Our Thoughts - CAPflash

“Excessive risk taking” and “incentive compensation” entered day-to-day parlance with the onset of the financial crisis in 2008. “Excessive executive compensation” had been grabbing headlines since the mid ‘90s, but there was little focus on how a company’s incentive compensation programs might influence enterprise risk taking. Few made the connection that an organization’s appetite for risk could have a dramatic (and potentially adverse) impact on how that organization structured its incentive programs. [ More | Download as PDF ]

2009 was challenging as companies struggled to overcome the difficult economic environment. Now compensation committees are assessing company performance in 2009, making decisions on annual incentive payouts, and determining grants of long-term incentives. Committees are considering how to balance executive rewards with the interests of shareholders, not to mention the governance practices supported by shareholder advocacy groups such as RiskMetrics Group (see page exhibit for RMG’s list of problematic pay practices). [ More | Download as PDF ]

In September, the Conference Board Task Force on Executive Compensation issued a report that sets forth guiding principles for executive compensation.  The Conference Board’s Task Force convened in March, 2009, during the worst days of the economic crisis.  Members were responding to the erosion of public confidence in the business community, sparked by economic crisis and the uproar over excessive and inappropriate incentives.  The Conference Board Task Force’s work is an example of how the crisis in financial services has spilled over into other sectors and now impacts the entire business community. [ More | Download as PDF ]

The initiatives discussed above in "Independence Standards for Compensation Consultants " will likely result in a higher standard of independence for compensation consultants.  None of the proposals, however, attempts to define these standards, leaving that job to the SEC. Compensation Advisory Partners researched current disclosure practices in Fortune 25 companies to understand how companies are addressing this issue in the absence of regulatory guidance. [ More | Download as PDF ]

To enhance corporate governance standards, legislators and regulators are calling for Compensation Committees to use independent consultants as advisers on executive compensation matters.  Since June, 2009, two bills addressing consultant independence have been proposed in the House.  In addition, the Treasury has proposed a bill that would require the SEC to set standards for independence.  Finally, the SEC proposed rules requiring enhanced disclosure, including compensation consultant fee disclosure. [ More | Download as PDF ]