Employment

Ethics and Corporate Governance: The Role of the Compensation Committee

- Written By: Stephen Goebel & Michael J. Wurster If you could physically pick up the your company, how far do you think you could throw it? Probably as far as investors trust public companies these days, not far. In the aftermath of Enron, WorldCom etc., the role of the board of directors is under greater scrutiny than was once imaginable.

In particular, the roles of the Audit, and Compensation committees are literally having their charters rewritten. Having conducted extensive research in executive compensation, and advised numerous compensation committees, we feel it is an appropriate time to comment.

During these volatile times, motivating and rewarding executive management in a well researched, and conceived manner is critical. The Conference Board, Inc. the worldís leading independent, not-for-profit business network released a study on public trust in private enterprise in September of this year. The report advises that linking compensation to strategy is critical, while investigating new ways of linking compensation to performance must be explored.

Among the greatest concerns expressed by the Conference Board is that companies currently have compensation committee members who lack sufficient expertise to effectively monitor programs. They may also be unduly dependent on the CEO to act in a truly objective manner. The necessity for completely independent, and experienced directors to staff future compensation committees will be on every boardís agenda in coming months. Following are some observations on how these compensation committees will be expected to perform.

COMPENSATION COMITTEE DOís and DON'Ts

Do; devise compensation to motivate and retain, but not gratuitously reward executives.

Do; link compensation to overall corporate strategy. Do not establish compensation on a piecemeal basis.

Do; adopt a compensation committee charter that outlines the role and duties of the committee as expected by the full board. It may include membership criteria, how the chairman is chosen, member rotation policy, and recommendations for dealings with, and responsibilities of outside consultants.

Do; use performance-based compensation linked to long-term goals. This will aid in avoiding windfalls due to ups and downs in the stock market, which are unrelated to executive contribution.

Do; hold the committee accountable for the decisions they make.

Donít; allow the CEO, or any other company insider to sit on the committee.

Donít; allow the committee, or any member on the committee to become lax in their duty to direct, and monitor policy.

COMMITTEE ACTIVITIES,
AND RECOMMENDED BEST PRACTICES

Compensation committees are responsible for a wide range of actions:

They approve contracts and employment agreements with key executives and approve compensation plans, and pay levels for the CEO and other officers.

They are charged with ensuring that an executive succession plan is in place, as well as an evaluation plan for CEO performance which articulates pay-for-performance programs in line with long term strategies.

Respond to shareholder concerns, including the impact of stock compensation plans on shareholder value and the necessity to control dilution.

Determine who within the company should participate in various compensation plans (including stock option plans) and ensure proper communication with all participants.

Communicate appropriately with the full board, executives and other concerned employees, outside agencies, and shareholders.

Retain any outside consultants who advise it, and assure that said consultants report solely to the committee.

The above merely scratches the surface, and highlights some key points regarding the responsibilities, and accountability of compensation committees. The NYSE has already approved new guidelines for how companies should approach this key area of corporate governance, and we predict that more regulation from all exchanges will be seen in the coming months and years. Gaming companies might be particularly well advised to evaluate whether best practices are being observed in their own boardrooms, as this is sure to be a topic that will stay in the public eye for the foreseeable future.

HVS Executive Search
372 Willis Avenue
Mineola, NY 11501
516-248-8828
516-742-1905

Logos, product and company names mentioned are the property of their respective owners.