The Advisors' Blog

– Lynn Jokela

Compensation of an executive chairperson isn’t a frequent discussion point when reading commentary about board structure.  The debate about board leadership structure often centers on whether a combined chair/CEO role or an independent chair or lead independent director structure is appropriate – with the answer differing based on a company’s particular circumstances.  A KPMG memo reviews S&P 500 executive chair board leadership structures and looks at scope of responsibilities, investor perspectives and the need for disclosure and compensation considerations.

Some may question the degree to which executive chair pay differs from CEO pay and the answer likely depends on a company’s particular circumstances.  The memo outlines three common compensation scenarios:

– When the executive chair is the former CEO who’s transitioning to retirement, the executive chair commonly receives a base salary, consultancy fee and/or an annual bonus

– In situations where the executive chair is a founder with significant stock ownership, it’s not uncommon for the executive chair to have no base salary and/or incentives

– When the executive chair functions as a co-CEO, the executive chair and CEO pay packages are comparable – the article says former CEOs who’ve been in an executive chair role for less than 2 years, the ratio of median CEO pay to median executive chair pay is 0.7:1

The article quotes Paul Hodgson, senior advisor of ESGauge, who cautions that investors may expect to see a reduction in pay when the CEO becomes executive chair, not only because the executive chair is likely less involved than the CEO but also because the former CEO is continuing to receive compensation in the form of vested stock awards from their time as CEO.  In terms of proxy statement disclosure about executive chair pay, companies will need to take special care to explain the rationale behind decisions to help shareholders understand the intentions and choices about how the pay was structured.