GMI's executive pay scorecards shows failing grades

Compensation committees are continuing to cringe as they try to determine what level of pay increases will be acceptable for executives. But not many companies have been successful in adjusting their pay structures to incorporate pay for performance metrics. 

According to a study by Governance Metrics International (GMI), the independent governance and ESG research and ratings firm, 102 (22.3 per cent) of 456 S&P 500 companies were rated as high concern because of their ineffective pay practices. Just 89 (19.5 per cent) came in as a low concern

Some of the companies with the worst grades in GMI’s executive pay scorecards are Yahoo!, Prudential Financial, Abercrombie & Fitch, Aetna, and Constellation, Teradyne, Moody’s, Nabors Industries, Medtronic and Zimmer Holdings.

‘Our scorecards flag poor practice at a company, regardless of whether it is an industry-wide issue, such as the size and structure of executive pay packages in the financial sector, which encouraged excessively risky decisions that pushed the markets to the brink of disaster in 2008,’ says Paul Hodgson, senior research associate at GMI

The analysis was conducted using 10 tests to identify companies that lack effective pay practices. The metrics focus on whether incentive compensation policies adequately align CEO compensation and company performance. GMI says information used for the study was obtained from companies’ proxy statements filed on or after January 1, 2011 as they became available.    

Corporate Secretary previously reported that GMI’s executive pay scorecard, which was launched in February, received some criticisms from governance professionals. 

‘The problem with this scorecard is it does not encourage stockholders to think about the individual particulars of a company,’ said Diane Frankle, chair of public company and corporate governance practice at DLA Piper, the global law firm. ‘For example, if the company’s performance goes down, that does not necessarily mean that the CEO pay should decrease. The overall business reality must be taken into consideration.’ 

GMI says the scorecard has been designed to allow investors to flag those companies whose pay practices have come under question. For 2012, the scorecard will cover the Russell 3000.

[Article by Aarti Maharaj, Corporate Secretary]

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