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First US say on pay gets a no
As we have reported previously, Aflac is to become the first US company to put its executive compensation policy to an advisory shareholder approval vote. The company has taken this step voluntarily, and with moves spearheaded by Democrat Barney Frank to introduce a mandatory ‘say on pay’ likely delayed until after the election, it will probably be a lone example for some time to come. As such we commend Aflac’s decision.
PIRC has welcomed the opportunity to apply its pay rating model to Aflac’s disclosures. The resulting rating of BDD leads us to recommend a vote against approval of the pay policy for the following reasons.
Looking first at disclosure, the company uses a complex formula via which the total compensation for the CEO is linked to the size of his annual cash incentive. There is good disclosure of the ten measures used to determine the CEO's total pay and weightings used for each element are shown however performance against these measures is only discussed in general terms, "positive gains on many of the performance measures" or "peer group companies generally had greater gains".
Disclosure of annual bonus targets for 2007 is clear and we welcome the distinction between different individuals within the disclosures. However no maximum pay out limits for individuals are disclosed other than reference to a multiple of "more than 8 times salary" for awards to certain sales executives. Combined with the ability of the committee to use discretion, as was the case with certain divisional awards in 2007, we are not able to confirm that a maximum payment would be commensurate with corporate or individual performance. For this reason we are not able to confirm that targets are challenging.
Looking at targets relating to options, we note that senior executives receive option awards tested against challenging 3 year earnings growth targets. However we note with concern that the CEO received an incentive award in 2007 plus an increase in basic pay despite poor relative performance in 2006 against peer group companies. Disclosure does not identify which of the ten metrics used contributed to the company's own conclusion that performance was relatively poor. We also note that the CEO receives a projected increase for sector salaries within the value of his incentive award regardless of performance against peer companies.
We further consider that the formula by which CEO total compensation is determined is flawed in two respects. Firstly, the formula assumes that the CEO will never receive more in annual cash payments than the total compensation awarded to the CEO of the poorest performing peer group company. Secondly, the formula assumes that 60% of the value of prior year long term incentive received will never be more than total compensation awarded to the CEO of the poorest performing peer group company. We consider that formulas which lock pay into peer group pay levels without complementary absolute performance conditions may encourage executive pay inflation which is not commensurate with returns to shareholders.
Finally it is not clear that Aflac takes pay elsewhere in the company into account when setting executive compensation. Although the compensation committee makes clear that the CD&A and committee report refer to executive pay only we do not consider that the SEC prescription for disclosure prevents inclusion of internal pay relativities. We note disclosure confirming universal application of insurance policies and contribution rates for the 401(k) plan. However, financial advice, medical examinations and use of the corporate jet are only available to senior executives.
We look forward to the introduction of further advisory votes by US companies, however we will continue to support shareholders resolutions seeking a binding vote on grossly excessive severance terms, a particular concern in the US.
