How Much Are We Paying Our People?

Corporate boards are digging deeper into the details of executive compensation packages.

Earlier this month the Securities and Exchange Commission proposed guidelines for executive-compensation disclosure, but like many observers, corporate boards saw it coming years ago.

Indeed, in the past year or two, boards have increasingly enlisted independent consultants to help them analyze the possible future costs of executive-pay packages under different scenarios.

“Boards are more actively meeting independently with consultants,” says Carl Weinberg, a principal at PricewaterhouseCoopers’s Global Human Resources Solutions and a specialist in executive compensation. In the past, senior managers usually took those meetings, but nowadays — with the regulatory spotlight trained on executive-pay practices and disclosure — boards are keen to be familiar with the details of their company’s compensation plans. At present, Weinberg reports, about half his work is for compensation committees.

“Typically, most firms simply wanted a normal competitive assessment of their executive pay plans,” says Jack Dolmat-Connell, president of executive compensation consultancy The Odyssey Cos. That is, companies wanted to compare what they paid their executives with what their competitors were paying. Now, boards want to know much more about the relationship of pay to performance — not only whether corporate performance improved, but also whether the improvement was commensurate with the executives’ pay level, and how stock options figure into the final compensation.

Boards are also much more interested in assessing how pay packages perform under different hypothetical situations. How much would an executive walk away with if he were terminated? How much would she receive in the event of a merger?

To assess these scenarios, boards are increasingly employing “tally sheets” that add up the different components of the pay package, including severance and options. In fact, only 14 percent of companies do not intend to develop a tally sheet, according to a recent survey by executive compensation consultancy Pearl Meyer & Partners. Tally sheets overwhelmingly focus on chief executive officers (89 percent) and “named executive officers” (72 percent), according to the survey.

“One or two years ago, no one would know what a tally sheet was,” notes Derrick Neuhauser of BDO Seidman’s Executive Compensation Services group. Neuhauser, too, says an increasing number of his engagements are for boards.

For his part, Dolmat-Connell notes that he’s seen a marked uptick in such requests in the last year. “Before, three to five boards out of 100 used to ask for scenario analysis,” he says. “Now, almost every board is requesting it.”

Scenario analysis using tally sheets can help boards get a more detailed perspective on executive compensation, says Neuhauser. Instead of simply, “Where are we compared to our peers?” boards now want to answer questions such as, “How much have we authorized?” “How should we design our plans?” “Am I going to be on the hook for executive compensation in the future?”

According to Dolmat-Connell, the bottom line for boards is a straightforward “Does this feel comfortable to me?” And if board members can find out about it in committee rather than reading about it on the homepage of a business website, so much the better.

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