The successful candidate will bring at least three years of board experience, have a good working knowledge and understanding of executive compensation, be skilled in psychological jujitsu, and have enough political savvy to win a Chicago mayoral election.
He or she will be responsible for ensuring that executive pay and performance are appropriately aligned, the Compensation Discussion & Analysis tells a compelling story to investors about how the company is addressing executive compensation, and the executives are happy and motivated by their compensation plans. The position will be up for reelection on a yearly basis, and committee decisions may result in a failed “say on ay” vote and/or the loss of your board seat. Only able-bodied men and women with strong backbones need apply.
This article originally appeared on the Forbes blog.
Sound like an impossible job? Maybe. But this is the job that many companies need done today. It’s not for the uninitiated. With shareholders becoming more active in matters of executive compensation, the compensation committee is truly “caught in the middle” between the shareholders and the executives, who are, after all, the agents for the shareholders.
Shareholders and boards themselves are starting to realize just how tough it is to do this job, as compensation committees are generally getting poor marks. Why? Because many see the committees as complicit with management and playing a role in driving up what is already widely considered to be excessive executive pay.
At one recent conference, attended by a diverse cast of characters comprised of CEOs, compensation committee chairs, politicians, union leaders, academicians and others (including yours truly), the group didn’t agree on much. But one thing it did agree on was that compensation committees were largely to blame for the inexorable run-up of executive pay.
The group was saying that it was indeed the compensation committee – not the executives or the consultants – who were to blame. While I acknowledge that there is plenty of blame to go around and that some compensation committee chairs are actually very good at what they do, I, too, share the opinion that compensation committee chairs in general could stand to raise their game.
So, what does it take to do this job? My own view is that it’s one part compensation expert, one part psychologist and one part politician. Let’s take these roles one at a time.
The chairperson, by definition, is the ringleader. Like the chair of any committee, he or she is responsible for developing a relatively deep understanding of the key issues, and knowing what is at stake depending upon the actions taken. Companies need their compensation committee chair to know the basics and to have a healthy thirst for learning what they don’t already know.
For example, does your company’s compensation committee chair know the difference between Black-Scholes and Black Magic? Does he or she know that it is important to tackle the performance side of the pay for performance equation, and not just the pay side? Does he or she know that target and actual compensation are two different animals? And can your chair at least understand the subject matter when the alphabet soup of 162(m), 280G and 409(A) are discussed? These are all barometers of whether your company’s compensation committee chair has a “working knowledge” of executive compensation.
Second, psychology plays a significant role in compensation. Remember Maslow’s hierarchy of needs from your college psych class? It states that people always strive to satisfy successive needs, starting with the physiological (i.e., food and shelter), and moving on to safety, love, belonging, self-esteem, and finally, self-actualization. It is, of course, tough to argue that multi-million-dollar-a-year executives are still striving to make ends meet, and the self-actualized ones don’t really care about money. So, most executives must be going for love and belonging or self-esteem.
Too often, compensation committees lose sight of the fact that what the CEO really wants is to be told that he or she is doing a great job. Peer comparisons are another tricky matter. According to Dan Ariely, a professor of behavioral economics at Duke University, “compensation is a ‘positional good.’ It’s not how much compensation we have; it’s about whether we have more compensation than someone else.” The list of psychological landmines goes on. The point is that the compensation committee chair must be aware of these issues in order to ensure good decisions.
Finally, the compensation committee chair needs to be a skilled political strategist. Are the views of the constituents divergent or aligned? How will the votes line up? If the votes are split, how can the chair facilitate the compensation committee meeting in such a way as to bring the group together for a workable solution that will pass muster with shareholders and executives alike?
In one situation, the compensation committee chair recognized that the CEO was always two or three steps ahead of the compensation committee, and was using this preemptive strategy to take advantage of the situation. In order to rebalance power, the chair decided to hold executive sessions both before and after the compensation committee meetings. It worked. With this simple change, the committee was able to stand up to the CEO during the meetings and say “no,” while still being supportive. A good chairperson can design a process that appropriately balances power – between the CEO and the committee, and among the committee members – for better decision making on behalf of shareholders.
My own belief is that the “job description” for the role of compensation committee chair needs to be rewritten. After all, the landscape has changed dramatically over the last decade, and the chair role is a legitimate job, requiring both hard and soft skills, as well as increasing amounts of time. Does anyone want to apply?
Robin A. Ferracone is the Executive Chair of Farient Advisors, LLC, an independent executive compensation and performance advisory firm which helps clients make performance-enhancing, defensible decisions that are in the best interests of their shareholders. Robin Ferracone is the author of a recently published book entitled Fair Pay, Fair Play: Aligning Executive Performance and Pay, which explores how companies can achieve better performance and pay alignment. Robin can be contacted at email@example.com