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Executive Compensation Decision-Making in an Era of Greater Scrutiny
Abstract
The compensation committee of a high-profile industrial company was recently embarrassed when several institutional advisors recommended a "withhold/against" vote for each member. The reason? Poor pay decision-making as measured by the standards of investment advisors. A few months later, the directors' embarrassment turned into disbelief and anger when their narrow reelection margin was disclosed. "How could this happen?" they asked. "The programs and practices we have approved are no different than others in our industry. How can ‘outsiders' who know nothing about us arbitrarily say we have made poor decisions about pay?"
This compensation committee, like most, had acted with diligence and in good faith. Its decisions reflected a reasoned balance of the interests and needs of three key constituencies: the shareholders, the company and the executives.
Today, however, that is not enough. Not only are there more influencers of effective executive compensation decision-making, but outsiders - including legislators, regulators, business analysts and the media, along with shareholders, shareholder activists and institutional advisors have become the leading influencers in determining what are "good" and what are "poor" executive pay decisions. Executive compensation decision-makers must work smartly within this reality to avoid the negative consequences of nonconformance with the new standards for compensation decision-making accountability.