compensation consultants. That same year, CalPERS announced a significant change to their analytical framework, extending their model from 3 years to 5 in order to capture a longer period of sustained performance for assessing pay-for-performance alignment.
In September 2019, CalPERS announced its proprietary 5-year pay for performance model (adopted March 2019) and its proprietary CalPERS Pay for Performance (P4P) Scorecard (adopted August 2019). In announcing this new and comprehensive framework, CalPERS stated that its compensation program assessment would encompass the proprietary 5-year quantitative P4P Scorecard plus a second test of a qualitative analysis of compensation plan design, structure, and practice. The new analysis framework is designed to meet the following objectives:
- Testing the relationship between CEO pay and company performance over a 5-year cumulative measurement period, measuring both total shareholder return and CEO compensation
- Ascertaining the reasonableness of CEO pay compared to peer company CEOs when considering company performance
- Assessing whether the company’s executive compensation plans are appropriate in terms of design, structure, and practices and supportive of long-term shareholder value creation when considering risk levels
CalPERS is working with compensation database firm Equilar to execute this new P4P Scorecard. Included in the new Scorecard is a 5-year CEO “realizable pay” analysis as well as a commensurate 5-year total shareholder return analysis. Realizable pay is an estimate of what the CEO could potentially earn; it calculates the value the CEO could have earned based upon an analysis of grant date pay for each of the past 5 fiscal years compared to the mark-to-market 5th year measurement date on a cumulative basis. Total shareholder return over 5 years represents the actual gains realized by shareholders, including the change in share price and the value of dividends paid.
CalPERS compensation program review includes two quantitative tests under their P4P Scorecard:2
- The P4PTM Score measures 5-year CEO pay and 5-year company TSR relative to a peer group. CalPERS indicates that a negative score (ranking higher relative to peers on 5-year CEO realizable pay than on 5-year relative TSR rank) would be interpreted to “mean that the level of pay may be too high relative to the performance shareholders receive.”
- The CEO and Shareholder Financial Outcomes Analysis measures the change in 5-year CEO cumulative realizable pay versus 5-year CEO grant date target pay, and compares this metric on an absolute basis to the company’s 5-year TSR (5-year company TSR minus 5-year percent difference between CEO realizable pay and CEO target pay opportunity). CalPERS indicates that a significantly negative score (5-year CEO realizable pay change above 5-year company TSR) would indicate that “the financial experience of shareholders is significantly worse than that of the CEO.”
In addition to its P4P Scorecard, CalPERS will perform a qualitative assessment of a company’s executive compensation plans. In this regard, CalPERS reviews pay policies similar to advisors Institutional Shareholder Services and Glass Lewis in determining whether such policies are in the best long-term interests of