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The Top 10 Questions the Compensation Committee Should Ask

Korn Ferry’s annual “Top 10 Questions for Today’s Compensation Committee” helps management and board directors zero in on the most important topics facing the committee in the coming months. Here is just a sampling:

  • How should we interpret our own PVP disclosures? The complexity of these disclosures has led to a “muted” response from investors and media, so the main takeaway is to just have an understanding on the basic movements in compensation actually paid.  

    • Create talking points to explain the factors influencing these numbers to answer questions such as, “Were there big swings in pay and is it all related to stock price?” 

  • What should we know about clawbacks?
     
    • Review new and existing policies. Most companies will now have dual policies. The Dodd-Frank compliant policy will be limited to Section 16 officers and a broader policy, which may provide for recoupment for misconduct as well as financial restatements, may apply to a larger executive population. 
  • Why is Glass Lewis criticizing above-target bonus payout?
      
    • In a nutshell, more disclosure is needed. The proxy advisor issued “against” recommendations for companies who received a “D” or “F” on their performance test because of negative TSR but paid annual awards above targetThe simple solution is to include a more robust explanation in the proxy about the goals and outperformance. 

  • Are incentive plans prepared for market volatility? Consider multiple approaches to address times of significant uncertainty.  

    • Widen performance ranges in the annual plan. 

    • Take a hybrid approach to goal setting, such as setting annual goals and averaging the three years for the outcome. Or apply growth percentages based on year one actual results to build a three-year cumulative goal. 

    • Use a moving target based on an external market indicator like a target revenue based on a certain inflation rate that adjusts as inflation moves. 
  • Should we move away from TSR? 
    • In a volatile environment, management may balk at a relative TSR metric as stock price seems out of their control. Some companies may shift to relative financial metrics. The board may ask:

    • What metrics are used in the long-term strategic plan? What metrics are most correlated with TSR and shareholder value creation? What metrics do peers use? What metrics are investors focused on? 

  • Do we need more than one peer group?
     
    • Maybe. Some companies don’t have competitors their size or only have a few peers in their niche industry. This may create the case for having two primary peer groups; one for magnitude of pay (based on peer size) and one for pay design (size is less important).

    • Questions: Does our current peer group capture core competitors only? Is the sample size sufficient? Do we have the right market for talent represented? Does the group provide strong enough matches to Section 16 roles? Is the group defensible to shareholders and governance groups? 

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Authors: Megan Wolf

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