The role of the Compensation Committees is ever more critical and ever more risky. Yet a common lament among Committee members is, “so much information, too little time.” To facilitate review and decision making, management often summarizes information and CEOs may “guide” deliberations. Such shortcuts, while well-intentioned, may inadvertently provide the Committee with an incomplete picture or rush them through the review and approval process.
Fortunately, simple approaches exist to combine efficiency with effectiveness and foster transparency and communication. Six suggestions can avert breakdowns and will sharpen the foresight of Compensation Committees.
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Breakdown Scenario
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Solution
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A strong CEO who intimidates Committee members and shuts down discussion.
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Schedule an annual discussion on LTI philosophy and strategy outside of plan design and ask the tough questions, e.g.:
- Does the program pass the test of fairness, justice and transparency?
- Would we feel comfortable opening up pay decisions to public view?
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Committee approves plan components at different times and never sees the big picture.
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Whenever pay is discussed, provide a tally sheet that lists the estimated annual value of every pay element and the total annual value.
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Committee ignores negative press about its executives’ pay, ignoring the opportunity to make an honest assessment.
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Annually report to the Committee where the company stands vis-a-vis the evaluation of relevant constituencies, such as ISS, unions, proxy advisors, major institutional shareholders, and regulators.
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Committee is put in a position of rubber stamping top management performance ratings and pay.
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Establish a process for reviewing CEO performance before the CEO evaluates the top management team.
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The Board approves its own pay arrangements.
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Separate Board pay from the duties of the Compensation Committee—have it handled by the Nominating or Governance Committees.
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Complexity of the plan can be daunting.
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Hold an executive session for Committee members allowing them to “ask the consultant” without management present.
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