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.

NACD Introduces New Director Credential and Recognizes Its First Class of Board Leadership Fellows

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In today’s complex business world, there’s a growing need for well-rounded directors who stay informed on emerging issues and leading practices. Unlike doctors and lawyers, directors do not have a formal certification program. They must find resources, mentors and peers on their own to help them stay up to speed.

The need for this kind of peer-to-peer director education led the National Association of Corporate Directors to create a specialized course of study, the NACD Board Leadership Program. NACD’s new director credential enables directors to not only demonstrate their dedication and commitment to boardroom excellence, but also to showcase the highest standards of director professionalism and anticipate the unknown by learning from experienced, world-class board leaders.

To become an NACD Board Leadership Fellow, participants must be experienced company directors, complete The Master Class and then complete at least 10 more credits of NACD education within 12 months. Participants are required to take a number of formal, skill-specific learning electives to hone their committee skills, keep their knowledge of board function and purpose up-to-date, and prepare them to offer a 360-degree vision to shareowners, companies and their board colleagues.

After completion of the program, fellows must complete at least 10 credits of NACD director education every year to maintain their status as NACD Board Leadership Fellows.

The first 16 NACD Board Leadership Fellows were recognized at a dinner in New York City in May. Collectively, this elite group represents boards of more than 60 companies and provides a snapshot of the caliber of directors engaged in continuous learning with America’s premier membership organization for board members:

“As a director in today’s rapidly changing corporate environment, board leadership requires keeping current, fresh and, above all, relevant,” said Michael Pocalyko, one of the new NACD Board Leadership Fellows. “NACD events are among the only places where I can speak with my peers frankly, confidentially and unimpeded. By participating in the full range of NACD director education and becoming a Board Leadership Fellow, I get early intelligence on emerging issues—so my boards can engage these issues as opportunities instead of reacting to them as challenges. These advantages not only ground me as a director, but ultimately benefit the companies and the shareholders I serve.”

Directors who are interested in becoming an NACD Board Leadership Fellow can contact NACD’s registrar at 202-572-2088 or email Fellowships@NACDonline.org.

For information about the NACD Board Leadership Fellowship program, please visit http://www.nacdonline.org/Education/content.cfm?ItemNumber=3577&navItemNumber=3704.

NACD Insight and Analysis

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As noted in yesterday’s NACD Director’s Daily, the Boston Globe reported that the Federal Deposit Insurance Corporation (FDIC) issued final rules on recovering cash compensation from executives and directors of financial institutions that have been liquidated by the federal government. The Dodd-Frank Act empowered the FDIC to recover compensation when a current or former senior executive or director is “substantially responsible” for the failed condition of a covered financial company. The FDIC’s final rule clarifies that an executive or director would be considered “substantially responsible” if that person failed to act “with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances.” In other words, executives and directors stand to lose their compensation from the previous two years if they are shown to be negligent in the performance of their duties.

While this new FDIC rule only applies to banking institutions, other clawback provisions in the Dodd-Frank Act will affect all public companies. The Act directs the Securities and Exchange Commission (SEC) and national listing exchanges to require companies to recover incentive-based compensation from any current or former executive if the company is required to prepare an accounting restatement due to the material noncompliance with any financial reporting requirement under the securities laws. The specifics of the rule are yet to be developed; the SEC is scheduled to release a proposed rule near the end of 2011 with final adoption in early 2012.

Both clawback provisions set a fairly low bar to recoup compensation. The FDIC will recover compensation in cases of negligence. In banking institutions on the verge of collapse, it may be a heavy burden for an executive or director to prove lack of a breach of a fiduciary obligation and exercised “prudent” business judgment. The SEC and national listing exchanges will recover compensation in the event of noncompliance with “any financial reporting requirement.” This seemingly provides many opportunities to clawback incentive compensation from an executive. Final rules from the SEC will shed more light on the practical implications of the law.

Clawbacks may have more lasting effects than simply revoking an executive’s pay. Therefore, boards must monitor the corporation’s well being and closely align executive pay with performance.