Rob Swystun, Pristine Advisers
With excessive CEO pay being a regular fixture in the news, compensation committees have to be wary that their decisions about who deserves what can result in a lot of scrutiny for the company. They must take into account the needs of the company for talented leaders, plus public, shareholder and employee perception about the fairness of the compensation provided.
Compensation committee chairs find themselves in the eye of a storm consisting of:
- current and potential investors,
- the media and
- communities in which their company operates.
As Elizabeth M. Dunshee with Fredrikson & Byron PA points out in an article for Lexology, compensation committee chairs have to balance the interests and perceptions of these stakeholders while also keeping them informed and dealing with complicated taxes, securities and employment laws and competitive considerations. They also have to work closely with legal counsel, compensation consultants and the executive team.
Fortunately, she also provides some sage advice for triple Cs in the form of five tips.
- Prepare Meeting Agendas in Accordance with the Committee Charter
Compensation committees are not standard across all companies. Their charters can differ significantly, but for the most part, they will have some similar key responsibilities that the chair must always keep in mind.
- Approve or recommend approval of executive compensation arrangements and performance goals. These goals must link pay to company strategies and performance.
- Ascertain whether compensation programs motivate the appropriate level of corporate risk-taking.
- Communicate compensation strategies and decisions to executives, employees and shareholders.
- Approve equity grants and management share pools in accordance with the company’s equity incentive plan and equity grant policies.
- Oversee the negotiation of executive employment agreements and the administration of compensatory agreements, policies and plans.
Committee chairs should ensure the committee addresses all of its enumerated responsibilities.
- Stay Attuned to Compensation Trends and Company Strategy
The compensation committee has to keep up with trends in compensation so they are fully prepared to deal with any requests from executives or other stakeholders and also so they can appropriately refine company performance programs and goals.
If the compensation committee finds that customized elements of compensation are better for the company than the standard best practices of the day, the committee has to recognize this and communicate why they’re more appropriate for the company.
- Spruce Up Documents and Make Them as Reader-Friendly as Possible
Companies always want to win the Say on Pay vote and compensation committees can go a long way toward doing that by eschewing boring, text-only documents and livening them up with infographics and easily-digestible summaries that clearly explain pay practices and link executive pay to performance. (Of course, the compensation still has to be fair in order to get support, but by making it easy to understand, you’ll avoid negative sentiment from people who just can’t follow the compensation plan.)
- Prepare for Upcoming SEC Rules and Related Investor Communications
In 2015, the Securities and Exchange Commission made some new rules in accordance with the Dodd-Frank Act and these will shape the future of not only say-on-pay votes, but also director elections.
Pay Ratio Disclosure: Starting with the 2018 proxy statement, companies will need to reveal the pay ratio of the CEO compared to the median employee. Now is the time for compensation committee’s to start discussions with the company’s executive, HR and IT teams to ensure necessary systems are in place to gather the necessary data for complying with the new rule.
Clawback Policy: Although not in place yet, rules proposed by the SEC in 2015 would require companies to have a policy in place to recover executive incentive compensation in the event of an accounting restatement.
Therefore, public companies should start including language that addresses this in current employment agreements to support future policies. Dunshee also suggests that companies consider using non-financial performance metrics as a basis for awarding incentives to executives not involved with accounting and finance matters. She also suggests that companies begin tracking all incentive-based compensation.
Pay for Performance Disclosure:
Although not likely to be ready for the 2016 proxy season, rules will eventually be put in place that require public companies to disclose how executive compensation is related to financial performance.
Compensation committees should be mindful of these impending rules when determining executive compensation, paying special attention to the link between executive compensation and total shareholder return.
- Focus on Communication
Because the compensation committee chair often liaises with consultants, legal counsel and executives to finalize sensitive compensation decisions, that person must be a skilled communicator. And clear communication is key to the compensation committee having a positive working relationship with the executive team, which is necessary to:
- establish and convey the structure of the compensation program,
- articulate the performance it is intended to incentivize,
- define acceptable levels of risk-taking,
- share the results from annual performance evaluations,
- discuss company and individual areas of strength and weakness and
- affirm the value of each executive to the team.
The communication doesn’t stop there, though. Working with the executive team and committee advisors, the compensation committee must also articulate the company’s compensation philosophy and goals and how executive pay fits in with these to employees, investors and other stakeholders.
Being the compensation committee chair brings with it a lot of responsibility, but these five tips should help any triple C with navigate the often choppy waters of executive compensation.