

According to a blog post by Paul Hodgson, Senior Research Associate at GMI and co-author of the report, scorecards for the 2011 proxy season "will be available to subscribers to the service for each of the S&P 500 that have filed or are filing proxy statements between January 1 and December 31, 2011."

Using research and analysis provided by The Corporate Library, which merged with GMI in December, the report measures the compliance of companies based on ten compensation governance tests. According to the report, "These practices are largely focused on incentive compensation policies that gauge the effective alignment between CEO compensation and a company's performance, but also incorporate an internal pay equity metric, as well as an assessment of key fixed pay elements."

As Hodgson wrote in the blog, "While it would seem axiomatic for a well-governed incentive plan that executives would only receive a reward for performance if their company was outperforming at least half of its peers, incentive plan design in the US makes such a position rare. The vast majority of long-term performance-related awards have some form of payout for below median performance."

Compensation practices at the five worst-scoring companies in 2010—Equifax, Masco, Medtronic, Pitney Bowes, and Yahoo!—each earned eight red flags out of ten. CEOs at each of the companies, for instance, earned compensation that was more than three times that of other senior executives. Four of the five companies set performance targets lower than the previous year, and paid out higher bonuses to CEOs as a result. Four of five used the same metrics for short- and long-term performance goals, as well.

Overall, 345 companies rated an average concern, 77 a low concern, and 72 a high concern.

"The Dodd-Frank Act makes voting on pay practices a critical issue for institutional investors," stated Jack Zwingli, CEO of GMI. A measure of the critical nature of the issue presented last week, when a coalition of 39 institutional investors with more than $830 billion in assets under management, led by Walden Asset Management and others, called on companies "to support an annual advisory vote on executive compensation in their spring proxy statements."

The SEC's rules mandate a shareowner vote on executive compensation at least every three years, but calls also for a vote on the desired frequency of an executive compensation vote at least every six years.


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