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02 Oct. 2009 | Comments (0)

As most of corporate America awaits new executive compensation regulations in the aftermath of the financial crisis, a group of about 100 independent directors has started a grassroots movement to head off the regulators. Calling itself the Independent Directors Executive Compensation Project (IDEC), the directors recently held a meeting at the Kellogg School of Management at Northwestern University where they agreed on five key principles for determining executive compensation plans. They also agreed that “there are serious problems with executive compensation at publicly traded companies, independent directors should take a leadership role to do something about the problems and an ongoing effort should be undertaken to continuously define, research, develop and communicate principles and best practices.” “Whether or not a mechanism is needed, everyone’s [independent directors] are very clear that they don’t want government overseeing executive compensation,” Pastora San Juan Cafferty, a longtime independent director and IDEC leader, told me last week. “We want principles, not regulations.” Cafferty, who serves on the board of Waste Management Inc., Integrys Energy Group and Harris Financial, and Donald P. Delves, president of compensation consultant The Delves Group, have spearheaded the effort. They have been meeting with groups of 15-20 directors to discuss how to institute principles and have companies adopt and implement them. They also want to integrate executive compensation principles into the proxy statement. Ideally, they are looking to create an executive compensation standards board based on the Financial Accounting Standards Board (FASB) model and develop Generally Accepted Executive Compensation Principles similar to Generally Accepted Accounting Principles (GAAP). (See The Case for an Executive Compensation Standards Board, Directors&Boards, Spring 2009) In addition to such a standards board, IDEC wants to take a similar approach to the German Corporate Governance Code, which was adopted in 2006. That code has three levels of guidelines that include requirements that must be followed, recommendations that should be followed and suggestions that could be followed. “Independent directors who attended these meetings have expressed interest in fostering a voluntary peer-led process that would establish and expand these principles and encourage boards to incorporate them into their practices and proxy statements,” Delves and Cafferty said in an e-mail. As the group works on honing its principles-based compensation strategy message, Cafferty tells me they are including the work of The Conference Board (See Executive Compensation on Everyone’s Mind, Sept. 22 Governance Center Blog post), Kellogg School of Management and the Center on Executive Compensation. The group also plans on putting up a Web site soon. “We have also talked to four leading compensation consultants,” Cafferty said. “We thought that anything that independent directors had concerns about needed to be rooted in the compensation consultant industry.” There is a major concern that this fast-growing industry has no standards, she said. It’s interesting to look at the executive compensation pay principles that have been floated thus far. Here is a look at IDEC’s , the Center on Executive Compensation’s (an offshoot of the HR Policy Association) and The Conference Board Executive Compensation Task Force’s guiding principles: IDEC (See Agenda Week article, Sept. 21 – registration required) •    Accountability – Boards must account for pay-setting decisions. •    Alignment – Executive compensation should be precisely aligned with performance. •    Fairness – The amount paid to a given executive should be fair to the individual and, above all, the shareholders. •    Transparency – Boards should make decisions on pay in an open and accessible manner. •    Objectivity – There should be an effective use of incentives to motivate innovation to create wealth for shareholders. Center on Executive Compensation •    Aligned – Executive compensation arrangements should be aligned with the best interests of a company’s shareholders and other stakeholders. •    Fully compliant – Executive compensation arrangements should be structured and executed in full compliance with applicable laws and regulations. •    Independently informed and approved – Executive compensation arrangements should be approved by the board of directors’ independent and active compensation committee. •    Appropriately Customized – Executive compensation arrangements should be appropriately customized to and aligned with the company’s culture and values, business strategy, industry and competitive and financial conditions. •    Transparent and Accessible – The compensation committee should ensure that the company’s executive compensation program is disclosed in a clear and understandable manner. •    Fair and reasonable – Executive compensation arrangements should be fair to the company’s shareholders and executives. The Conference Board Task Force on Executive Compensation •    Establish a clear link between pay, strategy and performance; •    Provide compensation that is fair, affordable and clearly aligned with actual performance; •    Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance unless specific justification exists; •    Demonstrate credible board oversight of executive compensation; and •    Foster transparency with respect to compensation practices and appropriate dialogue between boards and shareholders. As of Sept. 21, six companies said they would adopt The Conference Board task force’s principles (AFC Enterprises Inc., AT&T Inc., Cisco Systems Inc., Hewlett-Packard Co., NASDAQ-OMX Group Inc. and Tyco International).

Worth Reading …

Here are some interesting articles on executive compensation •    A Price to Pay: Kellogg professors debate the merits of regulating executive compensation (Kellogg School of Management, April 2009) •    Is Executive Compensation Shaped by Public Attitudes? (Paper, Camelia M. Kuhnen, Kellogg School of Management;  Alexandra Niessen, University of Cologne (Germany), May 2009) •    The Best Thing You’ll Read About Executive Compensation Today (The Tally Sheet, Corporate Board Member Blog, Sept. 25, 2009)
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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