Editor’s note: Executive compensation has always been a pressing issue for boards—and now it has made its way to the forefront of public debate. With regulators, media, and the public at large thundering at the gates, the issue is more controversial than ever, and no less complex. In hoping to shed some light on the proper procedural steps needed to establish sound executive-compensation policy, The Conference Board Task Force on Executive Compensation issued a formal policy statement intended to advise directors and related parties on the difficult challenge of crafting a pay structure that sufficiently rewards company executives for their dedication and talent without over-indulging them—and without drawing shareholder ire.
Long before the current financial crisis, executive compensation was generating debate and controversy, with many in the investment community and the general public viewing executive pay as too generous, insufficiently related to performance, and too often rewarding short-sighted behavior.
The economic crisis, evidenced by the meltdown in the financial services industry and unprecedented government intervention in that industry, coupled with well-publicized payments to executives as their companies’ stock prices plunged and unemployment rose, has only intensified public anger over executive compensation. This anger relates not only to the overall increase in executive pay over the past decade, but also to severance and other arrangements where payouts appear to be unrelated to performance. This anger has not been ameliorated by the decline in overall chief executive officer compensation levels.
Rules cannot substitute for the good judgment required to make sound pay decisions.
In retrospect, executive-compensation governance and disclosure reforms implemented earlier in the decade may have changed “too little, too late,” and the current public demand for change has effectively eliminated the option for executive pay practices to gradually evolve as boards explore and test alternatives over time. Regardless of whether the recent executive pay issues are concentrated in the financial services industry, the task force believes that public corporations and directors are at a crossroads with respect to executive compensation. In order to restore trust in the ability of boards of directors to oversee executive compensation, immediate and credible action must be taken. All boards should examine their executive pay practices and take action to ensure that there are strong links between performance and compensation; the company employs best practices and avoids the controversial practices described in this report absent significant justification; they demonstrate effective oversight of executive pay; there is transparency with respect to the executive compensation decision-making processes; and that board and shareholder dialogue is available to resolve executive-compensation issues.
The task force recognizes that a “rules-based” approach cannot provide the essential flexibility required to accommodate the disparate industries, strategies, business models, and stages of development represented in the more than 12,000 U.S. public companies. Given the differences among companies and even within the same company as its situation and strategy change over time, each company must have the flexibility to set (and change) its business strategy and then design unique executive- compensation programs that promote and reward achievement of the objectives for the operative strategy. Moreover, rules cannot substitute for the good judgment required to make sound pay decisions.