Based on a review of 350 proxy statements filed this year, Moody’s Investors Service looked specifically at performance targets, peer group selection, and change-in-control payouts concluding that the new Compensation Discussion and Analysis (CD&A) is proving useful to credit analysis.
In a statement, Moody’s said it believes that “well-articulated performance targets provide insight into the aggressiveness and risk profile of a company. Peer group selection reveals how a company perceives itself, and whether the board is exercising disciplined oversight of pay benchmarking in particular. Finally, change-in-control payouts and terms provide insight into incentives (or lack thereof) management teams may have for pursuing strategic alternatives that can be transformative events for creditors, such as business combinations.”
When assessing peer groups, Moody’s recommended that “red flags” include more than 15 firms listed, a bias toward firms that are financially larger or more profitable, multiple peer groups with unusually high CEO pay, and unexplained year-to-year peer group changes.
Moody’s also found that the pay level for the second highest paid executive is about half of the CEO’s total direct compensation. “In our view, a large disparity in internal pay equity (greater than three times the amount received by the executive second in pay, for example) may indicate underdevelopment of management succession planning, and concentration of power in the CEO,” Moody’s wrote.
While companies are not required to disclose pay equity, Moody’s noted that ConocoPhillips, Amgen, and Intel voluntarily disclosed the information. A number of companies, including Kellogg and DuPont, disclosed the board discussion around “tally sheets” on the wealth accumulation of top executives.