Despite Strong Say-on-Pay Shareholder Support, Many U.S. Companies Continue to Sharpen Their Focus o

Despite Strong Say-on-Pay Shareholder Support, Many U.S. Companies Continue to Sharpen Their Focus on Pay for Performance, Towers Watson Survey Finds

Only six in ten companies have conducted pay-for-performance analyses

NEW YORK--(BUSINESS WIRE)-- Though most U.S. public companies received strong shareholder support for their executive compensation programs during the most recent proxy season, a new survey by global professional services company Towers Watson (NYSE, NASDAQ: TW) reveals that almost half of the respondents either have made or will make program changes to strengthen the link between pay and performance in advance of the 2013 proxy season. The study also found that while the vast majority of companies say they pay executives for performance, only about six in 10 have actually conducted a pay-for-performance analysis to demonstrate this linkage.

The Towers Watson survey found that 45% of 253 U.S. companies polled either made or will make changes to their executive pay programs this year to further strengthen the link between pay and performance. Among these respondents, more than half (55%) are introducing or enhancing the emphasis on performance-based equity while 50% are changing the performance measures used to determine incentive payouts. These changes are occurring even though only 2% of respondents failed to gain majority shareholder support in their most recent say-on-pay votes.

"While companies have generally received strong shareholder support during the first two years of say-on-pay voting, most are far from complacent as we head into year number three," said Andy Goldstein, leader of Towers Watson's executive compensation consulting practice for the central U.S. "Even companies that received overwhelming shareholder support in 2012 are considering fine-tuning how they pay executives, and we're seeing the most activity among those receiving less than 90% say-on-pay support. That's a very high standard."

According to the survey, the vast majority of companies (90%) state in their proxies that their executive compensation programs pay for performance. However, only 61% have actually conducted a pay-for-performance analysis that compares the company's relative financial performance with its relative pay positioning. Additionally, only about half of the companies that conducted pay-for-performance analyses decided to disclose the results to shareholders in their public filings. Among those that did, nearly three-fourths (73%) believe their disclosures were effective or very effective in boosting shareholder support for their pay programs.

"We were surprised that many companies that conducted pay-for-performance analyses chose not to disclose the findings to their shareholders, particularly given that the companies that did so found their approach helped boost shareholder support," Goldstein said. "This finding reinforces our belief that conducting and disclosing a thoughtful pay-for-performance analysis is a best practice that companies should adopt regardless of whether the SEC requires such disclosure for upcoming proxies."

When asked why they decided not to disclose the results of their pay-for-performance analyses to shareholders in 2012, companies offered various reasons. Nearly four in 10 (39%) said they were waiting for SEC disclosure rules to be issued, while roughly three in 10 were concerned about setting a precedent that would likely require the disclosure of a similar analysis in the future or said the analysis did not yield incremental valuable information to shareholders.

Other findings from the Towers Watson survey include:

• Among the companies that conducted a pay-for-performance analysis, 81% compared their performance to a company-defined peer group.

• More than half (52%) of companies conducting analyses continue to rely on the pay required to be disclosed in the Summary Compensation Table when assessing pay for performance. While this may align with how proxy advisors have historically considered pay, there's growing interest in other measures of pay outcomes, such as earned pay and "realizable pay," that take into account stock plan payments the Summary Compensation Table ignores.

• In terms of measuring performance, 73% of those conducting analyses used total shareholder return, but most also considered other measures that reflect income statement and balance sheet results.

• Only about half of the survey respondents engaged with shareholders on pay-for-performance issues in 2012, but nearly one-quarter (23%) plan to engage more actively in 2013.

"With companies under growing pressure from shareholders to strengthen the governance of their executive compensation programs, our survey results clearly underscore the complexity of designing, analyzing and disclosing pay for performance. Companies are adopting a wide range of approaches and performance measures as they continue to refine their programs. The bottom line is that each company is different, and there is no single approach that is right for all companies," said Goldstein.

About the Analysis

The Towers Watson survey was conducted in September 2012 and is based on responses from executive compensation executives and professionals at 253 large and midsize U.S. publicly traded companies.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.

Towers Watson
Ed Emerman, +1 609-275-5162
eemerman@eaglepr.com
or
Binoli Savani, +1 703-258-7648
binoli.savani@towerswatson.com

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