News & Insights

Directors Governance Center

July 2, 2013

Executive Compensation Practices (Compensation Committee Leadership Network)

In November 2012, twenty members of Tapestry Networks Compensation Committee Leadership Networkmet to discuss various challenges facing compensation committees. The members addressed the universal shift away from stock options in long-term incentive plans, the impact of share ownership guidelines on establishing an ownership culture and the challenges of creating better compensation peer groups.

Following the meeting, Tapestry Networks published a report on the meeting, called ViewPoints, and this report is a useful resource for insight into members thoughts on these important issues facing compensation committees. This posting provides a summary of the ViewPoints report published by Tapestry Networks.

Long-term incentive plans have shifted away from utilizing stock options and increasingly towards performance-based plans. Members largely believe that performance-based plans work well to align incentives, despite their added complexity. The most challenging aspect of implementing performance-based plans is selecting proper metrics. Some members noted an increased openness to qualitative metrics and significant focus on incorporating strategic metrics, by altering metrics in response to changing competitive environments and strategic goals.

Members emphasized the importance of allowing for board discretion and the necessity of trust for stakeholders to tolerate such discretion. Members suggested that compensation committees can preserve some discretion, while satisfying stakeholders, by (i) establishing a history of moving awards both up and down, as appropriate, (ii) including realizable pay as part of the communication effort, and (iii) demonstrating to executives that time and care go into the exercise of discretion.

In discussing share ownership guidelines, members emphasized the importance of executive tone in establishing an ownership culture. Executive stock holding requirements as such typically have minimal impact, as most executives hold in excess of the required minimums. Members identified three means by which a CEO could foster an ownership culture: (i) leading by example through holding stock and limiting their own sales; (ii) speaking with any other executives prior to their sales to discuss their movies for sale, thus precluding any impression of pessimism; and (iii) being alert to any changes in the existing culture.

Members evaluated a recent paper by Charles Elson and Craig Ferrereof the University of Delawares Center for Corporate Governance. Members belief in the transferability of executive talent led many to question Elson and Ferreres thesis that peer group benchmarking is fundamentally flawed because of an inefficient market for executive talent. However, all parties agreed that there is no clear alternative to peer group benchmarking.

Members also evaluated Equilars new social media based algorithm for peer group creation. Under this approach, Equilar considers which companies a particular subject company lists as peers, who those companies identify as peers, which other companies identify the subject company as peers, etc. Overall, members were impressed with this innovative approach to peer group creation, especially its potential to mitigate gaming the selection process.

Tapestry Networks brings together leaders in the healthcare, financial services, and corporate governance industries to identify and discuss solutions to emerging challenges. Tapestry Networks Compensation Committee Leadership Networkmeets throughout the year, bringing together compensation committee chairs from across North America with the goal of fostering innovative and practical solutions to executive compensation. More information about Tapestry Networks and the Compensation Committee Leadership Network is available on its website