Assigning a Value: The Role of the Compensation Committee

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When a board’s compensation committee decides on executive pay, directors can be between a rock and a hard place. Activist shareholders may vote against generous executive compensation packages they feel are not merited, yet attractive pay can be a tool to attract needed talent in an increasingly competitive and global marketplace.

As debates continue on the proper levels of compensation and its regulation, directors need to educate themselves on the best practices and current trends to create packages that are acceptable to both shareholders and executives, while advancing the goals of the company.

We see headlines daily about executive and director compensation. The recent decision of the board of Indian company Tata Consultancy Services’ to increase their CEO’s annual compensation by 67 percent, for example, recently earned a Wall Street Journal headline.

Meanwhile, statewide media are busy tracking any trends and developments they find on compensation issues, usually in a negative light. Recently, the Arizona Republic reported that CEO compensation in the state rose 48 percent in 2010. Iowa’s Des Moines Register also reports that executive pay in Iowa is on the rise. A recent article in the Atlanta Journal-Constitution details the compensation packages for the chief executives at the top 25 public companies in Georgia.

In addition to focused media attention, there are new regulations around compensation. In March of this year, the Securities and Exchange Commission proposed a rule that would require certain financial institutions to disclose the structure of their incentive-based compensation practices. The rule would also prohibit the same institutions from issuing compensation packages that encourage inappropriate risk taking.

How can directors make the best decisions about compensation packages—both for executives and directors? One of the best ways is by looking at best practices and talking to other experienced directors and expert advisors about not only the right mix of equity and cash, but also performance metrics and how to communicate with shareholders about pay packages.

This year’s annual NACD Board Leadership Conference in Washington, DC from October 2-4, will feature a Compensation Committee Forum led by compensation experts from Pearl Meyer & Partners to provide in depth guidance for compensation committees. Attendees will discuss the latest challenges and strategies around executive compensation packages. Additionally, those in attendance will gain expert advice on communication strategies so that company talent is retained and shareholders and C-suites are satisfied.

To register for the NACD Board Leadership Conference, go to nacdonline.org/conference. Early-bird discounts are in effect until July 31. Additionally, directors and executives from NASDAQ-listed companies will save 10 percent on the registration price by entering coupon code OMXSAVE.  To register or ask questions in person, please email registration@NACDonline.org or call 202-572-2088.

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