Realizable Pay: Insights into Performance Alignment
APRIL 26, 2019
Definitions of CEO compensation may vary, and each definition of pay may offer unique insights about a compensation program’s link to company performance. In this article, we review the concept of “realizable pay,” a measure of executive compensation that focuses on the value of compensation after the compensation is granted and before the compensation is fully realized. We argue that realizable pay has a unique capacity to highlight alignment or misalignment of pay and performance.
- Realizable pay focuses on the middle of the “compensation lifecycle,” allowing investors to see how an executive’s pay has changed relative to the target payout measured in grant-date pay.
- Calculations of realizable pay may vary significantly, resulting in widely different figures. The main differences focus on the method for valuing options and the timing of valuing performance-based and time-based awards.
- Realizable pay shows alignment with shareholder returns, and a disconnect between realizable pay and shareholder returns can help identify potential cases of pay-for-performance misalignment.
- Disproportionate increases in realizable pay relative to shareholder returns are likely to meet shareholder dissatisfaction in the form of lower say-on-pay support rates.
- Realizable pay can be a useful analytical tool, but it cannot replace a comprehensive pay-for-performance analysis.