8 habits of highly effective compensation committees

8/13/2019 8 Habits of Highly Effective Compensation Committees

1/24

8 HABITS OF HIGHLY EFFECTIVECOMPENSATION COMMITTEES

Copyright 2008 by The Segal Group, Inc., parent of The Segal Company and its Sibson Consulting Division. All Rights Reserved

Rick Smith

Senior Vice [email protected]

Jason Adwin

Senior [email protected]


2/24

1

Todays Agenda

Governance Landscape: 1999 to Present Day

Sibsons Board Effectiveness Framework

The 8 Habits

Question and Answer


3/24

2

Shareholder suits and rejection of management Increased regulation Greater prominence of third-party proxy advisors Rising sensitivity on executive pay levels and shareholder dilution

Effects

Crisis in Confidence Consumer Bliss

1999 2002

Market volatility Accounting scandals High profile bankruptcies Insider trading Security analyst collusion

Causes

Market BoomExponential

Executive PayGrowth

Market Bust

Discovery ofAccounting

Scandals / HighProfile

Bankruptcies

Spotlight onCorporate

governance

1999 2002: Consumer Bliss to Crisis in Confidence


4/24

3

2002 To Present Responses: Action From All Fronts

Revised exchange listingrequirements (2003)

More prominentinstitutional investor voice

ISS and other third-partyproxy advisory services

opining on governanceand pay practices

Analyst conservatism

Media spotlight (allmediums)

Third Parties

More conservativefinancial forecasts

Greater transparency andcommunication with thestreet

New / revised governance

policies

More stringent Board ofDirector selection andtraining

Executive pay redesign

Greater CEO churn andfocus on successionplanning

Companies

Increased SEC authorityand staffing

Sarbanes-Oxley (2002)

FAS 123R (2004/2005)

Increased disclosurerequirements (CD&A andothers) (2006)

409A (2007 final)

Shareholder Vote onExecutive Compensation

Act (Say-on-Pay) (2007)

Inquiries on consultantindependence (presentand future)

Government /Regulatory

Boards and compensation committees have had to adjust

to the new environmentboth proactively and reactively.


5/24

4

Compensation committees will continue to evolve

The role of the committee along with its members is continuouslychanging and evolving Increasingly larger time commitments

Growing legal exposure and liability

Increasing director and committee member compensation

More direct related experience for committee chairs and members


6/24

5

Rewards

Learning/pursuit ofknowledge

Contacts

Business development

Sharing of expertise

Prestige/affiliation Cash compensation/

benefits/perquisites/stock

The Director Value Proposition is the mixof elements that attract and retain directors

Costs

Time

Experience/expertise

Effort

Risk

Reputation

LitigationFinancial

DIRECTOR VALUE PROPOSITION


7/24

Board Effectiveness Framework

The Eight Habits

Appendix


8/24

7


People, Practices, and Policies form the foundation for effectivegovernance

More than items to be checked-off, they have changed the nature of the

boardroom

How change is applied in real-time defines the behavioral dynamics of acorporate board

Composition Compliance andDisclosure

Rewards

Operating Discipl ine

Dynamics

Development

People

The Best Talent

Practices

Doing theRight Things

Policies

With Credibilityand Integrity

Greater detail on the framework can be

found in the Appendix of this presentation.


9/24

8

Dynamics refers to how well therules of engagement are being applied

Simply establishing sound rules of engagement does not guaranteeBoard effectiveness

Indicators of strong dynamics include the ability to Leverage individual and collective capabilities

Build chemistry based on contributions and performance

Use the time commitments of each member efficiently

Drill into areas inside and outside of respective expertise

Raise issues that advance critical thinking

Balance stakeholder expectations while taking appropriate levels of risk

Challenge the status quo among board membersand with the executive team

Examine the strength, effectiveness, visibility and accountability of the Board andmake appropriate changes

* Jeffrey A. Sonnenfeld, Associate Dean for Executive Programs, Yale School of Management.

Its not rules and regulations. Its the way people work together. *


10/24


The Eight Habits

Appendix


11/24

10

The following reflect model habits of thehighest functioning compensation committees

1. Maintain Recent Advancements

2. Compensate Role and Activity

3. Work Beyond the Boardroom

4. Remain Internally Focused, Externally Sensitive

5. Build Rapport with Management6. Commit to Director Development

7. Build a Talent Portfolio

8. Broaden Scope of Responsibility


12/24

11

Habit 1:Maintain Recent Advancements

Trends in Compensation Committee operations and accountabilitieshave raised expectations and are now expected baselines

Service limitations for activeexecutives

Greater scrutiny in directorselection

Formal evaluation (Board,Committee, and individuallevel)

Board and committeesuccession planning

Validation and compliance(charters, policies, anddecision rights)

Increased education on lawsand regulations

Greater directoraccountability and riskmanagement

Improved transparency(within the Board and toshareholders)

More thorough duediligence and approvalprocesses

Proactive agendas

Frequent ad-hoc meetings

Robust meeting materials,more timely distribution

Greater clarity in payphilosophy and design

Tally sheets and internalequity assessments

PeopleThe Best Talent

PracticesDoing theRight Things

PoliciesWith Credibilityand Integrity


13/24

12

Habit 2:Compensate Role and Activity

Recognize the increasing role and time commitmentrequired of all directors

Increased complexity as directors balance diverse constituents: Shareholders and institutional investors

Customers, employees and executives

Regulators, media, third party advisors

An increasing shift to role-based compensation (i.e., retainer-based instead of meeting fees) The prevalence of retainer-based meeting fees has doubled from 2002 to 2007

Source: Equilar, Inc. Analysis of S&P 500 companies.

People Practices Policies


14/24

13

S&P 500 Director Compensation Analysis:2002 vs. 2007

1133416Committee Retainer (Audit)

1054522Full Value Shares

461913Committee Retainer (Comp)

47118,30080,400Total Annual Equity

Prevalence

Pay Level Medians

(25%)

(43%)

8249%

% Increase

5067Meeting Fees (Comp and Audit)

38%67%Stock Options

60,00033,000Cash Retainer$194,300

2007

$130,600

2002

Total Director Comp1

1 Total Compensation assumes a non-employee director serves as a member of the Audit Committee and the Governance Committee and attends five

Board meetings, seven Audit Committee meetings, and five Governance Committee meetings.2 Prevalence represents the percentage of companies that pay a given fee out of the 355 companies covered in the analysis.Source: Equilar, Inc.

On average, the number of meetings has increased 38% from 2002 to 2007(from 4.8 to 6.6), leading to increased retainer-based compensation.


15/24

14

Habit 3:Work Beyond the Boardroom

Increasingly, work is done outside of committeemeetings

Responsibilities reach beyond reading board booklets and meetingattendance

Informal sensing and lobbying outside of meetingsmost often led

by Committee Chair

Requires fostering interpersonal relationships and communication Compensation committee members

Other committee members/chairs of other committees

Board Chairman

Nothing in a committee meeting should come as a surprise.



16/24

15

Habit 4:Remain Internally Focused, Externally Sensitive

Successful pay programs are driven by internalrequirements, yet informed by external practice

Focus on instituting programs that align with individual companysmission, culture and operating dynamics

Remain open to alternativesexamine pay levels, vehicles and

design mechanics; reserve time to evaluate: How effective programs are todaystrategically and operationally

Programs at competing peer companies

Industry or broader market best practices and emerging trends

Potential application of alternative designs, pros and cons

Build the above into formal agendas annuallyled by managementor external experts

The best committees do not wait for programs to become ineffective

before looking at alternative approaches. Evaluation is continuous.



17/24

16

Habit 5:Build Rapport with Management

Relationships with company leaders improvescommittee process and creates more of a collaborative

environment Relationships exist with diverse cross-section of leaders

Corporate Leaders: CEO, HR, Finance, Legal Line: Business unit heads

Fosters transparency leading to greater insights on: Company/function needs and challenges Leadership perceptions and potential decision implications

Are helpful during the following exercises: Performance metric selection, goal setting, and calibration Talent management (hire, fire, retention, succession, etc.) Regulatory compliance and reporting Executive pay oversight, decision making, and communication

Building rapport with management, does not mean managing the company.



18/24

17

Habit 6:Commit to Director Development

Investments in education and development ensureoptimal contribution from directors

Formal on-boarding processes to ease integration For new directors and new compensation committee members

On-going director education/consultant briefings

Practices, future trends, and regulations

Director development stipends (e.g., attendance at networkingworkshops and conferences)

Committee rotation New members bring new perspectives and knowledge to the committee

Be mindful not to rotate members too frequently



19/24

18

Habit 7:Build A Talent Portfolio

A diversity of skills and experiences leads to richdiscussion and better decision making

Overall board competencies driven through individual directoraptitude

Committee members bring diverse: Backgrounds Expertise

Experience (general or compensation)

Develop director profiles for attraction and selectionensure rightmix of skills

Plan for successionmaintain list of qualified candidates



20/24

19

Habit 8:Broaden Scope of Responsibil ity

The Compensation Committee works with a variety ofissues beyond pay

Committees role and responsibilities expand to include additionaltalent management elements such as: Leadership and succession planning

Career planning

Strategic recruiting

Performance management

Committee members knowledgeable of external talent markets as

well as the available talent within the company

By expanding the committees focus, itbecomes the Human Capital Committee.



21/24

20

A well-governed Board helps buildgoodwill, value, efficiency and effectiveness

Outcomes of Effective Governance

Correlates to better company performance and greater access toinvestment capital for public companies

Reduces potential for corporate liability litigation

Increases competitive position for attracting director talent

Enhances competitive advantage

Increases ability to adapt to unprecedented amount of change in thebusiness community

People

The Best Talent

Practices


Policies



22/24

21

Questions


23/24


The Eight Habits

Appendix


24/24

23

Sibsons Board Effectiveness Framework

For public companies, the components within People, Practices and Policies form thenecessary foundation for effective governance. They cannot be overlooked or treated simplyas items to be checked off. How these components are applied in real-time begins to definethe behavioral dynamics of a corporate board

Composition

Mix, Skills and Experience Selection Criteria and Process

Board Succession Planning

Compliance and Disclosure

Regulatory Compliance By-laws, Guidelines and Written Codes

Transparency Sarbanes-Oxley Compliance

Rewards

Compensation Continuous Learning

Sharing of Expertise Prestige / Affiliation

Operating Discipl ine

Structure Roles and Accountabilities Decision Rights Performance Measures and Standards Documentation Evaluations Meeting Effectiveness Internal / External Communications

Dynamics

Engagement and Interaction Objective Problem Solving Facilitation / Conflict Resolution Cross-Committee Collaboration Decision-Making Processes

Development

Board Capability Planning Assimilation of New Members

Skills and Knowledge Development

APPENDIX

People

The Best Talent

Practices


Policies


8 habits of highly effective compensation committees

Documents