Governance Scorecard Stirs Up Controversy

In response to the SEC’s recent adoption of the rules requiring large public companies to provide shareholders with a vote on executive compensation, GovernanceMetrics International (GMI), a global risk monitor, recently published an Executive Pay Scorecard to help facilitate the demand for data when investors cast mandated advisory votes.

The launch of the scorecard coincides with the Executive Pay Scorecard report, which assesses corporate pay practices at S&P 500 companies based on their 2010 proxy reports, the governance ratings agency says.

‘The Dodd-Frank Act makes voting on pay practices a critical issue for institutional investors,’ says Jack Zwingli, chief executive officer of GMI. ‘These company reports will directly assist investors in conducting due diligence, as well as support efforts to engage with corporations to have a constructive dialog on executive pay.’

According to GMI, the scorecards will be delivered to subscribers via email and FTP (file transfer protocol) prior to the annual meeting after each new proxy statement is filed.

However, some governance professionals find fault with the scorecards.

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

‘People can use the scorecard as a uniform metric to measure all S&P 500 companies but the metric should be only one factor when considering CEO pay,’ Frankle adds. ‘Keep in mind, the kinds of things the boardroom is looking at in assessing CEO compensation, including recruitment and retention, is not covered in this metric, although, it is a good first cut at some key factors.’

The report measures companies’ compliance based on 10 compensation governance tests. ‘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,’ the report states. 

Some of the companies whose scores resulted in them falling into the ‘high concern’ category in 2010: Equifax, Masco, Medtronic, Pitney Bowes, and Yahoo! The CEOs at each of these companies earn more than three times the compensation of the company’s other senior executives.While Masco, Medtronic, Pitney Bowes, and Yahoo! paid out higher bonuses to their execs despite having set lower performance targets for 2010 and used the same metrics to measure short- and long-term performance goals.

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