The Conference Board has published a list of recommendations for executive compensation practices, saying public companies should take immediate action to restore credibility and trust in their pay practices.The subtext of the recommendations is that if companies fail to act now, the federal government could mandate more burdensome changes through regulatory and legislative action.
“A ‘one size fits all' or ‘rules-based' approach to executive compensation is not workable,” the board's Task Force on Executive Compensation said in a report. “Compensation programs should be sufficiently flexible to accommodate the disparate industries, strategies, business models, and stages of development represented in the more than 12,000 U.S. public companies.”
The board's Task Force developed the following 5 guiding principles for executive compensation:
- Compensation programs should be designed to drive a company's business strategy and objectives and create shareholder value, consistent with an acceptable risk profile and through legal and ethical means. To that end, a significant portion of pay should be incentive compensation, with payouts demonstrably tied to performance and paid only when performance can be reasonably assessed.
- Total compensation should be attractive to executives, affordable for the company, proportional to the executive's contribution, and fair to shareholders and employees, while providing payouts that are clearly aligned with actual performance.
- Companies should avoid controversial pay practices, unless special justification is present. Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance--such as excessive golden parachutes, overly generous severance arrangements, gross-ups of parachute payments or perquisites, and golden coffins
- Compensation committees have a critical role in restoring trust in the executive compensation setting process and should demonstrate credible oversight of executive compensation.To effectively fulfill this role, compensation committees should be independent, experienced, and knowledgeable about the company's business.
- Compensation programs should be transparent, understandable, and effectively communicated to shareholders. When questions arise, boards and shareholders should have meaningful dialogue about executive compensation.
"Real--and perceived --abuses in executive compensation have contributed to this loss of trust, and the report provides a practical set of guidelines that, if appropriately implemented, can make significant progress in restoring credibility in our corporations,” said Robert E. Denham and Rajiv L. Gupta, co-chairs of the board's task force. “We believe that a rules-based, 'check the box' approach cannot substitute for thoughtful board action discussed with shareholders."
A group of public companies have already pledged to implement the task force's recommendations.
The full report of The Conference Board Task Force on Executive Compensation can be found at: http://www.conference-board.org/ectf