The NACD panel on executive compensation set forth its perceptions of tasks for the public compensation committee for 2017. Set forth below are some significant take-aways:
The first job of the compensation committee is to figure out how to motivate executives to do the right thing for the company. Don’t get distracted by changing policies of the proxy advisory community (see the November 11th post to this site concerning changes in ISS parameters for measuring executive compensation).
What is the best way for the compensation committee to understand what motivates the CEO and executive team? The committee should stay very close to the CEO and include the CEO in its meetings. A suggestion to make sure that the committee also has its own time to separately consider compensation: an executive session held both before and after each committee meeting.
Executive compensation may be almost “out of control.” The audience was asked, “how many people here are in a company where the compensation committee target is to pay below the industry average?” There is a constant natural pressure, given human nature, to inflate CEO compensation. Coupled with research indicating that virtually every CEO views himself/herself as materially under-compensated, there is a problem which compensation committees may not be able to contain.
Although surveys may be valuable for lower echelon employees, compensation surveys for the C-suite should be looked at with great suspicion. Who did not participate? How accurate is the data? Most compensation committees do try to gauge compensation of chief executives of comparable companies.
There is growing pressure from the proxy regulatory companies on selecting the “correct” peer group for your company, as selecting an “aspirational” peer group will tend to drive up compensation.
See the following post re pay disparity.