Breakthrough Report on Executive Pay Launches New WomenCorporateDirectors Thought Leadership Council
Inaugural report chaired by Pearl Meyer; challenges directors to act with courage and candor around “lightning rod” issues
NEW YORK—May 6, 2014—Representing a new level in critical examination of key boardroom issues, WomenCorporateDirectors (WCD) has formed the WCD Thought Leadership Council (TLC) – a commission of corporate board directors and advisors which issued its inaugural report today. The TLC report, “Going Beyond Best Practices: The Role of the Board in Effectively Motivating and Rewarding Executives,” tackles one of the most visible and talked-about boardroom agenda items – executive pay – exploring what’s working and what isn’t in executive compensation strategy.
“We are launching our Thought Leadership Council with one of the most complicated and highly-charged issues for Boards today, and our work with Pearl Meyer & Partners has enabled us to uncover the best real-world thinking about executive compensation,” said Susan Stautberg, CEO and co-founder of WCD. “Realizing that a path without challenges and obstacles probably doesn’t lead anywhere, WCD’s Thought Leadership Council, brilliantly led by Pearl Meyer & Partners, has candidly shared the challenges Boards face in setting compensation strategy and the steps needed to better link pay with business objectives.
“The TLC followed Noah’s rule: no prizes for predicting rain – only for building arks,” said Ms. Stautberg. “The report provides both the vision and strategic steps to improve corporate governance.” Next week, WCD will hold its annual Global Institute in New York, where 250 directors and business leaders will convene to discuss a number of board issues; the program will include a panel on executive compensation practices. Each year, the TLC will explore a pressing boardroom topic – pulling insights and recommendations from leading directors and subject-matter experts globally – and develop an actionable report for Boards to use in their decision-making.
David Swinford, president and CEO of Pearl Meyer & Partners, commented, “Most companies actually get compensation strategy right, but doing so requires much more of Boards today than ever before. The complexity and scrutiny involved are unprecedented. And while Boards might be doing the right things, they are still challenged by how to communicate their practices effectively to multiple stakeholders, who are demanding much more transparency throughout the process.”
Highlights from 2014 WCD Thought Leadership Council Report
Boards face numerous challenges and distractions when setting compensation strategy, the report argues – from the outsized influence of external groups (such as proxy advisory firms, large investors and the government) to the weighting of short-term stock gains over long-term strategy. In their 40-page report, the 23 Thought Leadership Commissioners offer Compensation Committees these recommendations to improve governance and increase public confidence in their decisions:
1. What Boards are up against: Reluctance to use their discretion. One of the most controversial issues for Boards is the decision of whether to use the power of their discretion to overrule a compensation formula. Boards fear that this will create an optics issue with proxy advisory firms and shareholders.
TLC recommends: Use situational judgment. “Discretion can be the linchpin that connects the compensation program to the business and management team, leading to better alignment of pay and performance,” says the report.
2. What Boards are up against: Being handcuffed by data. The decision to set pay solely through the use of competitive market data ignores vitally important considerations such as individual performance (especially during unusual company circumstances) and the variances in actual job duties from company to company even for nominally the same title.
TLC recommends: Target the position, pay the person. “Data should serve as only one factor in making decisions,” says the report. Multiple other variables and individual circumstances must go into the mix.
3. What Boards are up against: Skepticism over need for retention pay. Shareholders and other stakeholders tend to be skeptical of pay for retention, especially when the economy isn’t doing well.
TLC recommends: Retention is worth paying for. “Unwanted turnover in the senior ranks has a cost to the organization.” This includes hard costs such as executive search fees and replacement costs for “trickle-down turnover” in reporting positions, and soft costs such as the organizational distraction that happens during a top-level change.” Retention of a strong management team is as legitimate an objective for compensation design as performance.
4. What Boards are up against: Short-termism. Companies often experience short-term investors clamoring for quarterly returns, while investors claim the short tenure of executives leads to a focus on maximizing immediate results. But incentive programs that have a particularly long time horizon (e.g., 10-year stock options) may not truly incentivize, either.
TLC recommends: Value creation is a marathon, not a sprint. Boards must tailor their incentive time-frames to make sure they are rewarding against their business plans. While a company in a start-up mode may want to weight executive compensation toward long-term equity to focus executives on a sale or IPO, a company in a turnaround mode may want to emphasize the achievement of shorter-term goals that are necessary to corporate survival.
5. What Boards are up against: Opposing pulls on the issue of severance. Severance provisions have been greatly reduced and are more shareholder-friendly than ever, but the expectations of executives are still high, and market norms are hard to ignore. At the same time, high severance payments routinely generate negative press and shareholder anger.
TLC recommends: Stop paying for failure. “It is naïve to believe that severance contracts will disappear completely,” says the report. However, the report outlines several possible strategies for reining in potential payouts under the most extreme circumstances, such as providing an offset for signing bonuses in the case of short-lived executives.
High Stakes for Boards
“The pressures Compensation Committees face are significant, often unpredictable, and very real,” explains the TLC report. Unhappiness on the part of activist and institutional investors may “lead to negative votes from a governance group – even when portfolio managers are pleased with a company’s strategy and performance.” “In this environment, what is required more than anything else for Boards is courage,” says Alison Winter, a director at Nordstrom and a co-founder of WCD. “Directors need the courage to stand behind tough, well-reasoned decisions around pay, and not reflexively bend to outside pressures.”
For more information about the WCD Thought Leadership Council or for a copy of the full report, please contact Suzanne Oaks Brownstein or Trang Mar of Temin and Company at 212-588-8788 or firstname.lastname@example.org.
About WomenCorporateDirectors (WCD)
WomenCorporateDirectors (WCD) is the only global membership organization and community of women corporate directors, comprised of more than 3,000 members serving on over 5,000 boards in 62 chapters around the world, with many more slated in the next two quarters. The aggregate market capitalization of public companies on whose boards WCD members serve is $8 trillion – if WCD were a country, its economy would be the world’s third largest, behind only the U.S. and China. In addition, WCD members serve on numerous boards of large private companies globally.
WCD membership provides a unique platform for learning from the intellectual capital of accomplished women from around the world, and WCD’s mission is to increase courage, candor, inclusion, and cohesion in the boardroom. KPMG is a Global Partner of WCD. Spencer Stuart is a Premier Partner, and WCD Strategic Partners include Marriott International and Pearl Meyer & Partners; WCD Alliance Partners include International Finance Corporation (IFC), JPMorgan Chase, and Northern Trust.
WCD has 62 global chapters, located in Arizona, Atlanta, Beijing, Boston, Charlotte, Chicago, Chile, Cleveland, Colombia, Columbus, Dallas/Fort Worth, Delhi, Denmark, Finland, France, Germany, Gulf Cooperation Council, Hanoi, Ho Chi Minh City, Hong Kong, Houston, Iceland, Indonesia, Israel, Japan, Kansas City, London, Los Angeles/Orange County, Malaysia, Melbourne, Mexico, Milan, Minnesota, Morocco, Mumbai, Netherlands, New York, New Zealand, Nigeria, Northern California, North Florida/South Georgia, Panama, Peru, Philadelphia, Philippines, Quebec, Rio de Janeiro, Rome, San Diego, Sao Paulo, Seattle, Shanghai, Singapore, South Africa, South Florida, Switzerland, Sydney, Tennessee, Toronto, Turkey, Washington, D.C, and Western Canada. Upcoming chapters include Argentina, Brisbane, Brussels, Denver, Egypt, Guatemala, Hawaii, Kenya, New Mexico, Poland, Puerto Rico, South Korea, Spain, Tampa, and Thailand. For more information, visit www.womencorporatedirectors.com.