Practice Guide to Board Compensation Committees By: Craig Freese

Overview
1
Fundamentals for Membership

2
3 4 5

Common Decisions of all Comp Committees

Non-Profit Concepts

For Profit Compensation Consultants

For Profit Agency Requirements

Decision

Emerging Issues

Fundamentals for Membership

Neutrality

Attendance

Professional Background

No current / former relationship with executive team

o Includes philanthropic giving o Business relations o Personal friendship

Meet in person at least annually Presence Quarterly is most typical

Skepticism Ask difficult questions Cannot be intimidated by CEO

Decisions in For & Not for Profit

Organizational Salaries & Policy

Know the salary ranges for the staff Know policies for setting salaries

Be sure ranges reflect the education, experience, and responsibility required in the positions. Inadequate compensation leads to high turnover

What incentives are used? What is the total value of non-salary options?

For & Non Profit - Evaluate Performance

Review the committees performance annually
Did the organization meet the results the board set at the beginning of the year? If not, is current executive compensation still appropriate? Could it be the incentives are not adequate? If yes, should performance be rewarded in this years recommendations? Utilize self-assessment tools, did committee satisfy its own goals and objectives?

Organizational Results

Annual Analysis
Salary
Equity Perks

Non-profit Compensation Concepts

It is required to disclose officers, directors and five highest paid employees on IRS form 990
(If annual revenues exceed $25,000)

Non-profit board members can be held personally liable for compensation that is considered to be excessive. Members should be comfortable defending compensation decisions publicly.
Assume your name will appear in a front-page story in the local newspaper about nonprofit executive compensation

Non-profit Compensation Concepts Continued

Keep in mind agency theory does not apply to a non-profit
Executives do not own any part of the organization, they do not have same level of association as a for profit executive

Organizational size is a good predictor for differences in salary

A suggestion is for every 10% increase in revenue, executive salaries increase 1%

Practices for Using a Compensation Consultant

Define objectives for the year
Is training needed for the committee members on new compensation legislation or regulations? Is committee uncomfortable with high pay and stock, when stock remains flat or loses value?

Create a statement of work for compensation consultants at beginning of each year Provide the compensation committees goals and objectives to the consultant so their recommendations are well aligned

Practices for Using a Compensation Consultant Continued

Ask for a high-level review of the in-use pay program Annual performance evaluation should include the compensation consultants as well Committee should approve of any other work requested by management of the consultants
Minimize the risk that consultants are appeasing senior management in salary recommendations, in order to obtain other lucrative consulting engagements

Compensation Consulting Agencies

Below list are most common consulting agencies in U.S. and U.K. Most large public traded companies hire one of the major agencies

Source: Compensation Consultants and Executive Pay by: Conyon, Peck, and Sadler

Agency Requirements
Disclose comp. of CEO, CFO, & 3 others File the amounts in Annual-proxy statement Include chart w/ amount and type of benefit Committee report included with 10-k Committee charter required Annual goals & performance review of committee

SEC

NYSE

At least 3 members on committee 2 yr term limit for insider members CEO cannot be present during voting

Nasdaq

IRS

$1MM limit on tax deductibility 2 or more members on committee

Emerging Issues For Profit Compensation

Committees should get out ahead of these recurring proposed legislations

Say-on-Pay

Non-binding vote on executive pay by shareholders

Independence

Bolster the current SEC regulations Extend independence to compensation consultants, & anyone hired by committee

Prepared for Upcoming Change

Clawbacks

Now: recoup CEO pay for misconduct Future: Include all executive officers, and expand to more than just misconduct

Bibliography
http://www.sec.gov/answers/execomp.htm, accessed on 5/2/10 http://www.kl.com/files/tbl_s48News/PDFUpload307/10542/Compensa tionCommitteeStructure.pdf , accessed on 5/1/10 http://portland.bizjournals.com/charlotte/stories/1998/02/09/editorial3.h tml#ixzz0mEmyZkKf , accessed on 5/1/10 https://secure.nacdonline.org/Source/Meetings/faq-details.cfm?faq=3 , accessed on 5/2/10
http://www.midwestacademy.org/proceedings/2007/papers/mam07p5.pdf,

accessed on 5/4/10 Conyon, Martin J., Simon I. Peck, and Graham V. Sadler. "Compensation Consultants and Executive Pay: Evidence from the United States and the United Kingdom." Academy of Management Perspectives 23.1 (2009): 43-55. Business Source Complete. EBSCO. Web. 1 May 2010.