The Issue of Perception
Talent development is a critical part of the process. If the board is confident that the company has a robust and talented leadership team, then it will feel less beholden to the CEO when negotiating pay levels.
Perhaps most important, both for directors and those opining from the sidelines, is to consider reducing the complexity of the compensation program. The more layers or moving parts presented in a program, the more difficult it is for people to understand what the “total” amount of compensation is. What’s more, complicated programs make observers feel that something is being hidden or that confusion is intentional.
Of course, all of this is meaningless if no one is aware of it. Compensation is being played out in the public arena, and boards need to get better at articulating and communicating the compensation strategy, how it is genuinely linked to both financial and nonfinancial performance, and how is compares to others. Addressing the perception issue—that all CEOs and executives are overpaid— can only be done through clear, concise disclosure and an open approach to strategy and performance. Yes, there are competitive reasons to withhold certain strategy elements, but don’t hide behind these too much.
There is great danger in assuming the general public and outsiders do not know enough to understand the finer points of compensation strategy. The new reality is that these are the people who are driving regulation and lawmaking, and directors ignore them at their peril.
Of all the challenges in setting compensation, perhaps the most vexing is clarifying the perception of compensation among all those outside the boardroom. With that goal in mind, the National Compensation Advisory Committee will meet regularly to examine solutions, and plans to release proposals and practical advice for all compensation committee members.
Comp Committee Takeaways
The NACD National Compensation Advisory Council recommends that compensation committee members consider the following key points when designing executive pay programs:
- More aspirational goals should be discussed, considered and disclosed.
- No pay for lack of performance.
- Create real up- and downside variability in pay.
- Equity: Is the CEO really worth it?
- Find a better, more accurate way of defining performance.
- Have more conversations with shareholders.
- Is there a problem with your pay program? Maybe the entire structure needs revisiting.
- Compensation committees need to take a greater oversight role in talent management.
- Make CD&A disclosures more readable for average shareholders.
Participants
Adam M. Aron: Director – Starwood Hotels, Prestige Cruise Holdings
Glenn H. Booraem: Fund Controller, Principal, Fund Financial Services – The Vanguard Group
James R. Boyd: Director – Arch Coal
Stephen L. Brown: Director of Corporate Governance and Associate General Counsel - TIAA-CREF
Dr. George Campbell Jr.: Director – Consolidated Edison, Institute for Internal Education
J. Kermit Campbell: Director – SPX Corp.
Betsy Z. Cohen: Director – Aetna
L. Dale Crandall: Director – Coventry Health Care
Ken Daly: President and CEO – NACD
Richard M. Donnelly: Director – Oshkosh Corp.
Kevin Edgar: Senior Counse – Capital Markets/Securities U.S. House of Representatives, Financial Services Committee
Robin A. Ferracone: Executive Chair – Farient Advisors LLC
Barbara Hackman Franklin: Chairman – NACD
Brenda J. Gaines: Director – Fannie Mae, Nicor, Office Depot, Tenet Healthcare
Steven T. Halverson: Director – CSX, Blue Cross Blue Shield of Florida
Roy A. Herberger: Director – Apollo Group
Thomas Kim: Chief Counsel and Associate Director – Division of Corporation Finance – Securities and Exchange Commission
Linda H. Lamel: Director – Universal American Financial Corp.
Arthur C. Martinez: Director – AIG, IAC/Interactive Corp., PepsiCo, Liz Claiborne, International Flavors & Fragrances
Patrick S. McGurn: Special Counsel – Institutional Shareholder Services
Ronald O. Mueller: Partner - Gibson, Dunn & Crutcher
Georgia Ricci Nelson: Director – Cummins
David S. Pottruck: Director – Intel
Gary L. Roubos: Director – Omnicom Group
Richard D. Shirk: Director – Amerigroup Corp.
Christopher A. Wightman: Senior Manager – The Vanguard Group
Edwina D. Woodbury: Director – Radioshack
Ann Yerger: Executive Director – Council of Institutional Investors
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Strong leadership by senior executives responsible for managing business are critical to our capitalist system and in tern to our democracy. The movement by Government to convert Board members into bureaucrats and cause management leadership to athrophy is the greatest issue facing Corporate Boards today.Oversight of CEO pay for performance has always been the fundamental responsibility of Compensation Committees. However, when Compensation Committees or Boards, in the name of fiduciary responsibilty, excessively involve themselves in fundamental management issues which deplete a CEO’s ability or incentive to lead, they have committed a serious disservice to the shareholders who elected them. Isn’t it time for Directors and our NACD to begin to understand the clear lines between oversight and overinvolvement? Or should we do nothing about the bureaucracy that we are fostering and imposing upon our free enterprise system and our American way.
Top executives keep getting increases by using methods that have become common practice in Corporate America. They get their boards of directors to give and give and give. How do they do it?
The executive compensation committee of the board and/or the VP or Director of Executive Compensation (a fast growing occupation) review market data of energy peers at the 25th, 50th and 75th percentile for annual cash compensation, bonuses, long-term incentive compensation, and perks. Of course these boards and compensation executives also hire outside consultants, who are paid handsomely to help out by also benchmarking and conducting competitive assessments. So as one CEO’s compensation goes up, other CEO’s in the same industry demand that their compensation must go up and then another and another.
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