Board Focus: A Wake-Up Call on Executive Pay?

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As boards regroup after the dog days of summer, a development in executive pay is already showing up on their radar: An influential proxy advisor has overhauled its methodology for evaluating executive pay—and this could potentially affect investor expectations and provide greater leverage to activists.

In a little-noticed move, the proxy firm, Glass Lewis, recently revised its pay-for-performance model. The result, experts say, will be much more scrutiny of top C-suite executives’ compensation. The proxy firm’s new model grades on a special numerical system, instead of a broader, alphabetic one, and is based on five weighted quantitative tests, two of them new: evaluation of short-term incentive payouts, and analysis of actual versus granted CEO compensation.

The move, which goes into effect next year, is meant to address past criticisms of Glass Lewis’s approach to compensation analysis, experts say. Some companies bristled, for example, at the firm’s emphasis on one-year total shareholder returns, a metric which is less meaningful than, say, the five-year total shareholder-return average. Notably, Glass Lewis’s new model directly incorporates the U.S. Securities and Exchange Commission’s pay-versus-performance tables into its methodology. “This is the first time a proxy advisor is specifically using pay-versus-performance disclosures in these calculations,” says Irv Becker, vice chairman in Korn Ferry’s Executive Pay and Governance practice. “Up until now, there hasn’t been much feedback or finger-pointing to pay-versus-performance disclosures.”

Glass Lewis’s revision of its model comes at a time when pay transparency has been garnering attention globally. In the US, a number of state and local governments require companies to disclose salary ranges in job postings; in the EU, new rules on pay transparency will go into effect in 2026.

To be sure, the fact that one proxy advisor has taken a new approach to pay-for-performance assessments doesn’t mean compensation committees everywhere have to overhaul their own practices. For one thing, Glass Lewis hasn’t gone into detail about the metrics and calculations it uses to arrive at its scores. “They’re clarifying some of their tests at a high level, but not fully disclosing their approach,” Becker says. Many companies already using best practices—such as increasing the level of disclosure to explain, say, a one-time award—can proceed with business as usual. For firms that may not be as diligent, however, the new methodology could be “a wake-up call,” Becker says.

But experts say the Glass Lewis update could provide more ammunition for investor activism, which already is at all-time highs. That’s because activists often look for proof points that executive pay and performance are out of sync. If firms don’t provide narratives to explain performance or pay issues, proxy advisors may impose their own, which could in turn chip away at investor support—and encourage activists to wage proxy fights, experts say. “If a company is underperforming or activists sense a stock is undervalued, they’ll use any mechanism possible for their case,” says Claudia Pici Morris, co-lead of the Board Succession Practice at Korn Ferry. “So if this is a new mechanism they can use, they likely will.”

In most cases, Glass Lewis’s updating of its compensation-analysis model is a reminder to compensation committees to revisit their disclosure strategies, use consultants or advisors to run predictive tests under proxy-advisor methodologies, and ensure a clear narrative for anything that’s out of the ordinary. “Directors need to stay apprised of how their story is interpreted by external parties, especially proxy-advisor firms,” says Sarah Oliva, a principal in Korn Ferry’s Board Effectiveness practice.

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