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13 Nov. 2009 | Comments (0)

When The Conference Board Task Force on Executive Compensation first met back in March, Co-Chair Robert Denham said task force members agreed there are two primary questions boards need to answer when considering executive pay: What are they paying for? How much are they paying? Five months after the task force’s first meeting, those two questions led to a 40-page report on executive compensation that includes a list of five guiding principles. By no means does the report complete the group’s mission, according to a RiskMetrics Webcast Thursday where Denham, Co-Chair Raj Gupta and task force member Lynn Paine announced the group’s next steps. (For a copy of slides from the Webcast, e-mail governanceexchange@riskmetrics.com.) The task force, which includes 13 directors, is actively seeking endorsements from major U.S. public companies. In a Webcast moderated by Stephen Deane, a team leader ofprinciples2 RiskMetrics’ online Governance Exchange, Denham, Gupta and Paine made a point of saying the group’s work is not done. “The principles are getting a lot of traction now but more needs to be done as companies decide if their compensation systems [performance vs. compensation] are already aligned,” Denham said. He pointed out how important it is for boards to realize that “what” they are paying for in terms of performance is just as important as “how much” they are paying executives. The task force also plans on contributing to the public dialogue on executive compensation by taking part in similar events as the RiskMetrics Governance Exchange Webcast and being interviewed by business news outlets. There are also plans for a director education program. Paine, who served on The Conference Board’s Commission on Public Trust and Private Enterprise in 2003, sees some similarities in the calls to action in this year’s executive compensation task force. But the difference with the task force is its involvement in garnering support. “This is different than the 2003 Commission on Public Trust and Private Enterprise report because there is a movement to get a broad level of support and adoption of the principles,” Paine said. “This is not a static effort; it is ongoing. It is at the very beginning of an ongoing effort.” She recalled how executive compensation was a big issue following the accounting scandals at Enron and WorldCom in the early 2000s. “At the time, we all thought that executive pay was a huge deal. But if you look at it now, that [Enron and WorldCom] was child’s play.” So, why has executive pay continued to be a problem in the United States despite past reforms at the start of this decade? It’s really a matter of “follow the leader,” as is in the leaders in executive pay, Paine said. “The reason a lot of these controversial pay practices got embedded at companies is because of the negotiations of executive contracts over the years,” she said. “I think there are a lot of reasons these practices exist, but that is a main one.” Of the five guiding principles, Paine said Principle Three on avoiding controversial pay practices was the most difficult for the group to reach a consensus. The sticking point was that many of the members didn’t think it made sense to make a blanket condemnation of such practices (i.e. golden parachutes, severance agreements, tax gross-ups). “We talked about cases where some of these practices made sense,” she said. So in the end, the task force decided to take a “comply or explain” approach with the adoption of such controversial pay practices. For any companies interested in learning more about the task force principles, click on this link. To find out more about endorsing the principles, send an e-mail to me at gary.larkin@conference-board.org.
  • 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…

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