Executive compensation has become a lightning rod for critics of corporate governance and the role of independent directors. Shareholders are expressing their views through advisory 'say on pay' votes in a growing number of countries, including the United States, and some jurisdictions are adopting policies that will make these votes legally binding. Regulators are demanding greater disclosure of the details of executive compensation packages, and a few are calling for outright caps on pay.
Now more than ever, effective compensation must balance long-term company performance and growth, with the creation of shareholder value and appropriate rewards for individual executives. Successful compensation committees achieve this balance by developing pragmatic compensation policies, seeking innovative approaches to pay, reviewing the actual results, and maintaining an unwavering focus on the alignment between pay and performance.
These leading compensation committees frequently revisit and test their compensation philosophy to ensure that it is aligned with the corporate strategy. They focus on developing short-term and long-term incentives, and they believe in and exercise discretion – upwards and downwards – to correct for irregularities that may emerge.
The members of Tapestry's networks are actively discussing these issues, and generating insights about effective practices with fellow directors, investors, regulators, proxy advisors, and other stakeholders.
Compensation’s relationship to culture and reputation
In light of the crisis arising from Wells Fargo’s recent settlements to resolve a multi-year fraud investigation, compensation committee chairs discussed how compensation and incentive programs can affect a company’s culture and reputation.
Positioning the company for long-term success
seek to position their companies for success by linking CEO selection,
executive compensation, and other important decisions with their companies’
long-term goals.In a series of recent
conversations, compensation committee chairs discussed how they stay focused on
the priorities that drive value not for the quarter or the year, but for many
years into the future.
Transformative corporate events and compensation strategy
CCLN members discussed the lifecycle of a major transaction and the different milestones at which companies and their boards must make decisions about key personnel. These include choices about who will manage the combined entity and how those leaders will be compensated in both the short and longer term. Members also considered executive severance and dismissals. CCLN members emphasized the importance of putting thoughtful severance programs in place that give managers license to make decisions that are in the best interest of the company.
Audit chairs discuss document management, corporate culture, and compensation
Central Audit Committee Network members met in Chicago on January 26, 2016 to discuss the issues of information governance, corporate culture and compliance, and compensation. With the expansion and proliferation of electronic records, managing information has become more complex, requiring corporate leaders to adopt new roles and processes, while prioritizing the information they wish to secure. Participants also discussed the challenges for boards in fostering a culture that promotes ethical behavior across geographies and identified a number of strategies boards could pursue to do so. In a dinner session, the group addressed trends in the executive compensation landscape, including increasing convergence of compensation packages, the importance of proxy advisors, and the impact of say-on-pay.
A focus on the board: assessment, refreshment, and pay
CCLN members discussed a wide range of pressures boards face as they seek to add value to their companies. Members said that directors must think harder about the backgrounds and skills needed to compose the right board for a company’s future. Members also discussed the best ways to respond to criticism about director pay or independence.
Motivating senior executives with compensation
Compensation committees face many choices when deciding how to pay, and thereby motivate, management. Members of the CCLN discussed how they select the right metrics, targets, and payout curves to align pay with performance. In another session, members were joined by a panel of institutional investors to discuss executive compensation, shareholder-director communication, and proxy voting. Members were also joined by Professor Michael Dorff for a lively dinner conversation about incentive pay plans.
Improving investor relations
The rise in shareholder activism and the increased attention institutional investors are paying to corporate governance requires boards to prioritize investor relations. CCLN members discussed the value of a strong relationship between the board and the investor relations officer (IRO), with a focus on ways to empower IROs to share early warning signs with directors. Members also discussed current trends in shareholder activism and the need for directors to think like the activist within a company.
Satisfying obligations and expanding opportunities
Interest in the compensation committee’s work is unprecedented and this ViewPoints illuminates some of the key governance and regulatory issues facing compensation committees today. First, the discussion highlights CD&As as an emerging tool to communicate complicated compensation decisions to a large number of stakeholders. Then, it examines six practices that boards and management should consider as part of a vigorous succession plan. Lastly, it assesses the steps companies are taking to prepare for forthcoming SEC rules on executive compensation.
Proxy trends and advisory firm policy
As they exercise oversight, directors listen carefully to their shareholders and to the proxy advisers. Compensation committee chairs and lead directors discussed trends from the 2014 proxy season. In a separate session, guests from ISS and Glass Lewis joined the directors to explore proxy advisory firm policies. Both guests shed light on their firms’ decision making practices and recommendations on specific proxy issues. Additionally, they described how their firms evaluate each proxy proposal individually and dispelled the myth that they just apply their policies universally.
Shareholder relations and the confident compensation committee
When and how executives and independent directors should engage with equity holders is top of mind for many compensation chairs. In many cases, compensation issues are the most obvious topics for board-shareholder engagement. “Compensation is the one thing the board actually decides, rather than advises,” one CCLN member said. And when an activist investor approaches, the question is not about whether the company should engage, but how. CCLN members explored effective strategies to prepare for and deal with activists.
Connecting pay to performance and communicating pay philosophy
Compensation chairs face the challenge of defining executive performance and linking pay to it. The company’s choice of metrics – and commitment to those metrics – requires considered judgment. CCLN members also continue to seek more effective ways to communicate their pay philosophies and outcomes to shareholders and the public, including through enhanced disclosures, supplemental letters, and direct engagement with investors.
Audit chairs discussed European trends in executive remuneration with Piia Pilv, a partner at New Bridge Street/AonHewitt. They identified potentially negative consequences of caps on pay and say on pay votes, and they underscored the importance of discretion and judgment in setting compensation. The audit committee can assist the board by reviewing performance metrics, remuneration risks, and disclosures.
Charting a course for tomorrow’s compensation committee
Compensation committee leaders do much more than set executive pay levels. Compensation Committee Leadership Network members discussed some of the broader leadership responsibilities that forward-thinking compensation committees will face in coming years, including how to identify, develop, and retain a new generation of executive leaders who seek to maximize flexibility and balance, not solely their paychecks.
Compensation philosophy and practice
Is the peer group model for benchmarking executive compensation fundamentally flawed? If so, what should replace it? Two distinguished guests joined the Compensation Committee Leadership Network (CCLN) to discuss the art and science of peer groups: David Chun, CEO of Equilar, and Charles Elson, chair of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Members also discussed two other evolving topics related to executive pay: long-tern incentive plans and share ownership guidelines.
Reforming bank culture: transforming values into action
A participant at the fourth Bank Directors Summit in London said simply, "A key element [of our culture problem] is compensation – it's behind all the excesses of the last 10 to 15 years. If we don't address compensation, we won't change banks." Participants at the Summit discussed a number of levers, including executive pay and performance metrics, which bank boards can use to shape culture.