Sample Question-Executive Compensation

QUESTION

What are some of the recent trends in executive compensation?

ANSWER

After doing some research on best practices and checking in with a few of our clients, we've found that executive compensation is being examined very carefully in light of recent ethical scandals and the spotlight these have brought to executive compensation packages.

The Sarbanes-Oxley Act of 2002 has tightened compensation and benefits rules for CEO's and other executives, so companies are exploring ways to attract "the best and the brightest" and still protect shareholder interests and maintain a credible public image. You can learn more specifics about this act by going to www.shrm.org and clicking on white papers/compensation and benefits.

We're finding that companies are focusing less on benchmarking to discover what the compensation level is for other companies' executives and more on aligning compensation decisions with how well CEO's protect shareholder interests over the long term and how well they achieve strategic objectives. Boards are discovering that simply following compensation practices of industry leaders only promotes unnecessary escalation of CEO salaries, with no discernible advantage to the company other than bragging rights about having the highest paid CEO. Shareholders in several companies last year actively campaigned to put a cap on CEO salaries and bonuses, and we believe this trend will continue.

An exception to this practice of curbing salaries simply based on benchmarking is for CEO's who are specifically brought in to turn around a failing company or division. The focus in these cases is still on being a compensation leader.

The clients I spoke with are leaning towards stock options as bonuses so that executives "share the pain" with other investors when the company is not profitable. A caveat for companies who are considering this approach is whether this might encourage executives to adopt risky strategies that will pay off short-term, at the expense of longer term sustained progress.

We're seeing more companies tie executive bonuses to measures of both profitability AND growth.

More companies now are evaluating executives on performance and providing additional compensation on the basis of that performance (resulting in both long term and short term success). We recommend a written agreement be established annually about the performance-pay relationship to clarify the metrics that will be used to determine compensation. This will provide a method to track compensation programs over time and assess the correlation to achievement of strategic objectives.

Lastly, more companies are requiring executives to hold stock until they leave the company or retire than in previous years.