This year’s FIFA World Cup highlights the importance of using defense to create a top-notch offense. The same can be said for Boards of Directors. The board’s best offense is a good defense, and good defense starts with a great fundamental base. That base, in the world of compensation, is the Compensation Philosophy, and that philosophy needs to mirror the business strategy of the company.
Two critical roles of the board of directors are establishing CEO succession plans and establishing executive compensation plans that both attract and retain executive talent and deliver the outcomes that align with the goals set by the board. While the board may act in good faith, there are times when there is shareholder push back. How can the leading boards of directors develop executive compensation plans that are shareholder friendly? Let’s take a deeper look at how executive compensation should be established in order to better align executive pay with shareholder returns.
The data from CEO compensation research continues to illustrate that the top paid CEOs have many layers of executive compensation. When a board’s Compensation Committee finally agrees on how executive compensation is determined, it must ensure that it is market defensible and will pass the seemingly infinite views on “appropriate compensation”.
There are four steps a board should follow when determining executive compensation:
- Establish the compensation philosophy and peer group;
- Review current executive compensation against market practice;
- Assess the business impact before making final approvals;
- Report the process and compensation results to the executives and shareholders via the annual Proxy.