If you are a publicly traded company you are likely in the process of dealing with Say on Pay as Proxy season approaches. Many past Say on Pay issues have included complaints regarding disconnects between pay disclosed and the financial performance of the company. Much of this has been attributed to the method of calculating compensation that we have all used for years. Realizable pay is the newest “answer” for this long time issue.

What is Realizable Pay?

Realizable Pay (“RP”) is pay measured at the end of the measurement period and includes the value of full value awards, such as Restricted Stock and RSUs and in the money stock options. Since this measurement uses real values, it better reflects the pay delivered and more tightly links to corporate performance and Total Shareholder Return over the period of the award. That being said, it is not a flawless measurement.

We will surely see a hailstorm of analysis regarding this relatively new popular metric. Evaluations performed by some of the major voices in the compensation industry have already declared RP to be an excellent measurement of pay versus performance. Of course others have quickly pointed out RPs inherent flaws. I am sure we will see rapid evolution and customized versions, but the time to get on board is now.

Beginning February 1, 2013, ISS will begin using realizable pay in its analysis of S&P 500 CEOs if a company’s compensation policies fall into the high or medium concern category. This new approach will be a welcome change for companies that have delivered pay in line with performance. For an unlucky (or poorly compensating) minority, this new evaluation may provide the final argument needed to tip the scales to a negative Say on Pay vote. As will all measurements like this, we can expect that the use of realizable pay by other institutional investors and their advisors will spread quickly, even to those companies not in the S&P 500. As a reference, I have included an excerpt from the recently updated ISS “Evaluating Pay for Performance Alignment” document that describes their process for calculating realizable pay.

Calculating Realizable Pay

Realizable pay will include all non-incentive compensation amounts paid over the measurement period (as reported in the Summary Compensation Table), plus the updated value of equity or long-term cash incentive awards made during the period and either earned or, if the award remains on-going, revalued at target level as of the end of the measurement period. Total realizable value for these grants and payments will thus be the sum of the following:

· Base Salary reported for all years in the measurement period;

· Bonus reported for all years;

· Short-term (typically annual) awards reported as Non-equity Incentive Plan Compensation for all years;

· For all prospective long-term cash awards made during the measurement period, the earned value of the award (if earned during the same measurement period) or its target value in the case of on-going award cycles;

· For all share-based awards made during the measurement period, the value (based on stock price as of the end of the measurement period) of awards made during the period (less any shares/units forfeited due to failure to meet performance criteria based on complete and clear disclosure); or, if awards remain on-going, the target level of such awards;

· For stock options granted during the measurement period, the net value realized with respect to such granted options which were also exercised during the period; for options granted but not exercised during the measurement period, ISS will re-calculate the option value, using the Black-Scholes option pricing model, as of the end of the measurement period;

· Change in Pension Value and Nonqualified Deferred Compensation Earnings reported for all years; and

· All Other Compensation reported for all years.

Take the time to get familiar with this new addition to the essential ingredients of Executive (and other) Compensation. If you’re in the S&P 500 you probably have about a week before your CEO calls you in to discuss this topic. If you are not in the S&P 500 you probably have three weeks before people start asking. Feel free to reach out if you have questions.

Dan

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation” , “If I’d Only Know That” , “GEOnomics 2011” and “Equity Alternatives .” Dan is on the board of the National Center for Employee Ownership , a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts , a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay

More than 2,300 organizations use PayScale’s subscription software to:

• Allocate raises. PayScale Insight allows you to allocate raises based on employee performance and labor budget.
• Attract talent. Price jobs based on your local market and competition.
• Retain employees. Get pay right and show them how you did it. Your employees will be more satisfied to stay.
• Drive performance. Get their salary right so they can focus on doing a good job.
• Be confident. With know-how to talk about comp with anyone.

What are you waiting for?