Author: James Reda
This article is the second in a two-part series to guide compensation committees in a rapidly evolving marketplace. For the first article, see Keeping Your Compensation Committee Proactive and Resilient When Facing New Volatility.
Compensation committees face a host of ongoing, external challenges and the need to balance and integrate often-competing priorities. Committees will benefit from 12 benchmarking considerations as part of assessing executive compensation programs.
What does a board compensation committee do?
Guidelines for evaluating an executive compensation program
A strong executive compensation program must balance competitive pay, regulatory compliance, shareholder expectations and long-term company performance. Compensation committees should consider the following in their overall compensation program assessments.
1. Public scrutiny and shareholder expectations
Executive pay frequently falls under significant public and shareholder scrutiny, especially in the event of perceived disparity between executive compensation and employee wages. Compensation committees must balance offering competitive pay to attract top talent while avoiding backlash from investors and the public.
2. Regulatory and legal compliance
Compensation committees must navigate complex regulations related to executive pay, including tax laws, disclosure requirements and shareholder approval rules. Ensuring compliance across varying jurisdictions can become time-consuming and complicated.
3. Litigation risk
Legal challenges related to executive compensation can pose significant risks. Committees must anticipate such potential litigation issues as pay-for-performance alignment disputes, severance packages and shareholder challenges.
4. Disclosure and transparency
Proxy advisory firms emphasize transparency in executive pay decisions. Companies must provide clear, comprehensive disclosures regarding pay structures, incentive plans and performance metrics to avoid negative assessments.
5. Engaging with proxy advisors
Proactive engagement with proxy advisory firms before formal proxy voting helps ensure voters understand the company's compensation philosophy and rationale. This preemptive approach can prevent misunderstandings and improve the likelihood of favorable recommendations.
6. Evolving guidelines and standards
Proxy advisory firms periodically update their voting policies and guidelines, which can influence compensation program decisions. Committees must stay current with evolving standards and adjust pay structures accordingly to align with shareholder priorities and regulatory changes.
7. Employee wellbeing
Compensation committees increasingly consider work-life balance, mental health support, workplace culture and other factors beyond financial compensation. Overlooking employee wellbeing can negatively impact morale, retention and overall company culture.
8. Shareholder activism
Committees must prepare for shareholder activism, where investors challenge executive pay structures. Managing shareholder proposals effectively and ensuring pay practices align with institutional investor expectations are critical.
9. Global considerations
For multinational companies, compensation committees must address regional differences in pay norms, tax structures and cultural expectations. A pay package that is competitive in one market may be excessive or fall short in another.
10. Aligning compensation programs with performance
Among their biggest challenges is that compensation committees must ensure that executive compensation ties directly to company performance. Committees must work to develop appropriate long-term metrics and short-term incentives that discourage risky behavior.
11. Executive turnover and succession planning
Planning for leadership transitions is crucial. Compensation committees should ensure incoming executives receive fair packages while protecting the company from high turnover costs. Fostering a sustainable work environment through holistic compensation strategies supports long-term retention.
12. Navigating proxy advisory reports
Proxy advisory firms influence institutional investor voting on executive compensation, board elections and shareholder proposals. Compensation committees must carefully analyze these reports to anticipate concerns and ensure their compensation strategies align with best practices.
Adapting successfully to the changing landscape
The compensation committee must adapt their thinking and aspects of the company to align with the current landscape. A well-designed and carefully reviewed executive compensation program serves as a foundation for long-term success. By proactively addressing these critical areas, compensation committees can create a pay framework that attracts and retains top talent while meeting shareholder and regulatory expectations.
Gallagher can help
Gallagher uses data, technology and trust to design and evaluate executive compensations models to fit your company's strategic goals. Our team can work with your compensation committee to proactively analyze market shifts and determine how the incentive model may need to evolve to align with changing business dynamics.
