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Pay Governance LLC is an independent firm that serves as a trusted advisor on executive compensation matters to board and compensation committees. Our work helps to ensure that our clients' executive rewards programs are strongly aligned with performance and supportive of appropriate corporate governance practices. We work with over 400 companies annually, are a team of nearly 70 professionals in the U.S. with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Current Issues in Executive Compensation

Pay Governance understands that times remain uncertain. Our domain expertise remains executive compensation consulting. Therefore, each week we will continue to provide you with a short newsletter to keep you abreast of developments in the executive remuneration world.

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Featured Viewpoints

The 2023 Say on Pay Season – Outcomes and Observations

Say on Pay (SOP) votes were mandated by the Dodd-Frank Act of 2010 as a mechanism to allow shareholders to voice their opinions about the level and structure of executive compensation as well as promote the engagement of companies and their shareholders regarding a key area of corporate governance. The general view was that shareholders would increasingly reject executive pay programs by voting against the SOP proposal in years of poor total shareholder return (TSR) performance unless executive pay was reduced. Our findings show that the 2022 and 2023 SOP seasons run counter to this premise for S&P 500 Index companies. SOP failures in 2022 hit a record high (n=22) when TSR performance was strong (1- and 3-year TSR of 27% and 24%, respectively), whereas SOP failures in 2023 unexpectedly decreased (n=11) when TSR performance declined (1- and 3-year TSR of -19% and +6%, respectively).

As published in our recent Viewpoint entitled, “The 2023 Say on Pay Season – Outcomes and Considerations – April 2023,” we reviewed the full history of SOP outcomes for S&P 500 companies beginning in 2011 through 2022. At the time, we anticipated an active and volatile 2023 SOP season given the decline in TSR performance of the S&P 500 Index in calendar year 2022 (down 19%), historically much lower than any previous year in the SOP era. This Viewpoint adds the 2023 SOP season to our previous findings and highlights the outcomes, which were unexpected given the negative TSR performance in calendar year 2022.

Background: Say on Pay 2011-2023

Figures 1 through 3 below have been updated from our prior April 2023 Viewpoint to include SOP outcomes for the 2023 SOP season (through June 30, 2023).

Figure 1: Unfavorable S&P 500 SOP Proposals by Year1

The number of companies failing SOP in 2023 is down by 50% compared to 2022 (the actual number of companies failing SOP decreased from 22 to 11). In other words, 2.5% of companies failed in 2023 versus 4.6% in the previous year (2022). This is likely due in part to only 43 of the S&P 500 companies, or 9.7%, receiving an “Against” SOP recommendation from Institutional Shareholder Services (ISS) — down from the previous 3-year average of 11.6%.

Figure 2: S&P 500 Historical 1-Year TSR3 & ISS “Against” SOP Recommendations2

Figure 3: S&P 500 Historical 3-Year TSR3 & ISS “Against” SOP Recommendations2

The number of ISS “Against” SOP recommendations declined to 43 companies through June 30, 2023, compared to the prior 3 years’ average of 56 companies (2020-2022). We note that despite 2022 TSR of-19%, the 3-year cumulative return was a positive 6%, which may have helped mitigate the number of ISS “Against” recommendations and failed SOP votes.

2023 Outcomes

The number of ISS “Against” SOP recommendations in 2023 fell substantially from 2022, from 60 to 43, or a decline of nearly 30% in a year in which the S&P 500 performed at a historically low 1-year TSR of -19%. This performance created an expectation that ISS “Against” SOP recommendations and subsequent SOP failures would increase based on the premise that companies have difficulties reacting to sudden significant drops in TSR with corresponding changes to CEO compensation. For most companies, the majority of CEO compensation has already been determined or granted as they near the end of any 3-year TSR measurement period.

Our careful review of the drivers of an “Against” SOP recommendation by ISS in 2022 and 2023 reveals three areas of change between the 2 years which may have contributed to the reduction in “Against” SOP recommendations and failures, including:

  1. A decline in companies that received consecutive “Against” SOP recommendations from ISS in back-to-back years (i.e., both 2021 and 2022 versus both 2022 and 2023).
  2. Improved overall performance on ISS’ Relative Degree of Alignment (RDA) test from 2022 to 2023. The RDA test measures a company’s relative CEO pay rank with the company’s relative TSR rank within an ISS-selected peer group over a 3-year period and has historically been, and continues to be, a significant predictor of ISS “Against” SOP recommendations.
  3. Some improvement in ISS’ qualitative assessments of other aspects of executive compensation.

We discuss each area of change below.

1. Companies Receiving Consecutive “Against” Recommendations

In any given SOP voting season, some companies receive SOP “Against” recommendations from ISS in ≥2 consecutive years. The 2022 SOP season featured a historically high 40% of companies with “Against” recommendations in consecutive years, or 24 of 60 companies. The roster of consecutive “Against” recommendations declined significantly in the 2023 SOP season to 23% of companies or 10 companies out of 43 companies receiving “Against” recommendations, a reduction of 14 companies.

Figure 4: Repeat ISS “Against” SOP Recommendations3 — 2022 versus 2023

We believe the decline in companies with consecutive “Against” recommendations was likely a function of Boards and Compensation Committees taking the necessary actions over the course of 2022 and early 2023 to address shareholders’ concerns with the prior year’s executive compensation program. In some cases, companies may have felt additional pressure to be responsive considering declining 2022 stock prices. Based on our experience as executive compensation consultants, companies understand the changes they need to make to existing compensation programs and practices in a year of a potential SOP failure, especially in the context of declining TSR. Examples of such actions include:

  • Changes to relative TSR plans (e.g., targeting the 55th percentile for a 100% of target payout of performance shares rather than the 50th percentile),
  • Reduction or elimination of the use of discretion in determining incentive plan payouts,
  • Removal of overlapping performance metrics between the annual and long-term incentive plans,
  • An increase in the proportion of long-term incentive delivered as performance-based equity, and
  • Elimination of “single trigger” vesting or upon a change of control or any remaining “golden” parachute excise tax gross-ups.

While making these changes is not guaranteed to garner a “For” ISS recommendation or shareholder support for SOP, we have found that these changes have contributed to a significant turnaround in the following year’s SOP voting results.

2. Better RDA Performance

We also looked at the underlying reasons for the issuance of an “Against” SOP recommendation from ISS over the 2 years of 2022 and 2023. Specifically, we looked at how many of the companies receiving “Against” SOP recommendations failed each of the three main ISS quantitative pay for performance (P4P) tests in each year: the RDA test, the Multiple of Median (MOM) test and the Pay-TSR Alignment (PTA) test.

Figure 5: Quantitative P4P outcomes for S&P 500 Companies Receiving an "Against" SOP Recommendations3 — 2022 versus 2023

Our conclusions can be summarized as follows:

  • RDA: Companies in the 2023 SOP season performed significantly better on the RDA test than they did in the 2022 SOP season. Of companies receiving an “Against” recommendation, 56% had a “Low” rating on the RDA test in 2023 versus 37% of companies in 2022. Such an outcome means that long-term TSR and long-term CEO pay (both measured over 3 years) are reasonably aligned for most companies receiving an “Against” recommendation. Based upon this conclusion, we anticipate S&P 500 companies in total may have performed better on the RDA test, resulting in fewer “Against” SOP recommendations overall.
  • MOM: Companies in both 2022 and 2023 performed about the same on the MOM test, likely resulting in little or no change to the number of “Against” SOP recommendations in 2023 versus 2022.
  • PTA: Companies performed slightly worse on the PTA test in 2023 versus 2022, which may have resulted in some increase in “Against” SOP recommendations for 2023.

Overall, companies appeared to perform generally better on the three main ISS quantitative P4P tests in 2023 versus 2022, led by significant improvement in outcomes on the RDA test. This improvement was somewhat offset by overall performance on the MOM and PTA tests; however, the dramatic decrease in ISS “Against” recommendations between years suggests improved RDA scores was a contributing factor to the decrease in the overall number of “Against” recommendations in 2023 versus 2022.

3. Overall Performance Against ISS Qualitative Tests

ISS also undertakes a qualitative assessment of executive compensation programs and practices, reviewing the structures and disclosure of company programs against ISS expectations for such programs. We compared the qualitative assessments cited in ISS’ “Against” SOP recommendations for 2022 and 2023 across six categories. Our objective was to determine if there were significant changes in the categories over the 2 years which may have contributed to the decline in “Against” SOP recommendations and failures. The outcomes are shown in the exhibit below:

Figure 6: Reasons for S&P 500 Companies Receiving an “Against” SOP Recommendation3 — 2022 versus 2023

We note several observations from Figure 6:

  • Overall, from a qualitative perspective, the most significant declines in S&P 500 companies receiving an “Against” SOP recommendation in 2023 were in P4P misalignment, Committee responsiveness, and severance payments.
  • P4P Misalignment with Structural/Disclosure Concerns — this declined as a primary reason for an ISS “Against” SOP recommendation between 2022 and 2023, likely reflecting the generally better performance on the RDA test noted above.
  • Sizeable One-Time/Special Awards — there was an increase in the percentage of companies who received an ISS “Against” recommendation due to the grant of special one-time awards. In general, ISS does not support the use of special one-time awards, especially when such awards are granted without a compelling rationale, are significant in value, and/or are not subject to rigorous performance goals. We believe some companies view the use of special awards as essential in certain situations to ensure retention and to motivate outstanding performance, regardless of proxy advisor reaction to such awards, and are willing to accept a SOP against recommendation from ISS.
  • Poor Compensation Committee Responsiveness — the percentage of companies noted in 2023 was down slightly versus 2022. While this decline suggests companies are taking active measures to connect with major investors to address their concerns, the relatively high proportion of companies cited by ISS as being non-responsive is a warning to companies to solicit shareholder feedback and to act on that feedback following a shareholder vote of less than 70% support for SOP.
  • Severance Payments Upon Voluntary Termination — we note this category disappeared entirely in 2023 as a major reason for a SOP ISS “Against” recommendation, likely reflecting greater awareness by Boards/Committees on how ISS, and its institutional investors, viewed the issue. ISS has strengthened its policy and explicitly states in its voting guidelines that the payment of severance to exiting executives must be due to an involuntary termination (not for cause) that is fully disclosed in the proxy. Otherwise, such payments may result in an automatic “Against” recommendation on SOP.


The 2023 SOP season, which we expected to be a difficult year for many S&P 500 companies due to historically low 1- year and 3-year TSR outcomes, turned out to be fairly benign. ISS “Against” SOP recommendations and related SOP failures declined significantly not only from the high-water mark of 2022 levels but also from levels in 2020-2022. The key drivers of the decline appear to be improved relative TSR performance coupled with heightened awareness of ISS and investor expectations.

As we move beyond the 2023 SOP season and look ahead to 2024, companies should monitor their projected ISS quantitative scores and evaluate potential qualitative concerns to ensure the company’s pay levels and incentive plan design are appropriately rewarding their executive talent to avoid a surprise ISS “Against” SOP recommendation.

General questions about this Viewpoint can be directed to Perla Cuevas (, Jose Lawani (, or Linda Pappas (
1. Perla Cuevas, Jose Lawani, Joe Mallin, and Linda Pappas. The 2023 Say on Pay Season – Potential Outcomes and Considerations – April 2023. Pay Governance. April 25, 2023.
2. TSR data for the S&P 500 were collected from S&P’s Capital IQ database.
3. ISS vote recommendations and SOP vote outcomes were collected from ISS Corporate Solutions Voting Analytics database.

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Featured Viewpoint

Share Buybacks and Executive Compensation: Assessing Key Criticisms


Stock repurchases (or “buybacks”) — where a company uses excess cash flow to repurchase shares of its stock to reduce common shares outstanding — have attracted significant attention from journalists, academic researchers, and government regulators; the concept of repurchases has also accrued significant supporters and detractors. According to Securities and Exchange Commission (SEC) Chair Gary Gensler, “In 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022”. [1] In 2023, the SEC revised rules issued in 1982 governing buybacks to require quarterly reporting of daily officer and director stock transactions that occur during a period of a stock repurchase program in addition to narrative disclosure of the details of the company’s buyback program and trading policies applicable during the program. The new regulations are intended to increase transparency of buyback processes and executive stock transactions during such programs. This Viewpoint summarizes Pay Governance research on buybacks within the S&P 500, the impact of buybacks on incentive compensation, and recent regulations governing buybacks.

In 2003, the SEC amended rules that provided companies with a safe harbor from liability for market manipulation for stock repurchases or buybacks as long as the buybacks were conducted in accordance with the rules. Prior to the initial rules issued in 1982 that allowed for buybacks, companies largely had to be dependent upon dividends to allocate excess cash. However, granting special dividends was a much less tax-efficient method, given the dividends were paid to all shareholders and may be taxed as ordinary income, while buybacks allowed shareholders the option to participate in a plan to repurchase shares.

More recently, the Inflation Reduction Act of 2023 included an excise tax of 1% of the aggregated market value of net corporate share buybacks beginning January 1, 2023. Additionally, the current Administration budget proposal includes a limitation on corporate executives selling shares within 3 years of a buyback program at their company.

Buyback Pros and Cons

Why should companies conduct buybacks and what are the key benefits? Proponents argue that buybacks:

  • Efficiently reallocate excess cash held by corporations using a method of liquidating stock positions that is more tax effective for shareholders.
  • Possibly signal positive underlying fundamentals not directly reflected in the current stock price.
  • Reduce stock volatility and increase market liquidity, resulting in a corresponding stabilization of the stock market. [2]
  • Provide “optionality” to shareholders to participate in a “sell-back” of shares. [3]
  • Help complete the capital raising / investment / cash return to investors cycle that supports and encourages infusions of capital to companies as they execute on growth strategies. [4]
  • Provide a greater share in the company’s profits per share to shareholders given the reduction in outstanding shares, which in turn could make the share price more appealing to investors.

Detractors of buybacks argue that the approach underscores short-term management thinking. In particular, detractors say that buybacks:

  • Contribute to disparate benefits that reward wealthy shareholders and executives while potentially inflating financial results measured by per share metrics.
  • Artificially drive stock prices higher.
  • Result in a transfer of wealth, not creation of wealth.[3]
  • Use cashflow for repurchases that could be better used for other investments (e.g., R&D or employee wages).
  • Inflate per share performance metrics used in incentive compensation plans through a reduction in shares that drives incentive compensation higher.

Buy-Backs and Incentive Compensation

Pay Governance reviewed publicly available incentive plan disclosures via proxy filings of S&P 500 companies that engaged in share buybacks from 2018 to 2021 (total number of buyback events is 561). We found that 46% used per share metrics such as earnings per share (EPS) or cash flow per share in their executive short-term and/or long-term incentive plans. Our research shows that of these companies that use per share metrics, 76% either don’t adjust for buybacks when determining incentive payouts or are silent in the disclosures about the use of adjustments. The findings could suggest that some companies that conduct buybacks have made the determination that buybacks are the most efficient use of capital at that point in time and deem it reasonable to reward management for the buybacks via the positive impact on per share metrics in incentive plans resulting in a boost to the incentive payouts. However, it is more likely that some or most of the compensation committees at these companies take the buybacks into account when setting incentive performance targets and/or determining payouts but do not explicitly disclose that they do so.

We found the remaining companies either disclose that they factor in the impact of share repurchases on shares outstanding when setting goals (15% of companies) or adjust for the impact when determining incentive awards (11% of companies). In other words, about one quarter of the companies consider the impact of share repurchases and prospectively adjust goals / set guardrails or retrospectively adjust incentive payouts to offset for the impact of buybacks.

Focusing on the companies that conducted the 20 largest buybacks based on value of shares repurchased in each of the 4 study years, we found that the majority (74%) disclose that they factor in the impact of share repurchases on shares outstanding either when setting goals (60% of companies) or adjust for the impact when determining incentive awards (14% of companies). The companies with the largest buybacks are more likely to factor buybacks into the goal setting process and/or adjust incentive payouts accordingly given the magnitude of the buybacks which have a significant impact on per share metrics and corresponding incentive outcomes.

The establishment and disclosure of such “guardrails” (prospective or retrospective adjustments to incentive payouts) are an effective way to mitigate potential criticisms that buybacks are inappropriately impacting executive incentive payouts.

While prevalence of per share metrics is important to understand the impact or lack of impact of buybacks on incentives, it is also important to consider the relative weighting of per share metrics in the incentive plan, as many organizations use multiple metrics. Pay Governance research on the 20 largest buybacks from a value of shares purchased standpoint from 2018–2021 (total number of companies = 80) found that the use of per share metrics, such as EPS or cash flow per share, in either the short- or long-term incentive plan is not significantly different from the total S&P 500. Over the 4 years, the prevalence of per share metrics averaged 45%, similar to the total sample (46%). In addition, we found the weighting of the per share metrics in the incentive scorecard averaged 52% over the same period, with the other 48% represented by other financial, operational, and individual metrics/goals that are not influenced by share buybacks.

With a significant number of companies not using per share metrics, and those that do weighting the per share metric at about one half of the incentive scorecard, the data suggest that companies engaging in buybacks are not overwhelmingly incorporating per share metrics in incentive plans to boost executive incentive payouts; otherwise, we would have expected to see a greater use of per share metrics and higher weighting of these metrics. The balanced weighting of per share metrics and other financial, operational, and individual metrics suggest that share buybacks do not have an outsized influence on incentive outcomes, thus countering a major area of criticism of the practice.

Total Shareholder Returns: Buyback vs Non-Buyback

Recent research [5] evaluated portfolios of companies that executed repurchases with those that did not conduct repurchases and concluded that stock price returns for the two sets are largely the same. The research rejected the notion that stock prices and compensation for CEOs of companies that conducted buybacks were inflated by the practice. The research underscored its conclusions by identifying three key factors present in these companies: 1. The repurchases generally reduce shares outstanding by a relatively small amount; 2. Buybacks are an ongoing strategy that is anticipated in establishing per share performance expectations; and 3. Compensation committees are knowledgeable about the impact of repurchases and take this into account in setting incentive performance targets and CEO compensation.

Considering that there is criticism of buybacks based on the premise that the open market purchases of shares results in artificially boosting stock prices, and thus executive gains on stock holdings, we researched S&P 500 companies’ total shareholder returns (TSRs) between 2018–2022 and segmented the analysis into companies that had conducted buybacks during the period and those that had not repurchased shares. While there is some annual variation in results, the 5-year TSRs for those conducting buybacks and those that did not are similar (see chart below).

Share Repurchase Activism

Investors and activists may use their influence to encourage or mandate target companies to address ESG, remuneration, personnel, and capital allocation issues. In some cases, these actions related to capital or cash allocation take the course of demands to conduct stock repurchases. In terms of prominence, the demands to return cash to shareholders (via repurchase or special dividend) are less common than ESG and remuneration actions.

Our research indicates that from 2018 to 2022, there were 151 initiatives launched by activist investors to mandate share repurchase or returns of cash to shareholders. The activist demands were mostly either partially or completely successful at 44% (6% and 38% respectively). Activists are classified based on their “focus” per Insightia Activism [1]. Our research includes “Primary Focus” activists such as Carl Icahn and Bulldog Investors, “Partial Focus” activists such as Saba Capital Management, “Occasional” activists such as Kinesic Capital, and a few “Concerned Shareholder” activists as well.

Share Repurchase Demand Outcomes 2018-2022

2021 and 2022 saw an increase in share repurchase demands with the highest rate of being successful at 60–67%. In addition, there are 11 ongoing demands initiated in 2023.

Share Repurchase Demands as % of Those Partially Successful, Successful, and Unsuccessful

Given the majority of activist share repurchase demands are successful, we conclude that activists/shareholders view buybacks positively and can be the best use of capital depending on a company’s specific circumstance. Pay Governance will follow up with another Viewpoint that examines the effect of activist buyback demands on TSR in the year or years following a successful campaign.


Our research of S&P 500 companies indicates that many of the criticisms of share repurchases are overstated or unfounded. While only a minority of companies explicitly disclose accounting for the impact of buybacks in incentive goals or actual awards, the actual impact for those that don’t is less than many perceive due to the use of multiple performance goals in incentive scorecards, goals that define performance on an absolute (not per share) basis, and performance targets that implicitly include board approved repurchase budgets. In addition, the majority of companies with the largest buybacks explicitly disclose adjusting for the impact of buybacks in incentive goals and payouts. Not surprisingly, we also found that TSRs for companies that conduct buybacks are very similar to returns of companies that don’t conduct buybacks, thus deflating the criticism that buybacks inflate stock prices and executive pay. Companies that conduct significant buybacks should consider the most appropriate means to transparently communicate with shareholders on the impact buybacks have on incentive plans (i.e., adjusted goals or performance, or repurchases embedded into performance targets) given their individual situations.

General questions about this Viewpoint can be directed to Lane Ringlee (, Clement Ma (, Marizu Madu (, or Joadi Oglesby (

[1] SEC Adopts Amendments to Modernize Share Repurchase Disclosure. U.S. Securities and Exchange Commission. May 3, 2023.
[2] Craig M. Lewis and Joshua T. White. Corporate Liquidity Provision and Share Repurchase Programs. Harvard Law School Forum on Corporate Governance. October 8, 2021.
[3] Six muddles about share buy-backs. The Economist. May 31, 2018.
[4] Harry DeAngelo. The Attack on Share Buybacks. European Financial Management. December 16, 2022.
[5] Nicholas Guest et al. Share Repurchases on Trial: Large-Sample Evidence on Market Outcomes, Executive Compensation, and Corporate Finances. Financial Management. January 23, 2023.

Featured Viewpoint

Utilizing Compensation Actually Paid to Evaluate Pay and Performance

Does the SEC’s new Pay Versus Performance (PVP) disclosure provide an effective means to evaluate the alignment of pay and performance?

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) required that companies disclose the relationship of PVP and granted the SEC wide discretion in promulgating the required disclosure. At the time, Congress acknowledged that the current disclosure rules, which included the Compensation, Discussion, and Analysis (CD&A) and Summary Compensation Table (SCT), did not provide shareholders with a sufficient understanding of the relationship of compensation and performance. While the CD&A and SCT provided better visibility to the rationale for — and components of — compensation, they did not illustrate the relationship between the pay decisions made in the reporting year with the subsequent performance of the organization.

The introduction of the PVP disclosure provides a more multidimensional view of pay relative to performance as it incorporates the impact of stock price and performance on equity awards in measuring compensation. At this point in the 2023 proxy season, thousands of companies have filed their proxy statements and spent countless hours preparing the new PVP disclosure, and many are now asking the question, “Does the SEC’s new PVP disclosure provide an effective means to evaluate the alignment of pay and performance?”

Based on Pay Governance’s analysis of 188 S&P 500 company PVP disclosures, the answer is Yes.

Various organizations and articles have utilized the newly required PVP disclosures in different ways, but many concluded that compensation actually paid (CAP) and total shareholder return (TSR) are aligned.

While this was nearly a foregone conclusion given the large emphasis on stock-based compensation for executives, it should reassure shareholders that their strong support for Say on Pay over the last 13 years was well founded. In that sense, one could argue that the PVP disclosures were successful, and we certainly agree that CAP is much better than Summary Compensation Table Total Compensation (SCT compensation) when evaluating the alignment of pay and performance. What remains to be seen is whether and how Compensation Committees, shareholders, and proxy advisory firms incorporate the PVP disclosures when evaluating pay and performance.

Establishing the Approach: Using PVP and Company Performance to Determine Level of Pay and Performance Alignment

Prior to the introduction of the PVP disclosure requirement, SCT compensation has been the primary measure of compensation used by many investors, academics, the media, and, importantly, proxy advisory firms to evaluate the alignment of pay and performance, in part because the data was most readily available. However, SCT compensation is based on the Grant Date Fair Value of equity awards which means equity awards are not adjusted for changes in stock price and/or actual performance. This is in contrast with an outcomes-based valuation of equity awards, such as CAP, which reflects the change in value of equity awards until the vest date. As a result, SCT compensation is not ideal for evaluating the relationship of pay and performance, as it provides a view into the accounting value of equity awards but not the actual performance-adjusted value of those awards, which is critically important when measuring pay for performance.

Based on our analysis, CAP is better for alignment evaluation purposes than SCT compensation to facilitate a meaningful evaluation of the alignment of pay with performance if a comparison of the relative amount of a company’s CAP is compared to its relative performance against an appropriate peer set.

While CAP amounts may be distorted (e.g., by the inclusion of equity awards granted prior to the performance period, use of the Black-Scholes value of stock options rather than the in-the-money value of such awards, and exclusion of cash long-term incentive plans until the year the award is earned, among others), they reflect the actual or best estimate of the value of equity at the time of disclosure versus the accounting value of equity at the time of grant. Further, the use of relative percentile comparisons against a peer index or peer group can remove some of the noise in these data.

To demonstrate how to analyze pay and performance using the PVP disclosures, the following approach was utilized:

  • Compared a company’s percentile ranking of cumulative CAP and cumulative TSR against companies in their 2-digit GICS® Sector.
  • Included only companies with revenue between the 25 th and 75 th percentiles to eliminate the potential effect of exceptionally large or small companies in the analysis.
  • Used cumulative figures over a 3- and eventually 5-year period to minimize the impact of outliers, transitions, and other CAP anomalies.

Assessing the relative positioning of CAP and performance using percentile rankings against a relevant peer or industry group demonstrates if a particular company’s pay and performance alignment is commensurate, better, or worse than peers. This type of relative analysis is consistent with how Pay Governance typically evaluates Realizable Pay and performance alignment for our clients. For additional valid methodologies for evaluating and confirming the alignment of pay and performance, see our Viewpoints, Demonstrating Pay and Performance Alignment: A Comparison of Compensation Actually Paid and Realizable Pay and What Shareholders Can Learn from the SEC’s New Pay Versus Performance Disclosure, which compare, respectively, changes in CAP to changes in TSR and key differences between CAP and Realizable Pay.


SCT Compensation

Figure 1 below is based on 188 S&P 500 companies and plots each one based on their difference in percentile ranking of 3-year cumulative TSR and 3-year cumulative SCT compensation. The three-shaded areas represent companies where relative TSR performance and SCT compensation percentile ranking are within 25 percentile points (green zone), TSR percentile ranking exceeds SCT compensation ranking by > 25 percentile points (yellow zone), and TSR percentile ranking is below SCT compensation ranking by > 25 percentile points (red zone).

  • As shown, only 43% of the companies have a TSR rank that is within +/- 25 percentile points of the SCT compensation rank (green zone), which suggests a minority of companies have aligned pay and performance.
  • The remaining 57% of the companies fall in the yellow or red zones, where the TSR rank either exceeds or is lower than the SCT compensation rank by > 25 percentile points, signaling a possible disconnect between pay and performance.
  • The correlation between TSR rank and SCT compensation rank is low (0.08). This is a strong indication that using SCT compensation for evaluating pay for performance has limited utility.

When the same analysis is performed using CAP rather than SCT compensation, the alignment of pay and performance improves dramatically as observed in prior Viewpoints and as shown in Figure 2 below.

  • The percentage of companies in the green zone increases from 43% to 66%. This model significantly reduces the number of “false negatives” by 43 companies, as SCT compensation is not aligned to stock price changes, but CAP is clearly aligned.
  • Correlation between TSR rank and CAP rank is high (0.54).

Figure 3 below focuses on the change in pay for performance alignment for the 28 companies in the Industrials sector using SCT compensation and CAP.

The chart on the left (3a) shows the comparison of SCT compensation and TSR; the distribution is random, and correlation is low as observed in Figure 1.

The chart in the middle (3b) shows how compensation percentile changes when using CAP instead of SCT compensation; arrows show the directional shift in SCT compensation rank to CAP rank.

  • The circled observation at the top of the middle chart highlights an Industrials Sector company in the sample with the highest relative TSR and SCT compensation at the 44 th percentile, suggesting a misalignment of pay and performance. When CAP is used, the percentile ranking of TSR and CAP are both at the 100 th percentile (highest performer provided the highest compensation), thus squarely in the green zone.
  • The circled observation at the bottom of the middle chart highlights an Industrials Sector company in the sample with the lowest relative TSR and SCT compensation at the 56 th percentile (red zone). When CAP is used, the percentile ranking for CAP is reduced to the 22 nd percentile, which is far more aligned with the company’s TSR rank and is squarely in the green zone.

The chart on the right (3c) shows the strong alignment of CAP and TSR among the Industrials Sector companies.

  • Overall, when using CAP instead of SCT compensation, 7 of the 28 observations (25%) move from outside the green zone (+/- 25 percentile points) to inside the green zone, while only 1 moves from inside the green zone to outside.
  • The total percentage of Industrials Sector companies in the green zone is 68% compared to 46% if using SCT.
  • 5 of the 28 observations (18%) do not change, meaning compensation percentile rank using SCT compensation and CAP are the same.

Table 1 below shows the distribution of compensation and TSR rank by Sector within the three zones of alignment: yellow zone where TSR rank exceeds compensation rank by > 25 percentile points, green zone where TSR rank is within +/- 25 percentile points of compensation rank, and red zone where TSR is below compensation rank by > 25 percentile points.

The percentage of companies identified in the red zone, where TSR is less than compensation rank by > 25 percentile points, decreases for all Sectors except Communication Services, which is likely due to the small sample size of seven companies.

A key takeaway of Table 1 for investors and others is the number of situations where a company’s compensation percentile rank significantly exceeds its TSR percentile rank (red zone) drops dramatically when actual performance is considered in calculating compensation.

Conclusion, Implications and Considerations

A relative analysis of cumulative CAP and TSR against a company’s peer group or industry sector can provide a more meaningful evaluation of pay and performance than comparing SCT compensation and TSR (or other industry specific performance measures).

For companies in the yellow zone, where TSR rank exceeds CAP rank by > 25 percentile points, it may signal:

  • Pay opportunities/targets are low relative to peers
  • Performance targets are more difficult than peers
  • Incentive plans are less leveraged than peers
  • TSR is performing better than incentive plan metrics

Companies in the yellow zone may want to further investigate the apparent pay for performance disconnect to ensure the company is not at a competitive disadvantage in retaining executive talent.

For companies in the red zone, where CAP exceeds TSR rank by > 25 percentile points, there may be several explanations, including:

  • Pay opportunities/targets may be high relative to peers
  • Pay mix may place less emphasis on equity incentives relative to peers
  • Performance targets may be less rigorous than peers
  • Incentive plans may be more leveraged than peers
  • Actual performance against incentive plan metrics/incentive goals is not translating to share price performance

Companies in the red zone may also want to further investigate the apparent disconnect to ensure the company’s pay levels and incentive plan design are appropriately rewarding their executive talent.


[1] This study includes data provided to us by ESGAUGE of 389 S&P 500 companies that filed PVP disclosures as of May 31, 2023. The sample was divided into 11 industry sectors, which were further refined by removing companies with revenues in the bottom and top quartiles within each sector. Results of the full sample were consistent with the data utilized by the presented figures and tables.

General questions about this Viewpoint can be directed to Ira Kay (, Mike Kesner (, Linda Pappas (, or Ed Sim (

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We are innovative thinkers with experience in the full range of executive compensation consulting services.

We simplify the complexities of the executive pay process. Our consultants are skilled at helping clients design and administer programs that appeal to reason, hold up under scrutiny, and successfully link executive pay to shareholder value.

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