The Family Business Board Role in Executive Compensation Planning: An Illustrative Case

In brief: Originally appearing in The Family Business Board Volume 2: Governance for Agility and Growth, this case study shows how a family business board can use a committee of independent directors and an outside consultant to resolve a family conflict over executive compensation.

This resource can help your board to

• Set executive compensation at a family business

• Resolve conflicts between family members at a family business

• Hire independent consultants to develop an executive compensation philosophy

Most relevant audiences: directors on family business boards

This case shows how one board used a committee of independent directors and a consultant to resolve family conflict over executive compensation.

Situation

• Family-owned $300 million manufacturing company

• Two family members (brothers) were senior executives (CEO and COO) of the company and also board members.

• Two family members (brothers—and cousins of the two senior executives) were on the board of Directors but not actively involved in management of the company.

• Several other family members (cousins) held minority interests in the company but did not sit on the board.

The focus on the board’s compensation committee has never been sharper. The components of compensation plans and the link between compensation and company performance are under intense scrutiny from shareholders, employees, policymakers, the media, and other stakeholders. The Report of the NACD Blue Ribbon Commission on the Compensation Committee revisits NACD’s 2003 Report of the NACD Blue Ribbon Commission on Executive Compensation to highlight the new environment in which compensation committees—and, more broadly, boards—are now operating. It recommends that the compensation committee and board work together to establish an executive compensation philosophy that supports the company in creating long-term, sustainable value.

The report includes ten specific recommendations for compensation committees to consider when evaluating their compensation philosophies. It also provides practical tools, such as sample compensation committee charters, a compensation committee assessment, and guidance on executive employment contracts.