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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

Demonstrating Pay and Performance Alignment: A Comparison of Compensation Actually Paid and Realizable Pay

The new PVP disclosure requirement from the Dodd-Frank Act of 2010 evolved from the belief of a limited relationship between executive pay and shareholder performance which, in turn, had become a significant corporate governance issue. This belief was documented by the SEC in the PVP final rule, which cited the legislative history of the new disclosure requirement:

“…the relationship between executive pay and performance has become a ‘significant concern of shareholders,’ and that the required disclosure should ‘add to corporate responsibility,’ as registrants will be required to provide clearer executive pay disclosures.”1

Companies have long searched for a methodology to evaluate the relationship between pay and performance, even prior to the enactment of Dodd-Frank, with limited consensus. This void was quickly filled by the proxy advisory firms, which developed their own quantitative pay for performance models that rely on SCT compensation values. These quantitative models generally serve to predict the proxy advisory firms’ Say on Pay voting recommendations, even though much of the compensation reported in the SCT is pay opportunity, rather than pay outcomes. The new PVP disclosure requirement is also a tacit admission by Congress that the SCT compensation values may not be suitable for assessing the alignment of pay and performance.

We demonstrated the limitations of using SCT compensation to evaluate pay for performance compared to CAP, the SEC’s new definition of compensation for PVP disclosure, in a recent Viewpoint. As highlighted below, total shareholder return (TSR) is highly correlated with changes in CAP and in contrast, changes in SCT compensation reflect a low correlation with TSR.

We believe CAP may be better for measuring pay for performance than SCT compensation. However, CAP includes several significant distortions when measuring the alignment of pay and performance primarily due to:

  • the inclusion of equity awards granted outside the performance measurement period;
  • the use of stock option expected values that often far exceed the in-the-money/intrinsic value of such awards.

In our opinion, pay for performance models that preceded CAP, such as Realizable Pay (RP), are more useful for evaluating pay and performance than the new PVP disclosure. About 10% of the S&P 500 disclosed the use of RP to evaluate pay outcomes compared to company performance in their most recent proxies. While existing RP models may vary, each has the goal of evaluating the relationship of a company’s pay programs and shareholder/financial performance for a given performance period. Since its founding 13 years ago, Pay Governance has used an RP methodology to evaluate pay for performance.

The SEC’s final rule also noted a recent survey of investors by one of the proxy advisory firms indicated that 84% of investors supported using an outcomes-based measure such as RP in a quantitative pay for performance analysis.2

The SEC believes the new PVP disclosure “is similar to the concept of RP”. 1 This Viewpoint compares how CAP and Pay Governance’s RP differ by the various elements of compensation and describes the implications of such differences in evaluating pay for performance.

Comparing CAP and RP by Element

CAP and performance in the new PVP disclosure are shown annually, which allows for year-over-year comparisons of pay and performance but may cause an undue focus on a short-term evaluation of pay and performance. RP, which aggregates compensation and total performance over a 3- to 5-year period, has a longer-term focus to match those of executives and shareholders.

The final PVP rules require disclosure of several metrics, allowing for performance to be evaluated from many angles. However, the rules fall short in one major way — they do not provide comparisons of both pay and performance on a relative basis (i.e., compared to a peer group of companies that compete for talent, resources, and business). This relative comparison is what provides investors with context for the quantum of pay and is critical to reaching meaningful conclusions about the pay for performance relationship. The importance of relative comparisons is evidenced by the proxy advisory firms and some investors that use relative SCT compensation and shareholder performance in their pay for performance models.

RP measures both pay and TSR performance on a relative basis (i.e., using percentile ranking). This normalizes the results and allows for more useful comparisons to peers. In addition, RP analyses may include other important metrics relevant to a company, allowing relative performance evaluations to be conducted across several performance metrics in addition to TSR.

CEO and other NEO transitions often distort compensation and may lead to misleading results due to the inclusion in CAP of items such as:

  • Forfeiture or acceleration of equity
  • Severance payments in termination scenarios
  • Partial year compensation for new hires or terminated executives
  • Promotional, new hire, make-whole, and other special awards

As described in more detail below, Pay Governance investigates each company’s situation to create the truest picture of ongoing CEO and other NEO compensation.

Salary, bonuses, and annual incentives are the least contentious components of compensation in terms of how they should be measured. However, CAP does not annualize or make any adjustments for newly hired executives, which can result in distortions of annual cash compensation.

With RP, Pay Governance investigates each incumbent to present the truest picture of annual cash compensation. This often involves reading CD&As and 8-Ks to find salary rates or annualizing amounts based on hire dates.

We believe CAP overstates compensation by including the change in value of grants made in years prior to the PVP performance measurement period. These prior year awards often include tranches of equity awarded 3 and 4 years prior to the commencement of the PVP measurement period. Indeed, based on Pay Governance’s analysis of 160 S&P 500 companies, the change in CAP was significantly affected by the change in value of the prior year awards (74% of the change in CAP from 2021 to 2022 and 58% of the change in CAP from 2020 to 2021).3 The significant proportion attributable to prior year awards is due to the cumulative effect of the number of unvested shares remaining from grants made during these prior periods.

Another difference occurs as CAP stops tracking changes in the value of equity awards once they vest. This SEC requirement essentially assumes the executive sells all the shares immediately upon vesting, which is often not the case. The SEC notes that once vesting occurs, the executive’s decision to retain or sell the shares is an investment decision, and any change in stock price thereafter is unrelated to compensation. In high volatility markets, this valuation approach could differ significantly from other methods, such as valuing at the end of the performance period as does RP.

In contrast, RP assumes that all the shares granted and vested during the 3- or 5-year measurement period are retained until the end of the period to measure the impact of the change in stock price on awards granted during the measurement period. While this assumption ignores that some shares may have been sold or withheld to cover taxes and exercise price, the impact is normalized on a relative basis as RP makes the same assumption for all companies in the peer group.

Figure 1 below provides an example where CAP understates appreciation compared to RP when stock grows over a 5-year period.

As noted above, CAP values each tranche as the shares vest, resulting in a cumulative CAP amount for this award of $1,500, whereas RP assumes all 100 shares are held at the end of year 5 at $19 per share, or $1,900.

The same points discussed above for time-based RSAs/RSUs regarding an overstatement of compensation due to including equity grants made outside the measurement period and disconnect of valuing awards at vest are also true for time-based stock options and SARs.

In addition, there is typically a large variance observed between CAP and RP due to CAP’s use of expected valuation models, (e.g., Black-Scholes) versus RP’s use of intrinsic value. This variance is most pronounced for underwater stock options and SARs, where RP would include a value of $0, and a Black-Scholes valuation used to determine CAP will often include a material value to estimate the award’s potential future value (unless awards are significantly underwater).

Figure 2 below illustrates the difference in stock option values based on SCT, CAP and RP.

CAP’s requirement that in-flight performance cycles be valued based on expected performance is one of the largest differentiators to RP. Expected performance estimates are often based on confidential information and are rarely disclosed in the PVP table footnotes or the broader CD&A. CAP values for in-flight performance share units (PSUs) that are based on a market condition (i.e., stock price hurdles, relative TSR, or absolute TSR) are based on a Monte Carlo simulation of future performance. RP is based on the footnotes to the Outstanding Equity Table, which discloses actual performance for the most recently completed performance cycle and either threshold, target, or maximum payout levels for the remaining in-flight PSU awards. In cases where companies electively disclose estimated payout levels for in-flight awards within the CD&A, RP will reflect those values.

CAP ignores the value of in-flight performance cycles for cash-based long-term incentives, which is at odds with the mark-to-market valuation requirement for PSUs. Thus, CAP ignores what could be a material portion of an executive’s long-term incentive in determining PVP. RP, on the other hand, considers the awards made during the performance period, including payouts of relevant completed cycles and estimated levels of achievement for in-flight awards.

Most companies have either frozen or terminated existing defined benefit plans or never adopted such plans, and very few companies provide preferential earnings on NQDC plans. Moreover, where such arrangements do exist, the impact is generally modest to immaterial. Removing the value attributable to various changes in assumptions of pension plans and only accounting for service cost and prior service cost resulting from plan amendments helps reduce such numbers but could still be present as outliers in an analysis of PVP.

RP excludes all values associated with pension and NQDC plans, as such amounts are generally modest to immaterial. As a practical matter, very few companies would have been willing to incur the expense of calculating the service cost for each executive for each year for inclusion in RP absent the SEC mandate. Now that this data is available where applicable, it could be included in RP should it be relevant and material to a company’s analysis of pay and performance.

CAP includes All Other Compensation as disclosed. In many cases, the values are nominal. However, the inclusion of severance for a terminated CEO or NEO can materially distort the pay for performance relationship. RP excludes all values associated with All Other Compensation, due to immateriality and/or to better reflect ongoing compensation.

Conclusion, Implications and Considerations

Admittedly, there is no perfect methodology for evaluating pay for performance. Even if such methodology existed, it is highly unlikely a consensus on its validity would ever be reached, primarily due to potential subjectivity and value judgments required in unique situations, including in the context of judgments on peer companies for RP analyses. The SEC’s CAP values appear to be a better method for evaluating pay for performance than SCT compensation amounts. Nonetheless, the SCT combined with the CD&A continue to be used to evaluate the corporate governance of executive compensation.

It remains to be seen whether the new PVP disclosure will be found useful by investors or if proxy advisory firms will incorporate any of the CAP data in their pay for performance models.

While only 10% of S&P 500 companies expressly disclosed the use of some type of RP model to evaluate compensation outcomes with company performance, it is likely many more are using RP as part of their annual Compensation Committee process but do not disclose its use in public filings. And still others may decide to explore such RP analyses to eliminate many of the distortions included in the SCT and PVP/CAP disclosures when evaluating the alignment of pay and performance.

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


1 Pay Versus Performance: A Rule by the Securities and Exchange Commission (87 FR 55134). September 8, 2022.

2 2017-2018 ISS Policy Application Survey: Summary of Results. ISS Governance. October 19, 2017.

3 Ira Kay, Mike Kesner, Linda Pappas, and Ed Sim. What Shareholders Can Learn from the SEC’s New Pay Versus Performance Disclosure. Pay Governance. April 19, 2023.

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Featured Viewpoint

Clawback Rule Effective Date Extension -- Time to Prepare is Now

On April 24, 2023, the Securities and Exchange Commission (SEC) extended the approval date of the stock exchange’s clawback listing requirements from April 27, 2023 to June 9, 2023 (the SEC’s 45 day extension was to June 11, 2023, but because it is a Sunday, the SEC must act by June 9, 2023). Unless the SEC further extends the approval date, companies will be required to have a compliant clawback policy in place by August 8, 2023 (60 days following the approval date).

When the SEC issued the final clawback rule in October 2022, it gave the impression that the clawback rules would become effective November 28, 2023, and the end of the 60-day compliance period would therefore be February 27, 2024. Here is a brief excerpt from the final Rule:

While we acknowledge commenter concerns about the need for adequate time to prepare for the application of the listing standards and the development of appropriate recovery policies, including in some cases the renegotiation of certain contracts, we believe the final rules provide ample time for such preparations. In that regard, we note that issuers will have more than a year from the date the final rules are published in the Federal Register to prepare and adopt compliant recovery policies. We believe the prescriptive nature of Rule 10D-1 provides issuers with sufficient notice to begin such preparations concurrently with listing standards being finalized.

At a recent meeting of the American Bar Association’s Joint Committee on Employee Benefits with the SEC staff, the staff provided some indications that a further 45-day extension may not be forthcoming. Thus, it is highly advisable that companies prepare updated clawback policies and revise or amend clawback provisions included in employment agreements and incentive plans to ensure consistency across all affected plans, and adherence to the new requirements, in anticipation of the earlier compliance date.

Given the potential timing of the effective date, some companies may need to schedule a special compensation committee meeting or update existing meeting agendas to allow sufficient time to discuss and approve the new clawback policy.

The earlier effective date subjects annual and performance-based long-term incentives earned at companies with fiscal years ending between June 30, 2023 and October 31, 2023, a full fiscal year sooner if the effective date was November 28, 2023. In addition, all performance-based awards granted on or after June 9, 2023, are subject to the clawback rules rather than awards granted on or after November 28, 2023.


This Viewpoint is intended to inform compensation committees, executives, and compensation professionals about developments that may affect their companies; it should not be relied on as specific company advice or as a substitute for legal, accounting, or other professional advice.
General questions about this Viewpoint can be directed to Mike Kesner (

Featured Viewpoint

The 2023 Say on Pay Season – Potential Outcomes and Considerations – April 2023

The 2023 Say on Pay (SOP) season has a unique hallmark unlike previous SOP years: most companies within the S&P 500 have experienced significant decreases in total shareholder return (TSR) in the most recent performance year (2022) for the first time since SOP was mandated in 2011. These decreases have resulted in the S&P 500 index experiencing a -19% decline for 2022.

Pay Governance has compiled a significant amount of information on SOP outcomes and related TSRs for the S&P 500 since the dawn of the SOP era. We have analyzed these data to develop a framework for potential outcomes for the 2023 SOP season.

This Viewpoint presents a historical view on the relationship between S&P 500 SOP pass and fail rates and related TSR performance during the SOP era and, using history to forecast the future, provides an early potential 2023 SOP season forecast within in the context of negative shareholder returns experienced in 2022 by most of the S&P 500.

This Viewpoint serves as a starting point for evaluating the 2023 SOP season and will be accompanied by a more detailed Viewpoint in the coming months when further 2023 SOP outcomes are available and more additional conclusions can be reached regarding the 2023 SOP season.

Background: Say on Pay 2011 – 2022

The SOP era has been characterized by generally positive TSR throughout the period. Figure 1 below shows:

Historical 1-year TSR1 for the S&P 500 index has been positive in virtually every year, with the following exceptions:

  • 2011 and 2015, when S&P 500 index TSR was close to zero (0% and -1%, respectively).
  • 2018, when index TSR was -6%.
  • 2022, when, for the first time, S&P 500 index TSR declined by double digits, coming in at -19%.

The number of S&P 500 companies receiving an “Against” vote recommendation from ISS has increased in recent years2:

  • Historical “Against” vote recommendations by year have varied between 37 and 61 companies, and on average, about 10% of the S&P 500 (50 companies) received an “Against” recommendation from ISS. More recently, over the past 6 years, ISS “Against” SOP recommendations have varied between 47 and 60 companies.
  • We have not included year-to-date “Against” recommendations for 2023, as we are at the very beginning of the 2023 SOP season. We will cover 2023 SOP outcomes in our companion Viewpoint later this year.

However, when we consider the number of S&P 500 companies in each year that failed the actual SOP vote (i.e., receiving less than 50% shareholder support), a different picture emerges, as shown in Figure 2 below. (Note: the years referenced in Figure 2 are when the SOP vote took place.)

We observe the following:

  • At the outset of SOP, S&P 500 failure rates began at 1.8% in 2011 and increased to 3.0% in 2012.
  • The number of failed SOP votes among the S&P 500 was generally flat from 2013 – 2019, varying between 4 and 7 each year: an annual failure rate of about 1.0% – 1.5%.
  • The number of failed SOP votes began increasing in 2020 and peaked in 2022 at 22 failed votes among the S&P 500 companies: a failure rate of 4.6%.
  • While the number of companies receiving an ISS “Against” recommendation in 2011 is almost the same as those receiving an “Against” recommendation in 2022 (61 and 60 respectively), the number of actual SOP failures has almost tripled from 8 to 22.

Further, when we consider the key outcomes shown in Figures 1 and 2 together, the increased SOP failure rate among the S&P 500 occurred when annual TSR levels were among the highest recorded in the SOP era: 29%, 16%, and 27% for 2019, 2020, and 2021, respectively. Reasons for the increase in failures in recent years likely include:

  • Greater scrutiny of pay practices by proxy advisors and institutional investors as we move deeper into the SOP era.
  • Heightened attention over the past several years to the quantum of pay provided versus prior years without regard to absolute or relative performance.

We anticipate such scrutiny will not abate in the 2023 SOP season.

The Upcoming 2023 Say on Pay Season

When we consider the significant increase in failed SOP votes over the past 3 years within the context of higher TSR performance in 2019 – 2021, we predict an increase in S&P 500 SOP failures in 2023 compared to recent historical outcomes due to poor S&P 500 2022 shareholder returns (-19% at the median of the S&P 500 index as referenced in Figure 1). Using recent history to inform our expectations of the 2023 SOP season, the S&P 500 could possibly experience the highest failure rate since 2011.

However, before we conclude that an increase in failure rates is on the horizon for the 2023 season, the following considerations should also be weighed:

  • A longer-term look at S&P 500 TSR
  • The use by proxy advisors and institutional investors of relative TSR in determining SOP votes
  • A healthy increase in S&P 500 TSR in the first quarter of 2023
  • The implementation of the new Pay vs. Performance (PVP) disclosures for the first time in the 2023 proxy statements

Proxy advisors and institutional investors commonly compare the most recent 3-year TSR and 3-year pay as one of the key criteria when determining how to recommend or vote on SOP. Ahead of the 2023 SOP votes, we determined the most recent 3-year TSR for the calendar years 2020 – 2022, which are shown in Figure 3 below along with similar historical outcomes:

Figure 3 shows that, despite the SOP era record low annual TSR for 2022, the 3-year annualized TSR is positive at 6%, reflecting the positive TSR of 2021 and 2020. However, the 3-year TSR outcome for 2020 – 2022 is the second lowest of the SOP era, with the lowest being the inaugural SOP period ending in 2010.

Further, proxy advisors and institutional investors also compare TSR on a relative basis to peer groups for each of the S&P 500 companies. Given the general overall decline in TSR in 2022, it is likely the peer group TSR is down as well, meaning that lower performance by any individual company probably was directionally matched by the peer group associated with the company. Such directional alignment may reduce the number of potential SOP failures.

During the first quarter of 2023, TSR of the S&P 500 index increased by about 7%: not enough to offset the shareholder losses incurred during 2022, but perhaps enough to make investors feel more positive about future returns when voting on 2023 SOP ballots in the April – May timeframe. This is an entirely subjective issue that is not considered in the evaluations performed by the proxy advisors and institutional investors but can be a positive factor in potential voting outcomes, just as negative returns in the same timeframe would be viewed negatively.

A wildcard in the evaluation of SOP by the proxy advisors and institutional investors is the PVP disclosures appearing for the first time in the 2023 proxy statements. While proxy advisors have stated the PVP disclosures will not be used in the SOP evaluations this year, our preliminary examination of the outcomes of PVP disclosures among 160 early-filing S&P 500 companies shows a high directional alignment between “Compensation Actually Paid” and TSR performance.[1]

We speculate that companies who expect a challenging SOP vote could use the PVP disclosures in their defense, particularly if the PVP disclosures show a tighter relationship between pay and TSR performance. However, we note most companies who expect to pass the SOP vote have not emphasized the PVP disclosures, viewing them in this inaugural year as a difficult, but necessary, process to complete that may not have significant relevance in the near term.

This is also a year in which executive pay and performance outcomes will reveal, on a large scale, an issue well understood by Compensation Committees and their members. Specifically, TSR performance can change much more rapidly than pay can adjust. In a 3-year comparison of pay and performance, as used by the proxy advisors and some institutional investors and which is based on the SCT table, 3-year pay is fixed and cannot be changed for most of the period, while TSR can and does change on a continuous basis until the very end of the 3-year period.

By the end of a year in which share prices declined significantly, as occurred during calendar year 2022, little can be done to impact 3-year pay as reported in the SCT. This outcome is driven by the static nature of equity valuation in an SCT-based calculation, while 3-year TSR outcomes are much more dynamic and volatile in nature. The PVP disclosures attempt to address this imbalance by showing changes in equity values since grant. Other methods have been used prior to the newly defined PVP pay calculations to try to achieve the same results, such as realizable/realized pay calculations.


While the significant decline in S&P 500 index TSR in 2022 seems to signal a meaningful increase in negative SOP outcomes in 2023, we think there are mitigating factors that could dampen the overall impact. Our expectations are that SOP failures may continue at the elevated rate of the past 3 years but may not surge higher. We will provide an updated assessment of the 2023 SOP season once it is substantially concluded in the coming months.


1 TSR data for the S&P 500 were collected from S&P’s Capital IQ database.
2 ISS vote recommendations and SOP vote outcomes were collected from ISS Corporate Solutions Voting Analytics database.
3 Ira Kay, Mike Kesner, Linda Pappas, and Ed Sim. What Shareholders Can Learn from the SEC’s New Pay Versus Performance Disclosure. Pay Governance. April 19, 2023.

General questions about this Viewpoint can be directed to Perla Cuevas (, Jose Lawani (, Joe Mallin (, or Linda Pappas (

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