While the compensation consultant is not bound by an official code of professional conduct like an accountant or lawyer, a high standard of professionalism demands that consultants serve as more than a source of black-and-white answers or even a voice independent of management.

Unlike the oversight provided by the audit committee, most decisions made by the compensation committee are not right nor wrong – but primarily matters of judgment and degree. When appropriate, the consultant must also function as a brake on the decision-making process.

Committees are well served by a consultant who will take the initiative to say to members, “There are some important issues here that you’re overlooking and should be considered before you make a decision.” It is the consultant’s duty to try to persuade members to factor in new information when needed, even if doing so may end up increasing costs or result in a delay, but to do so without being rigid or demanding.

For example, if management and the committee are overly focused on how increased earnings should be reflected in pay levels, the consultant may need to point out that the organization’s return on capital employed ranks at the bottom of its industry. So yes, the compensation consultant can serve as a “reality check” for its client.

– Dave Swinford

According to a new study by our firm of Fortune Magazine’s Top 300 publicly-traded companies, a majority of 2007 proxy disclosures on annual and long-term incentive plans were inconsistent and incomplete when disclosing incentive performance metrics.

Surprisingly, many top U.S. publicly traded companies failed to disclose or explain their incentive performance metrics. Our study of 2007 proxies of nearly 300 companies revealed only 16% (46) of the companies provided complete metric and payout information for short-term incentive plans (STIP), while 19% did not provide any STIP metric values. 65% (190) of the companies had long-term incentive plans (LTIP), and of those, only 46% (88) included a reasonably complete set of metric values and corresponding payout percentages.

– TSR and EPS were the two most commonly used long-term incentive measures
– Income/profit measures and EPS were the most commonly used short-term incentive measures
– Most companies with long-term incentive plans had either one (60%) or two (32%) performance measures
– Short-term incentive plans usually included multiple performance measures
Relative performance measures to their peer groups were rarely found in short-term incentive plans (8%)
– 43% of companies with a long-term incentive plan used a relative measure
– 50% of long-term incentive plans with a relative performance measure used a total shareholder return measure with the target set at the 50th percentile of a peer group
– In all, two-thirds of companies with relative performance measures used total shareholder return
– For companies using the 50th percentile as target for a relative performance measure, over half (57%) set threshold performance at the 25th percentile
– For short- and long-term incentive plans, threshold payouts were frequently set at 0%, 25% or 50% percentile of target
– Maximum payouts were usually capped at 150% or 200% of target bonus

– Jack Moran