Posts Tagged ‘executive compensation’

Discussion Topics for Compensation Committees in 2013

March 28th, 2013 | By

In 2012, the focus for those both inside and outside the boardroom was compensation. Although numerous rules mandated by Dodd-Frank affecting the compensation committee—say on pay and compensation committee and advisor independence—have been implemented, directors still brace for those to come: pay-for-performance disclosures, clawbacks, and median pay ratios. As such, it is expected that the focus on executive compensation will not shift dramatically in the coming year.

As boards head into proxy season, NACD has recently released a new white paper: Compensation Committee Priorities for 2013. With input from our National Compensation Committee Chair Advisory Council and partners Farient Advisors and Gibson Dunn, this report details the issues that the advisory council—and compensation committees across the nation—will discuss in 2013. The list includes:

  • Executive Compensation and Supplemental Disclosures. In recent years, investors, proxy advisory firms, regulators, and boards have significantly increased the level of attention paid to the compensation discussion and analysis, particularly as the source of whether pay matches performance. This year, the Securities and Exchange Commission is expected to issue proposed rules on Section 953 of Dodd-Frank entitled “Executive Compensation Disclosures.” Section (a) specifically addresses the disclosure of pay versus performance.
  • Realized and Realizable Pay. A significant issue underlies the provision in Section 953(a): a lack of standards surrounding the various terms referenced. Although Dodd-Frank requires that companies disclose “pay actually received” (generally referred to as “realized pay”), many companies choose to disclose “realizable” pay. Not only do companies use a range of definitions to calculate realizable pay, Institutional Shareholder Services has begun to use its own definition when assessing compensation.
  • Peer Group Selection. Selection of peer group continues to be a highly contested and critical action. If a company’s chosen peer group is incorrect in the eyes of shareholders or their advisors, all ensuing calculations based on this selection are incorrect. Furthermore, selections that raise red flags to investors or proxy advisors may lead to negative say-on-pay votes come proxy season.

For the rest of the issues likely to be discussed by compensation committees in 2013 and related resources, download Compensation Committee Priorities for 2013.

Combatting Information Asymmetry

December 13th, 2012 | By

At any NACD education program, the discussion of directorship as a part-time profession with full-time risks is bound to arise. Yet following any corporate crisis, the question is always asked: “Where was the board?” Outside of the C-suite and boardroom, many perceive that directors should be able to foresee and avoid a crisis before it strikes.

This perception is misguided for several reasons. As a result of legislative and regulatory activity, since the 1960s corporate boards have become increasingly independent of management. Although legislation such as Sarbanes-Oxley and Dodd-Frank mandated independence at specific committees, this has extended to the entire board. Today, most publicly held company boards comprise a majority of independent directors, and often the CEO is the only executive director.[1]

The development of independent boards is not negative. In fact, it ensures that the board can effectively carry out its mission and responsibilities, and fairly hold management accountable to shareholders. However, there are a few consequences when directors are selected entirely for independence. Directorship, as noted above, is a part-time role. Inherently, directors rely on senior management for information necessary to carry out their oversight responsibilities. When outside directors are chosen for lack of ties to the corporation, they do not necessarily bring knowledge of the business or industry. Therefore, the benefit created by adding an independent director is largely tempered, as this outsider is reliant on the CEO for the information necessary to his or her oversight role.

To combat this risk of asymmetric information, NACD partnered with McGladrey to host four small gatherings of executives and directors in an effort to find ways of improving the communication and relationships between the board and C-suite. From these gatherings, the Bridging Effectiveness Gaps: A Candid Look at Board Practices white paper was created. As Bridging the Effectiveness Gaps notes, broadly, these gaps were found in the areas of strategy and risk, executive compensation, CEO succession planning, and board evaluations. By convening management and directors from different companies, the meetings fostered candid and open conversation regarding areas where communication tends to break down. However, where communication was generally the root of the problem, it was also the solution.

This report is available as a complimentary white paper on NACD’s Board Leaders’ Briefing Center.



[1] According to the 2012 Spencer Stuart U.S. Board Index.

Looking Down the Road: Governance Challenges of the Future

August 30th, 2012 | By

Reflecting on the second anniversary of the passing of the Dodd-Frank financial reform legislation, the business media were quick to notice regulatory agencies’ slow pace in putting the mandates into effect. For the past two years, directors have waited for the numerous rules on corporate governance as promulgated by the landmark legislation to become final.

Although regulators are not nearly finished with the resulting rules from Dodd-Frank, the role of the boardroom is to provide oversight while considering the challenges coming around the corner. Directors must monitor current corporate performance with an eye on the company’s long-term strategy.

NACD’s latest publication, Governance Challenges–2012 and Beyond, offers a forward-looking perspective on the priority topics dominating boardroom discussion. Governance Challenges–2012 and Beyond features current guidance and thought leadership from six of NACD’s Strategic Content Partners, on issues ranging from executive compensation and director liability to risk oversight and board effectiveness.

Here are just a few highlights:

  • Mastering CEO succession planning from Heidrick and Struggles, CEO succession is critical to the long-term success of any company. Today, full board engagement is necessary for proper management of the leadership pipeline. That means ongoing boardroom involvement to ensure that succession plans can be readily adapted to changing circumstances, with a particular eye toward both predictable and unpredictable leadership disruption. Among other practicable suggestions, the report suggests mock board meetings to identify CEO successors and strategies to ease the transition.
  • Do financial statements and disclosures tell the company’s whole story? According to KPMG’s Audit Committee Institute, this question has become more important than ever, given the call for greater transparency from regulators and investors. In disclosures, directors should go beyond what is required to address expectations and provide a clearer context for the decisions made. To assist in this process, the board may choose to enlist the management-level disclosure committee.
  • Understanding the drivers of the business. In this section, Marsh and McLennan Companies continues this discussion originally visited in 2010 by the Report of the NACD Blue Ribbon Commission on Performance Metrics. To effectively identify and mitigate risks, it is critical that directors understand what drives profit and growth throughout the organization. While directors often receive an abundance of data on performance, they are less likely to receive information on the paths that lead to profit or loss. As Marsh & McLennan suggests, the board needs information on the trajectory of the enterprise if they are to serve as a strategic asset.

Legislators, regulators and shareholders have had greater influence on the boardroom than ever before. With insights and practical guidance from the nation’s leading boardroom experts, Governance Challenges–2012 and Beyond is an essential resource for directors who understand the need to stay ahead of the curve.