The need for appropriate corporate governance practices and an objective approach to managing pay programs is greater than ever. Most companies in the U.S. already possess the attributes necessary for successful compensation governance. There is no single correct approach. Yet all companies have some common compensation governance needs, including the need to incorporate and consistently apply pay-for-performance criteria, use a disciplined process and to conduct analytical reviews assess pay/performance outcomes.
1. It is critical for compensation committees to establish a solid corporate governance foundation for designing, implementing and administering executive compensation programs. Ultimately, however, a committee’s success will not be assessed by this foundation, but by the soundness of compensation programs built upon it. This structural integrity is measured by outcomes: the degree of alignment between total realizable executive pay*and corporate financial and shareholder returns on the one hand and the motivation of the executive team on the other.
2. Since each company’s circumstances are unique, the governance process used may vary. Yet a focus on achieving results through outcomes-based analysis, and clear and concise communications to shareholders, should be universal. We present six key steps for success:
1) Assure that fundamental compensation governance elements are in place.
2) Follow a well-defined process to focus discussion and decision-making at each committee meeting.
3) Gather and analyze facts.
4) Consider relevant perspectives.
5) Make pay decisions.
6) Fully and clearly disclose pay program details.
3. Compensation committees should be aware of external views on what constitutes good governance. Yet what ultimately matters is that their actions are appropriate for their companies’ business strategies and talent needs. Executive compensation governance is about substance, not form. This substance is weighed by outcomes in the relationship between pay and performance and in the motivation and retention of highly qualified executive talent.
*Total realizable pay equals the sum of base salary, annual and long-term incentives granted during the examined period. Values of outstanding incentive awards at the end of the examined period are based on target and for equity awards, the then current stock price.
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