Compensation Practices and Fair Director Pay - NACD BoardVision
Certain compensation practices can have a potentially damaging effect on a company’s reputation, which makes determining what constitutes fair director pay no easy task. Daniel Laddin, founding partner of Compensation Advisory Partners, and Martin M. Coyne, II, Chairman and CEO of NACD’s New Jersey Chapter, offer their insights on today’s most critical compensation issues.
Chris Clark: Boards are sitting ducks when it comes to Director pay lawsuits. I'm Chris Clark and this is Board Vision. I'm joined today by Marty Coyne, Experienced Director and the President of our New Jersey Chapter, and Dan Laddin from Compensation Advisory Partners. Welcome gentlemen.
Marty Coyne: Thank you.
Dan Laddin: Yes, thanks Chris.
Chris Clark: I want to start out in this way in talking about Director Compensation. This is an ongoing debate and do you think that the Nom/Gov Committee or the Compensation Committee should be responsible? I'll start with Dan.
Dan Laddin: Chris if we look at the market, it's pretty mixed; a little bit leaning towards Compensation Committee versus Nom/Gov. At the end of the day I think it really comes down to the principles you use for compensation of your Directors overall. One you may want to make sure you have an objective committee which obviously you would on either. You also want to make sure that compensation for Directors aligns with the philosophy of the Directors and so in that sense, maybe the Compensation Committee is a little closer to that. The flip side is the Nom/Gov Committee is a little closer to the recruiting and bringing in Directors from a diverse group of individuals so having familiarity with the compensation program is always helpful and involvement in that process. At the end of the day, there's a lot of cross-pollination usually across those two committees so either really works fairly well. We do see a little bit leaning towards the Comp Committee though.
Chris Clark: Thanks Dan. Marty, you've been on all types of boards; what is your take?
Marty Coyne: Yeah, I prefer the Compensation Committee...
Chris Clark: Ok.
Marty Coyne: But mainly because the Comp Committee is much more familiar dealing with the compensation consultant and much more familiar with the peer group. And so when you look at all of the data inputs, the Comp Committee understands kind of the source, where the weaknesses are, and the strengths. I think one of the key things though is the full board approves Director compensation. So regardless of which committee brings it forth and brings forth the recommendation, the full board has to vet it and approve it.
Chris Clark: In many cases for leading governance practices, company size does matter. They are affected by different policies and regulations. The boards are occasionally very different; occasionally they are not. But when it comes to Director Compensation, it is a hot button and it certainly affects that board's reputation, the company's reputation, but most importantly, that individual Director's reputation. So Dan again, let me start with you; do you feel that there is a company size factor here when it comes to compensation and reputation?
Dan Laddin: I think reputation risk exists regardless of the size of the company and that's somewhat borne out by the compensation data we would take a look at. If you look at it the smaller side of companies, let's say a half billion to one and a half billion dollars, pays in the $200,000-$210,000 range. If you go 10X of revenue companies to $15 billion plus companies, you only see that increase to about $260,000 which to us says there's a basic responsibility of Directors that doesn't really change regardless of company size and that's really reflected in the compensation data.
Chris Clark: Marty?
Marty Coyne: There is a scale that the bigger the company the more the Directors are paid. The exposure potential for larger company Directors is far greater than the smaller company Directors because they just make better news than the smaller companies. There is a point though; it's almost like a minimum size where when you hit it, where the Director workload is pretty much the same regardless of the size of the company. And to attract and retain good Directors, you've got to pay a fair compensation for those individuals.
Chris Clark: Many companies have Director compensation limits. My question would be why and what is a fair compensation limit?
Dan Laddin: Sure. So this concept of the limits really is coming to play in the last few years as there were a few lawsuits against companies that said Directors are inherently conflicted when they are setting their own pay and in those specific companies the view was that they set it well above any credible norm. Given that inherent conflict of setting their own compensation, the Delaware court said that no longer stands in this case. However, the attorneys came in and said, "We can basically put in a shareholder approve limit on Director's compensation," which then gets us back within this business judgment role. Yes?
Chris Clark: For the shareholder approved limit, what's the status today?
Dan Laddin: We're seeing most companies as they go back to shareholders to renew their plans in the normal course that that's when they go back and put in a limit as well; when they go back for new equity plans or just general approval from shareholders, that's when it's happening. I wouldn't say there's a mad rush to do it, but it is normal course.
Chris Clark: Well Marty, what has been your experience? You've been on public boards; you've been on private boards...
Marty Coyne: Yeah. I think you know having a limit is very, very valid and it's necessary. I don't see any resistance to putting limits on Director's compensation. If I were a shareholder I would expect my compensation plan that I'm approving to have limitations for Director compensation.
Chris Clark: When we look at the umbrella of business judgment and compensation, I've got to ask you is the litigation environment lukewarm or is it red hot?
Dan Laddin: I would say it's lukewarm at this point. The lawsuits have really been at the extremes where Director compensation was well above the norm.
Chris Clark: Marty?
Marty Coyne: I think Chris just following up on what Dan said, there's been a quantum step forward on the Nom/Gov side in choosing the right Directors sitting around the table. I think the next step is going to be how do you compensate your Directors? What is your philosophy to attract and retain good Directors? How does Director compensation correlate with company performance? Is there potential pay at risk? I think there will be some probably comparisons of Director comp, the TSR. And if a company is not performing well, I think Directors are going to have to answer a lot of tough questions about you know why are we paying you when the company performance is so poor? But I don't see any dramatic changes in the next couple of years.
Chris Clark: Well that's closer to being red hot than lukewarm [laughter] so I really thank you both of you today, very useful commentary. I appreciate your time today.
Marty Coyne: Thanks Chris.
Dan Laddin: Thank you.
Chris Clark: If you'd like more information on this very same subject, I urge you to go to the NACD site; NACDonline.org or to the Compensation Advisory Partner's site. I'm Chris Clark and this is Board Vision.
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