Compensation Plans Provide Companies Chance to Rebuild Trust

Although executive compensation plans may not be as big a source of shareholder and public anger that they were last year in the heat of the financial crisis, they will become a sticking point for boards if and when Say on Pay becomes mandatory.

But there is a deeper reason public companies may want to address their compensation plans in the near future. There is a societal context to executive compensation as U.S. businesses try to regain the trust of the public and citizens feel some degree of common cause with those businesses. The financial crisis is the latest erosion of that trust, especially since American taxpayers were asked to bail out some of those large businesses.

“The next three to five years is your time to rethink your executive compensation plans,” Jonathan Spector, The Conference Board CEO, told a group of more than 100 directors, compensation consultants and human resource professionals and executives June 10 at The Conference Board 2010 Executive Compensation Conference in New York City. “If you do [address those plans], it will make an enormous difference.

“I encourage you to respond. This is a call for a meaningful thoughtful process, not a call for immediate action.”

He explained the rationale behind companies rethinking how they design their executive compensation plans as an action companies can take to rebuild that trust with the public while also helping to solve the problems that led to the financial crisis.

The rationale goes like this: Since CEOs of many of the largest companies believe the country’s most critical domestic policy is the financial crisis, most reasonable solutions call for some material sacrifices by the average citizen. In order for citizens to feel a common cause with large businesses, those businesses are going to have to show they understand the need to live within their means and make sacrifices as well.

The executive compensation packages, which have included such perquisites as bonuses, stock options, restricted stocks, and use of company jets, is an area companies can rebuild that trust. “That feeling of trust and common cause does not exist today,” Spector said. “I think work needs to be done there. There needs to be more trust and common cause.”

That societal context of executive compensation is one of the themes of last year’s Conference Board Task Force on Executive Compensation Report. The task force, which was co-chaired by Rajiv L. Gupta, former chair and CEO of Rohm and Haas Co., and Robert E. Denham, partner with Munger, Tolles & Olsen LLP, came up with five principles for executive compensation plans:

• Compensation programs should be designed to drive a company’s business strategy and objectives and create shareholder value.
• Pay the “right” total compensation.
• Avoid controversial pay practices, such as golden parachutes and multi-year employment contracts with generous severance packages.
• Establish credible board oversight by having independent, experienced and knowledgeable compensation committees.
• Engage in a transparent dialogue with shareholders.

According to a June 8 study by Financial Executives International (Financial Executive Compensation Survey), the majority of respondents (54 percent) did not have employment contracts and the most prevalent performance measures used by public companies continue to be company goals and objectives.

The task force report will be the focus of a panel at a special joint Conference Board Governance Center/Weinberg Center for Corporate Governance Roundtable at the University of Delaware June 21-22. In addition to the compensation principles, there will be panels on the elements of executive compensation, legal issues, compensation consultants’ perspectives, creating a template for effective compensation committee performance and institutional investors’ points of view.

For more information about the roundtable, click here. Read this blog next week for coverage of the roundtable.

- Gary Larkin