Executive compensation is the most critical and visible aspect of a company’s governance. Directors’ decisions about CEO pay speak volumes about the board’s accountability to shareowners. Too often, the story they tell is a dismaying one: Overly generous pay packages for under-performing CEOs.
While executive compensation has been the top governance concern of Council members for years, the financial crisis has revealed abuses that make getting pay right all the more urgent. Poorly structured pay packages encouraged the get-rich-quick mentality and overly risky behavior that helped bring the capital markets to their knees.
The Council applauded the Obama administration’s restrictions on executive compensation at financial institutions that receive extraordinary dollops of federal aid under the Troubled Assets Relief Program (TARP). The government-mandated salary cap, bars on bonuses and severance and holding requirements for equity-based pay were reasonable curbs for companies receiving taxpayer funds. Taxpayers should not have to foot the bill for excessive pay packages.
But lavish salaries, perks and severance payments at poorly performing companies are never appropriate. The Council has long advocated that executive compensation programs should be transparent, create value for the long-term, advance the company’s strategic goals and tied tightly to corporate performance. For example, Council guidelines state that:
- Companies should provide shareowners an annual, advisory vote on the compensation of senior executives. A non-binding “say on pay” vote would encourage the board’s compensation committee to be more careful about doling out unduly rich rewards that promote excessive risk-taking. It also would be a quick and effective way for a board to gauge whether shareowners think the company’s compensation practices are in their best interests.
- Executives who leave a company as a result of poor performance—whether they are terminated, resign under pressure or the board fails to renew their contract—should not be entitled to severance payments. The Council regards such sendoffs as “pay for failure.”
- Companies should have clawback provisions for recapturing unearned bonus and incentive payments to senior executives. Strong clawback policies may discourage executives from taking questionable actions that temporarily lift share prices but ultimately result in financial restatements.
- Individual compensation advisers and their firms should be independent of the client company, its executives and directors and should report solely to the compensation committee. Consultants who count on lucrative actuarial or employee benefits contracts from senior management may be inclined to recommend overly-generous pay packages for those executives.
- Companies should grant stock options or other equity awards at the same time each year. Companies should not coordinate stock award grants with the release of material non-public information and stock options should never be backdated.
To view the Council's corporate governance policies on executive compensation in full, please visit the Council Policies page. Council best practices for executive compensation are Section 5 of the Corporate Governance Policies.
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