Talk notes: Effective Compensation Committees (NACD Director Professionalism)

Director Professionalism Course
National Association Of Corporate Directors
Philadelphia, PA
June 8-9, 2010

Effective Compensation Committees

Matthew Turner, Managing Director, Pearl Meyer & Partners

Robert Galford, Director and Chair Compensation Committee, Forrester Research; Managing Partner,Center for Leading Organizations 

This talk was a surprise to me. I expected to pay less attention to this talk, especially after the fantastic talk on audit committees. But, holy cow, this was a great session.

Ever wonder how your pay packages get set up? Ever wonder what philosophies drive the creation behind the bonus plan? Ever wonder how to better negotiate your own salaries and bonus? Then read further.

Great session.

• Federal Reserve found today that banking compensation packages that led to financial meltdown are still here
• Agenda
  • Compensation in the spotlight
  • Action steps
  • Case study
  • Q&A
• Questions from audience
  • benchmarking
  • is CEO comp as big an issue as the press makes it out to be?
• Overview: role of committee
  • structure
    • independent
  • "Great to have HR exec on the compensation committee"
• Charter
  • written responsibilities and authority
    • composition
    • duties and responsibilities
      • meeting frequency
      • communication
      • outside resources
  • Categorize roles in charter
    • full board approval
    • committee
    • advisory to CEO
    • informational
  • Example: CEO contract approval and terms
    • boards will typically reserve approval to full board
    • for other execs and named execs, committee might approve
    • could be approving plant level bonus plan
  • for informational items, then don't spend much time on them
• Philosophy
  • under score the value and goals of corporation
  • attract, develop and retain valued employees
  • establish overall importance of compensation
  • provides clarity and sets priorities
• Strategy
  • clear statement of purpose of compensation in all its forms
    • what is appropriate target pay opportunity (level)
    • how should that pay opportunity be delivered (mix)
    • what criteria should pay be tied (pay for performance)
    • appropriate upside/downside (risk/leverage)
    • when should pay be earned (horizon)
    • alignment with shareholders (balance, equity)
    • share ownership, contracts, CIC, severance
  • comment: "this talk sounds very defensive. I want to be able to define the compensation plan and bonuses for the entire company, have the company work at maximum level, and pay the bonuses. I want to tell the company that this is the best money we can spend."
  • discussion around thresholds: someone gave pharmaceutical example: all about drug trials have lots of uncertainty, but if it's approved, then very large payouts; and if not, then nothing.
  • comment: "I am comfortable with having high expectations of our operating executives."
  • comment: "because of banking crisis, there's desire to have a sufficiently long term horizon."
  • Asked for examples of setting horizons
    • "vesting over 7 years, but could accelerate to 5 years" (holy cow. he's from banking industry. would be interested to know what it was before)
    • "separate vesting vs. holding"
    • "all execs required to hold certain number of shares, and hold them until they retire"
• Procedures and processes
  • promote good communication, sound documentation and timely execution of committee responsibilities
  • assure independence
  • align meeting agendas with responsibilities and timing
  • create open atmosphere
  • assure functioning of review and control processes
  • commentary
    • Matthew is from Chicago. thinks high tech startups would benefit from process. again, process is as important as the decision coming out of process.
  • meetings
    • frequency: 4x or more a year (2x per year not enough?)
    • duration
    • advance materials and action items
    • minutes
      • key deliberations
      • materials reviewed
    • executive session
      • "have regularly scheduled executive session, so scheduling one doesn't freak everyone out"
  • access to management and in-house staff (HR, legal, finance)
  • outside advisor relationships
    • ability to select, retain, direct, evaluate and fire
  • reports to full board
    • "does your comp committee understand the talent in the organization. how many key execs are needed, and how many do we have? large example: 400 key people, and the 200 people that are filling them."
    • "could include the chief engineer: it's not always the top of the ladder. who knows how to unlock all the doors."
• Ripped from the headlines
  • "NYSE Grasso example: $130M bonus was indefensible. what went wrong with the creation of the comp package?"
  • Scenario of company considering adjusting comp plan halfway through the year
    • For those adjusting comp plan, it begs the question of whether you would adjust the plan if company is knocking it out of the park, and adjusting bonuses down
  • Issues
    • Tactical: not adjusting puts staff at risk of leaving
    • Strategic: designing a good comp plan that can handle adverse economic conditions
  • comment: "how can you penalize management when things totally outside their control change? would prefer factoring how they're faring against competition"
    • A + R + C (absolute + relative + comparative)
    • unless you put all three into the equation,
    • A example: absolute benchmark (e.g., bookings number)
    • R example: change in performance measures: relative benchmark (e.g., gross margins, could be historic)
    • C example: often missed
• Exercises
  • 1. evaluate board comp raise in tough economic environment
    • commentary: example: board positions needed increase: if company has money, increase compensation, since no raise in 10 years
    • opinion: the company is making money, so give them the money; look at peers and comparables.  (A, R everwhere)
    • weigh optics issue: what is impact in press when board gets raise, when company is doing layoffs
    • commentary: "we went through same thing lately. comp was all over the place, some made more than others. we created rules for meeting fees, increased pay for audit committee"
      • current trend is towards unified retainer, away from meeting fees
  • 2. skipped
  • 3. private equity firm forces management to buy stock, not entitled to annual stock grant, receive restricted stock that only vests on the basis of total shareholder return over three years, receive zero bonus if corporate targets are not met
    • comment: "tell investor: some recommendations are good, some not. needs further study. what does it do to retention?"
    • overarching theme is fairness and alignment with shareholder value ("you'll become wealthy if they perform over time")
    • comment: "this guy is trying to super-impose private equity model on this company. if they want that, then they should buy 100% of the company like private equity does. Other shareholder may not agree with this 'shoot the moon' approach."
    • comment: "holding stock for three years; how much of stock price is within control of management" (eligibility vs entitlement)
  • 4. attract CEO of publicly traded company from competitor, who would leave lots of money on the table
    • comment: this is mirror image of #3.
    • the issue here is how do you attract a CEO that you want? the suggestion is very much like Peter Drucker: what kind of company do you want to be? you're trying to hire the CEO of the company you want to be. if you can't afford it, then hire one that you can afford.

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