Talking Points II - What Compensation Committees Should Be Doing Now

Current State of Affairs (JFO)

• Compensation Committees are undergoing a dynamic change:
  • Shift in power from management and staff to Committee and advisors
    • --  Need to find right balance
  • New mood for conservatism, restraint and transparency
• Committees will likely focus more attention on the emerging issues and challenges described next

Ten Important Issues for Compensation Committees to Consider (FWC)

1. Is the executive program supported/respected internally?
2. Are internal equity considerations given equal weight to external competitiveness?
3. Is fairness to executives balanced with fairness to the company and shareholders?
4. Is the program administered consistently or opportunistically?
5. Does the Committee monitor top executives' total compensation?  Is total direct compensation reasonable given the Company's relative size and performance?
6. Does the Committee know what is owed to executive officers under various termination of employment and CIC scenarios?
7. Does the Committee know the total compensation implications of changing one element of pay?
8. Is the Committee receiving objective advice?  Are the pros and cons and potential risks, of new proposals presented fairly?
9. Are surveys used fairly to monitor pay competitiveness?
10. Does the program meet best practices and high standards for executive compensation practices and governance?

How Committee Should Negotiate CEO Pay (JFO)

• Select point person
• Get CEO input
• Present recommendations to Compensation Committee
• Agree upon term sheet
• Communicate proposed terms

Best Practices for CEO Compensation Agreements (JFO)

• Form of agreement controlled by Compensation Committee and its special advisor
• Evergreen, so as not to have to renegotiate periodically
• Freedom to give raises, etc., without minimum requirements
• Responsible and conservative severance protection
• Right to amend or terminate unilaterally upon due notice
• If board wants to terminate contract or amend in a disagreeable way, CEO may quit and receive reasonable severance, e.g., one year's salary and benefits, plus pro rata bonus and LTI as earned
  • If CEO does not quit, then employment is continued "at will"

Compensation Committee Concerns (FWC)

• Avoiding criticism/enhancing reputation
• High standards of care and due diligence
• Obtaining objective input
• Linking incentives to corporate strategy
• Assessing total compensation
• Avoiding surprises
• Keeping Board informed

What Committee Should be Asking From its Advisors (JFO)

• Independence; duty of loyalty
• Due diligence; duty of care
• Proactive advice on best practices
• Identification of potential pitfalls and red flags
• Independent recommendations on CEO pay
• Ways to improve total compensation transparency and executive compensation governance
• Objective advice but also value-based points of view

What Lawyers and Consultants Should Now be Doing (JFO)

• Be more than scribes for management
• Present the full disclosure approach to boards, rather than the minimal required disclosure approach (and real potential liability e.g., Tyson and future SEC enforcement actions)
• The obligation of counsel to bring to their boards important guidance that directors need to see first hand (not distilled into a short summary or screened out entirely)