M3x transforms publicly available pay and financial data into past, present and future perspective analytics that tell your unique pay story. Your instinct concerning your pay can be supported by analytics from one or all three perspectives along with M3x’s narration. Each perspective may appear to utilize similar data, but each analytical approach tells very different stories that can identify pay short-falls and provide fact-based rationales for adjustments to executive compensation.
PAST
Five-Year Pay and Performance Lookback (against peers)
•Key financial measures
•Target pay opportunities
•STI and LTI payouts as % of target
•Realizable Pay
•Payouts vs. performance
Stock Ownership Levels (against peers)
•Vested and unvested values
•Ownership guidelines
•Actual progress toward guidelines
Holding Power (company only)
•Projected unvested values at various dates and stock prices for all executives at the company
PRESENT
Most Recent Target Pay Opportunities (against peers)
•Base salary
•Short term incentive (STI)
•Target Total Cash Compensation (TCC = Base Salary + STI)
•Grant date value of equity (LTI)
•Total Direct Compensation (TDC = TCC + LTI)
•Change in pension value
•All other income
•Total Compensation (Total Comp = TDC + change in pension + all other income)
Transactional Pay Actions Databases
•New-hire
•Promotion
•Interim role (CEO and CFO)
•Compensation treatment under mergers, acquisitions, divestitures, initial public offerings, spin-offs
FUTURE
Leverage Assessment (against peers)
•Fixed vs. variable
•LTI vehicle mix
•STI and Performance Share thresholds and maximums
•Overall upside without stock price change
•Range of outcomes with stock price change
Time Frame (against peers)
•Maximum life by component and combined
•Average life by component and combined
Performance Measurement (against peers)
•Metric selection
•Goal setting
Termination (against peers)
•Benefits: Severance, change-in-control, death, disability, and retirement
•Recoveries: Claw-backs and forfeitures
Other Services:
•Selection of alternative peer companies
•Director pay analyses
•Dilution and overhang analyses
•All participant equity modelling and allocation
•ESPP modelling and planning
•Financial modelling for planning and incentive design purposes only
•Alaska Native Corporations pay and performance studies (regional and village)
PAST PERSPECTIVE
Past perspective analyses explore the relationships among an executive’s target pay opportunities, estimated pay outcomes and measurable performance over the prior three- to five-years. In short, these analyses attempt to provide an executive report card that can be compared across companies.
Although an executive’s pay opportunities overlap and are constantly in flux, retrospective analyses set an arbitrary finish line (now) and determine relative winners and losers in terms of both pay and financial performance. These standardized report card approaches are the quantitative basis of governance groups’ recommendations; making them a focus of Compensation Committees’ and therefore management teams’ concerns.
For both preemptive and reactionary reasons, Committees and management will also assess their executive compensation history through a more customized Realizable Pay analyses which is then compared against Relative Total Shareholder Return (RTSR) and/or key financial measures to prove alignment with shareholders. While most Realizable Pay analyses commissioned by Committees are intended to disprove any appearance of over payment, a comprehensive analysis may also substantiate an executive’s belief of pay shortfall due to design rather than performance.
Depending on the cause and magnitude of the shortfall, these backward-looking analyses may provide the rationale and range of values for a make-up bonus or grant. At the very least they can pressure the Committee to adjust annual pay target levels and/or incentive design leverage in coming years.
For executives considering leaving their current position, retrospective analyses provide a clear pay history that can set a floor on their target pay expectations and more importantly quantify their past value creation. Backward-looking analyses can also be applied to the prior incumbent of the prospective position as well as other executives at the hiring company. These analyses may provide internal equity parameters for target pay opportunities and insights on the degree of difficulty of meeting or exceeding incentives’ performance targets of the hiring company.
Another insightful past perspective view can be obtained through analysis of an executive’s vested and unvested stock holdings. M3x’s analytical approaches allow testing of ownership levels under various price scenarios, time-frames and definitions of ownership. These analyses assess the effectiveness of past grant practices creating current retention strength (holding power) and the extent to which minimum ownership requirements have been met. Regardless of the cause, a quantified deficiency can provide a strong argument for greater annual grant values and/or a special grant to individual executives or the entire management team. For currently employed executives considering leaving, the analyses can quantify their equity buyout amount.
PRESENT PERSPECTIVE
Target annual pay opportunities represent the present perspective of compensation that is familiar to most executives and board members. These opportunities are annually approved by the Compensation Committee and typically include base salary, short-term incentive (bonus) target, and long-term incentive target values. The sum of these elements is called target Total Direct Compensation (TDC). It is the most watched and compared measure of pay since it is considered the starting line of the executive compensation race. Offering a significantly better or worse starting position than peers usually requires a good reason, other than past performance. Justifications for deviation may include company size, incumbent experience, pivotal role or imperfect position match.
To determine a reasonable range, an executive’s target TDC is compared with executives’ values in similar or “matched” positions at peer companies. Executives may access TDC data for their position from their company (what is delivered to the Board) or from an external source such as M3x.
Current top executives with publicly reported pay should annually review their pay position in the marketplace. If there is a shortfall, it should be addressed immediately since the gap will only expand over time. A shortfall may become so large that it is impossible to correct without governance watchdogs waving the red flag. A prolonged gap may affix a lower market value to the executive as viewed by the external universe and limit the executive from self-correcting by moving to another company.
For new-hire negotiation, it is critical to understand target opportunities as it is difficult to move pay levels once in the position. To avoid limiting annual pay opportunities to median market levels, the candidate can assess their relative position among the peers as well as their relative position among executives at the hiring company. This relative “talent” positioning could be key to supporting pay levels above the market medians for the position. It sometimes takes only one example to support above market median opportunities.
The present perspective also includes pay level adjustments and special one-time actions taken for new hires, promotion, merger completion, interim role (CEO and CFO) and the catch-all reason of retention. These actions should be closely monitored since they may be hidden increases in market pay levels and provide insights on market practices when special situations arise.
Data concerning new hire compensation will be key to arriving at appropriate sign-on bonuses and equity grants. A candidate should first look to sign-on practices among peers of the hiring company. There are usually not enough recent incumbent changes within a peer group to provide clear direction. A candidate should then look to recent sign-on practices at companies that may be a step or two away from the hiring company in terms of size or business. M3x maintains databases of recent transactional pay actions and is the only firm providing these data and analytics to individual executives, recruiters or the candidate’s legal counsel.
FUTURE PERSPECTIVE
Designing executive compensation programs for future outcomes is often overlooked or relegated to HR or finance to “figure out the details.” But these design details are the means to ensure alignment with shareholders and should be a top priority of compensation committees and executives. Actual compensation payouts or outcomes are the result of performance and critical design decisions including the balance of base salary and incentives, mix of LTI instruments, STI and LTI leverage, time horizon, metrics selection and goal setting. By thoughtfully negotiating these design elements upfront, the resulting compensation outcomes should be considered fair to all parties at every performance outcome.
Designing for fair pay outcomes begins with an upfront philosophical stance concerning the desired degree of alignment between the risk and return propositions of the shareholders and executives. The executives’ risk–return tradeoffs do not need to be identical to the shareholders’, just result in mutually acceptable pay outcomes whatever the business performance. Although governance firms have design rules that attempt to force alignment with shareholders, there is no best practice. Every situation is unique due to the inherent performance volatility of the company and the executives’ risk appetites.
Financial theory suggests that the more uncertain and the later the receipt of pay, the greater the target opportunity and/or the upside leverage (eventual payout level) must be. The opposite is true for more predictable outcomes and shorter time horizons. Therefore, Committees and executives should estimate the range, time horizons and probabilities of achieving the pay outcomes based on the terms of the proposed offering and their knowledge of the business.
To evaluate overall program leverage, M3x’s analysis provides a range of potential future payouts in terms of dollar values and as a percentage of target. M3x also offers analyses concerning time horizon, metric selection and goal setting. The metrics related analyses utilize data from S&P Capital IQ and sophisticated financial modelling. Together, these future focused analyses allow for a holistic comparison of the executives’ risk –return tradeoffs among peers or a broader group of companies.
If the proposed design is outside of the peers’ range or there is a desire for a greater/less risk-return tradeoff, these forward-looking analyses may provide rationale for changes to the proposed design and possibly the target opportunities. For executive candidates, M3x’s analyses may provide the data to support a request for greater target opportunities due a greater risk-return tradeoff.
Beneficial and punitive treatment of executive compensation under various termination scenarios is the other very important forward-looking perspective that should be carefully explored by existing executives as well as candidates. Termination scenarios include voluntary, for cause, without cause/good reason, change-in-control, death, disability, and retirement. Like prenuptial agreements, they are difficult to discuss and are best negotiated using data rather than emotion.
Most data providers present details on the various elements, but rarely a complete picture for each type of termination that could be compared across companies. For each scenario, M3x first estimates the cash and equity values for the company and peers based on the disclosed terms. For comparison, M3x then calculates the termination cash value as a multiple of target total cash and the total estimated value of the termination arrangement as a percentage of total direct compensation. This approach allows for identification and quantification of any short-falls in compensation protections; offering rationale for contract or termination policies changes for existing executives. For candidates, this analysis is critical for negotiation with the hiring company as it may be the only time to negotiate termination provisions that are different from the company’s current policies or practices.
In addition to potential benefits related to termination, an executive should be aware of the potential punitive actions that may be taken for their or another executive’s behavior that may go beyond termination of the offender. M3x can provide data to explore the hidden additional risk of triggering events for claw-back and/or forfeiture of compensation. The analyses can help to determine if there should be any sort of risk premium paid for broad reaching claw-backs and/or forfeitures such as financial restatement not directly related to the executive.