The Center On Executive Compensation is dedicated to developing and promoting principled pay practices and advocating compensation policies that serve the best interests of shareholders and other corporate stakeholders.
The Center believes the management of executive compensation by corporations should be conducted in accordance with a set of clearly defined principles. The Center encourages companies to incorporate these principles in the development, administration and communication of their executive compensation arrangements.
"The Center is dedicated to developing and promoting practices
and policies that serve the best interests of shareholders
and other corporate stakeholders"
The Center further believes executive compensation principles should be periodically updated to reflect current thinking on the subject.
The Center’s current principles follow.
Principled Pay Practices
- Aligned with the Best Interests of the Company’s Shareholders and Other Stakeholders
- Fully Compliant with Applicable Laws and Regulations
- Independently Informed and Approved
- Appropriately Customized to the Company’s Culture, Values, Industry, and Strategy
- Transparent and Accessible
- Fair and Reasonable as a Whole to the Company’s Stakeholders
Executive compensation arrangements should be aligned with the best interests of a company’s shareholders and other stakeholders.
- Link to Results. Incentives should be contingent on achieving rigorous, well-defined results-based measures linked to a company’s business with a significant share of the total compensation at risk, or not guaranteed, and the level of compensation proportionate to results achieved.
- Pay Equity and Compensation Decisions. Characteristics such as gender, ethnicity and race have no place in compensation decisions with the exception of addressing past practices.
- Ensure Appropriate Incentive Balance. Incentives should be structured to mitigate the possibility that executives would be encouraged to make decisions that could significantly reduce the long-term value of the firm. To mitigate such risk, incentives should include, for example, caps on total potential payouts, an appropriate mix among short- and long-term compensation elements and an appropriate balance among the types of equity used in long-term incentives.
- Require Appropriate Ownership Stake. Executives should have a significant ownership stake in their company, driven by an appropriate amount of pay delivered through equity-based compensation, a substantial portion of which is linked to results, and implemented through meaningful ownership and/or retention guidelines.
- Enable Necessary Talent. Executive compensation arrangements should enable companies to attract, engage and retain an inclusive pipeline of executive talent necessary to serve shareholders’ and other corporate stakeholders’ best interests, while ensuring a proper balance between pay that is focused on results and that which is focused on retention of talent.
- Support the Business Strategy. Compensation should be structured to support the company’s ability to execute its business strategy.
Executive compensation arrangements should be structured and executed in full compliance with applicable laws and regulations and a culture of compliance should be adopted and reinforced to guide a company’s pay policies and practices.
Independently Informed and Approved
Executive compensation arrangements should be approved by the Board of Directors’ independent and active Compensation Committee that is guided by high corporate governance standards implemented through a well-defined charter and informed by independent advisors.
The Board’s compensation committee actions should be based upon:
- Sound Corporate Governance Practices. Leading corporate governance practices help ensure that all elements of compensation are carefully reviewed and appropriately structured.
- Use of Independent Compensation Advisors. Outside advisors retained by the compensation committee should not provide other services that create an actual or perceived conflict of interest with the executive pay advice provided.
- Periodic, Independent Compensation Reviews. A thorough periodic assessment of the company’s executive compensation programs and practices, including an assessment of whether incentive programs mitigate excessive risk taking, helps to reinforce sound governance, manage risk and ensure appropriate and competitive compensation design.
- Regular Committee Evaluation . Committee member evaluation helps ensure the committee acts consistent with its charter, and engages in robust dialogue, thus reinforcing accountability.
Executive compensation arrangements should be appropriately customized to and aligned with the company’s culture and values, business and talent strategies, industry, and competitive and financial conditions.
- Utilize Well-Defined, Relevant and Rigorous Results-Based Metrics. Incentive plans should be customized to the company to support the realization of its business strategy and culture and structured to limit overly aggressive or overly conservative decision making by companies.
- Ensure Pay Peer Group or Other Market Comparison Is Appropriate for the Company. The pay peer group typically includes similarly situated companies in terms of industry, size, location(s), financial performance and talent pools, and should correlate closely with the performance peer group. Companies that do not have a good peer group may use a broader market index or another market comparison to set pay.
- Confirm Compensation Levels Are Proportionately Appropriate Relative to Competitors. By comparing the company’s compensation program and corresponding performance to that of its peers, including the rigor of incentive targets, where practicable, the compensation committee can determine the competitiveness of each element of executive compensation and the total program.
Transparent and Accessible
The Compensation Committee should ensure that the company’s executive compensation program is disclosed in a clear and understandable manner and ensure that the company is accessible to explain the program to the company’s stakeholders.
- Provide Clear, Concise, Customized Disclosure. Executive compensation arrangements should be disclosed and explained in a clear, concise and customized manner that complies with mandated disclosure requirements and facilitates a full understanding of the rationale for and levels of all aspects of reportable executive compensation.
- Be Accessible. Designated company executives and/or directors should be accessible to discuss and respond to inquiries about the company’s executive compensation policies and practices with its shareholders and other corporate stakeholders.
Fair and Reasonable
Executive compensation arrangements should be fair to the company’s stakeholders when viewed as a whole, and reasonable given the context in which the arrangements are structured and compensation is earned.
- Informed by Social/Societal/Cultural Norms. Executive compensation decisions should be informed by the broader environment in which the company operates, including global trends, where applicable, that may impact how shareholders, regulators or other stakeholders assess the company’s executive compensation plans.