Trends in Compensation Committees

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An expert panel convened this week by the National Association of Corporate Directors – New England identified current issues occupying compensation committees as they begin to engage on policies for the coming fiscal year.

One surprise: tremendous attention to the much-maligned SEC Rule requiring that current proxies contain a disclosure of the earnings ratio comparing a company’s CEO to the earnings of a “mean” employee.

I recently posted that ISS, in survey, had discovered that this much-criticized and much-delayed disclosure had actually proven to be of interest to investors, notwithstanding the fact that analysis during the Rule’s adoption debate suggested that the data was superfluous. The panelists speculated that such disclosure will cause executives to question whether all management is being properly paid, and will trigger discussions about compensation strategy throughout the organization, and about the entire “employee value relationship.”

What is the value proposition for an employee, why should that employee want to work where now situated and at current compensation? Millennials might be more attuned to such issues; millennials do not anticipate permanent employment relationships and may be more interested in what a company offers by way of career development.

The panel also noted that much more attention was being paid to “fair compensation” of minorities and women. Since 55% to 60% of current college graduates are women, boards should ask for hiring metrics for women at all levels. The absence of women at senior levels, and sitting on boards, is “a problem” and comp committees should make sure that pay is monitored by gender and that accurate data is provided. It is necessary to specifically call out wage disparities, as the only way to eliminate them: “if it is measured, it gets done.”

The perennial issue of balancing compensation incentives between rewarding short-term goals and rewarding long-term strategic goals was discussed at length. It is necessary for the compensation committee to determine what results are most important, and to provide a compensation and bonus strategy that specifically rewards desired outcomes. There is a problem where strategic goals are long-term: how do you craft a bonus plan, for example, where somebody is working during the first year of a five year strategic program? The general approach for rewarding people working on long-term strategic issues is to provide individualized bonuses, and not to rely on the over-all comp/bonus program (which is generally driven by financial metrics).

Finally, the operational aspects of the compensation committee were discussed. Often there is not enough time to deal with matters which must be addressed as a matter of corporate governance, and then have time to discuss the philosophy of compensation. Ways around this include: an organized and strong chair; receiving the board package well in advance so that members of the comp committee can discuss by email or telephone some of the issues presented prior to the actual meeting; a dinner of the committee prior to its formal meeting, in order to provide soft exposure for ideas and to facilitate communication (a practice of many boards but not committees).

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