Determining Fair Director Pay

Because board members set their own pay, director compensation is a wide-open opportunity for shareholder litigation. In this BoardVision interview–moderated by NACD’s Publisher and Director of Partner Relations Christopher Y. Clark—Marty Coyne, experienced director and president of NACD’s New Jersey chapter, and Dan Laddin, partner at Compensation Advisory Partners, discuss ways boards can limit exposure to litigation when it comes to director compensation:

  • Both the compensation committee and the governance committee are involved in determining director pay.
  • Director compensation aligns with that of company peers.
  • Director compensation is based on the responsibility of directors—which may see little change from small to large companies.
  • Companies may consider adopting a shareholder-approved limit for director compensation.

Determining Fair Director Pay

Here are some highlights from the discussion.

Christopher Y. Clark: Do you think that the [nominating and governance] committee or the compensation committee should [have primary responsibility for setting director pay]?

Dan Laddin: Chris, if we look at the market, it’s pretty mixed—a little bit leaning towards [the] compensation committee versus [the] nom/gov [committee]. At the end of the day, I think it really comes down to the principles you use for compensation of your directors overall. One, you may want to make sure you have an objective committee, which obviously you would [with]…either. You also want to make sure that compensation for directors aligns with the philosophy of the directors, and so in that sense, maybe the compensation committee is a little closer to that. At the end of the day, there’s a lot of cross-pollination usually across those two committees, so either works fairly well. We do see a little bit [of] leaning towards the comp committee though.

Clark: Thanks, Dan. Marty, you’ve been on all types of boards. What is your take?

Marty Coyne: I prefer the compensation committee…mainly because the comp committee is much more familiar dealing with the compensation consultant and much more familiar with the peer group. And so when you look at all of the data inputs, the comp committee understands the source, where the weaknesses are, and the strengths. I think one of the key things, though, is the full board approves director compensation. So regardless of which committee brings it forth, and brings forth the recommendation, the full board has to vet it and approve it.

Clark: In many cases, for leading governance practices, company size does matter. [Companies] are affected by different policies and regulations. The boards are occasionally very different; occasionally they are not. But when it comes to director compensation, it is a hot button and it certainly affects that board’s reputation [and] the company’s reputation, but most importantly, that individual director’s reputation. So, Dan, again, let me start with you. Do you feel that there is a company size factor here when it comes to compensation and reputation?

Laddin: I think reputation risk exists regardless of the size of the company, and that’s somewhat borne out by the compensation data we would take a look at. … [T]here’s a basic responsibility of directors that doesn’t really change, regardless of company size, and that’s really reflected in the compensation data.

Coyne: There is a scale that the bigger the company [is], the more the directors are paid. The exposure potential for larger-company directors is far greater than the smaller-company directors because they just make better news than the smaller companies. There is a point though; it’s almost like a minimum size where, when you hit it,…the director workload is pretty much the same regardless of the size of the company. And, to attract and retain good directors, you’ve got to pay a fair compensation for those individuals.

Clark: Many companies have director compensation limits. My question would be why, and what is a fair compensation limit?

Laddin: Sure. So this concept of the limits really [has been] coming to play in the last few years, as there were a few lawsuits against companies that said directors are inherently conflicted when they are setting their own pay. And in those specific companies, the view was that they set it well above any credible norm… The attorneys came in and said, “We can basically put in a shareholder-approved limit on directors’ compensation,” which then gets us back within this business judgment rule.

Clark: For the shareholder-approved limit, what’s the status today?

Laddin: We’re seeing most companies, as they go back to shareholders to renew their plans in the normal course, that that’s when they go back and put in a limit. When they go back for new equity plans or just general approval from shareholders, that’s when it’s happening. I wouldn’t say there’s a mad rush to do it, but it is normal course.

Clark: Well, Marty, what has been your experience? You’ve been on public boards, [and] you’ve been on private boards.

Coyne: I think…having a limit is very, very valid—and it’s necessary. I don’t see any resistance to putting limits on directors’ compensation. If I were a shareholder, I would expect my compensation plan that I’m approving to have limitations for director compensation.

Clark: When we look at the umbrella of business judgment and compensation, I’ve got to ask you, is the litigation environment lukewarm or is it red hot?

Laddin: I would say it’s lukewarm at this point. The lawsuits have really been at the extremes where director compensation was well above the norm.

Coyne: I think…there’s been a quantum step forward on the nom/gov side in choosing the right directors sitting around the table. I think the next step is going to be how do you compensate your directors? What is your philosophy to attract and retain good directors? How does director compensation correlate with company performance? Is there potential pay at risk? I think there will be some…comparisons of director comp to the TSR. And if a company is not performing well, I think directors are going to have to answer a lot of tough questions about why are we paying you when the company performance is so poor? But I don’t see any dramatic changes in the next couple of years.

For further considerations on director pay practices, please review the Report of the NACD Blue Ribbon Commission on Director Compensation.

Additional NACD Resources

2015–2016 Director Compensation Report

2015–2016 Director Compensation Report: Appendices

Report of the NACD Blue Ribbon Commission on Director Compensation

A Social Step Up the C-Suite Ladder: The Conclusion

As we continue the journey up the ladder of success this next step will require you to dig into the habits and patterns of your C-Suite, without stocking them.  I suggest this be done off the clock as you still have a job to do at work each day.

Rung two – Develop an executive presence. Not just seen physically, but actively contributing in the social media and internet space that the C-suite frequents.  Read what they read, comment on what they read, and share what you have learned.

Executive presence requires a degree of learning if you are to discover where your C-Suite spends their time.  According to CEO.com,

  • A whopping 68% of Fortune 500 CEO’s have no social media presence
  • Of those who do 23% of them engage in only one platform
  • 74% of the CEO’s who only participate in a single network join LinkedIn

The average CEO reports spending about two and half hours in meetings per day. They meet with executives 37% of the time, with clients 20% of the time and prospects 15% of the time.  Legal is the department CEO’s meet with the least.  The majority of their time is spent with finance, followed by operations, clients and professional informers and finally sales.

Social media is not to be neglected in your discovery process as over the past few years more and more in the C-suite are finding the value of using this resource.  Social media is a great tool for attraction of better talent, publishing news and creations that share the contributions and communicate a message of the influencer in their communities. Keep your ear on the pulse of the company through social media and the pulse of your C-Suite. One of your roles is to use this tool to make your presence known and felt.

Follow your company website and news releases from your C-Suite especially corporate videos.  Re-post items of interest when appropriate.  Your savvy use of social media will increase the respect and recognition of your C-Suite and help him/her to build better communications with clients, employees and the community. Your name on the re-post gives you a unique presence.

Consider producing a blog with content that establishes you as a thought leader in your industry. A consistent post will reinforce your position as the go-to source for solutions that are of interest to your C-suite and of creative content that is read and followed.

In the LinkedIn world, posting discussions in groups that your C-suite is a member will get you noticed, especially when you end with a question and then respond to the comments.  The more active you are the more your name will come up as a member with executive presence and a person of contribution.

A great resource for you to keep up with C-Suite thinking and thought leadership is www.c-suitebookclub.com. With today’s technology your automobile can be your mobile master’s degree advantage.  Every time you are in your vehicle is an opportunity to learn on the go. If you are like me I like to take notes on something of interest.  Be careful not to be distracted as you drive.  Reading and keeping up with what the C-Suite reads will keep your conversation relevant for this rung of the ladder to smash open the doors and give you the coveted seat at the table.

Taking A Step Up the C-Suite Ladder: A Continuation

As a follow up to last week’s blog, ‘Ten Steps Up The C-Suite Ladder‘ we will begin to delve deeper into each of the individual rungs. Hang tight, we will get a good work out.

Rung one – Master the essentials of your chosen industry. If HR, then become technically proficient in culture, comp, compliance, hiring, on-boarding etc.

Shrewd Executive leadership wants and seeks business partners who will add significance to the bottom line.  Human Resources has been invited but must deliver value, moving from administrative to a strategic partnership in alignment with leadership’s 30,000-foot view of the people side of the business.  We live in a global economy and HR must be able to create a culture of high performance to compete in today’s market.  A key question leadership demands to know the answer to is “how well is our workforce performing and how are we helping them to improve”. It is more than having top talent; it is about performance that gets their attention.

Feedback to the executive level must not be inflated or exaggerated.  “Just the facts “Ma’am”, cut the fluff or you find yourself outside the table.  Leadership understands value and sees the results and is not interested in a scramble of activities that are waste of time and of no benefit to the overall vision of the company. 

HR is comprised of many areas of discipline including benefits, comp, performance management, employee relations, recruiting and learning and development.  None of these areas are a silo unto itself but of great importance in your role as the HR professional at the table.  It is a part of the big picture of what leadership wants from its strategic partner. Until HR and the leadership team jointly ask “how well is our workforce performing and how are we helping our employees improve” nothing will happen to secure a seat at the table for the partner.

I deal with HR professionals all the time and ask about success dealing with the executive leadership team.  A few years ago I was talking to a lady who told me of her success at the table.  She always says yes to the requests she gets from the C-Suite at the first opportunity.   You might be asking yourself, leadership is not looking for “yes men” and you are right.  Her response moves quickly to asking what their vision is for this request she has said yes to.  She then focuses on the why and not the what or how as this will come when we all understand why we do what we do. Once she knows the vision of the C-Suite and the why, she follows with a discussion about what it will look like when it is completed.  It is your job as an HR professional to then provide the knowledge as a contributor to the vision to accomplish the goals clearly understood by all parties.  Your executive team values your input at this point.  You are known as a person that will not lead them down the wrong path but the best path to reach the vision of the request. You are a master of your profession and you know how to manage the C-Suite with the best interest of the entire company. You are now on the rung of influence you desire and deserve. 

How do you master the essentials? 

Don’t miss our next post about Rung 2 where we will focus on Developing an Executive Presence and actively contributing.

Ten Steps Up the C-Suite Ladder to Effectively Smash Open the Doors

The first Human Resource conference I attended in the early 90’s was titled “How to gain a seat at the table.”  For over a quarter of a century this has been a dream for most HR professionals and others trying to have impact in the organization’s core strategies and decision making processes. The seat at the table is elusive, but all of us can have influence and it involves some purposeful ladder climbing techniques.

A ten step strategy to put you on course to capture the seat this year – this is your year!

  1. Rung one – Master the essentials of your chosen industry.  If HR, then become technically proficient in culture, comp, compliance, hiring, onboarding etc.
  2. Rung two – Develop an executive presence.  Not just seen physically, but actively contributing in the social media and internet space that the C-suite frequents.  Read what they read, comment on what they read, and share what you have learned.
  3. Rung three – Learn to crunch the numbers with analytics and data on matters the C-suite has an interest in.  Include events that impact the bottom line like turnover, benefits as compared to competitors, employee surveys, client satisfaction scores, attraction etc.
  4. Rung four – Invest in your skills by taking a course in project management.  Volunteer to take a company project from beginning to the end and this will get you noticed.
  5. Rung five – Continued education and certification including a MBA to give yourself credibility that you understand the moving parts of a successful business.
  6. Rung six – Know you organization through and through and why your business works the way it does.    Involve yourself in departmental discussions to learn what each area is dealing with in conjunction to its impact on the strategic vision of the company.
  7. Rung seven – Numerous positions including human resources are considered cost centers within an organization.  Think clearly about making your role a revenue generator.  Your value to the C-suite will go up exponentially if you understand what you bring to the table.
  8. Rung eight – Do not isolate yourself from your employees, rather build strong relationships by listening to others, respond thoughtfully and offer suggestions that encourage collaboration.
  9. Rung nine – Find a mentor or someone more advanced in their career and watch them as they build relationships and provide value to their organization.
  10. Rung ten – The instance you have moved to the level of influence you desire, contribute, contribute and then contribute some more.

You must become skilled at the language of the C-suite.  What do they deal with?  M&A, industry language, know what success looks like to this select group you have managed to climb into the bunk with and know the space that you own and why you are the expert.  You are a contributor and that’s what the C-Suite is looking for to join the table.

The next several posts will go into deeper detail on each rung.  Share with me additional rungs that you feel are necessary to take you to the top of your organization in the comments section.

Using Assessments for Onboarding Insights

The work of HR or the hiring manager doesn’t end when an offer is made.  Onboarding is the next step and an essential part of a successful human capital process.  How you communicate your company’s mission and values and how the new hire relates to the mission and values will set the course for his or her success in the organization.

SHRM’s research shows that new employees are almost 70% more likely to stay at a company for 3+ years if they have a well-structured onboarding process.  Research also indicates that 40% or more of executives fail or quit during the first 18 months in a new position.  An effective onboarding strategy and process can dramatically improve new hire integration and retention.

Many organizations use pre-hire assessment tools to help ensure a match between the job and the person.  There are a number of very good assessment tools on the market and the best are able to measure specific job-related competencies and organizational core values and how a candidate “fits” or matches those competencies/values.  Too often, the results of these assessments are used for interviewing and selection decisions but then filed away and not used. 

Using the assessment feedback during the onboarding phase of early employment, whether it is from a pre-hire tool or administered post-hire, can provide valuable insight for both the new hire and the manager.  Getting early feedback on strengths and weaknesses and having a structured discussion on how those may impact the new hire’s success in his or her role are key benefits.  Discussing communication and work styles is another key benefit.  Most effective pre-hire assessment tools have a development version of their reports.  Consider using this valuable information to positively impact the success of your onboarding process.

Many onboarding processes include an engagement survey to gauge new hire commitment and enthusiasm.  Engagement surveys can provide key data on program effectiveness but they don’t provide direct benefit to the new hire and shouldn’t be viewed as a substitute for individual assessment feedback.  Sharing self-insight assessment feedback in the context of organizational competencies, missions, and values provides a compass to help the new hire navigate his or her integration into a new organization, a new manager, and a new set of expectations he or she needs to meet and exceed to be successful.

The Role of Career Vouchers in Belgium

For three years now, we have had a system of career vouchers in Belgium. Every six years, each active employee has the option to seek the assistance of a professional career center to assist them in their career. This system is purely a choice of the employee. The employer may, but doesn’t need to be, informed of this decision by his or her employee.

The government has introduced a unique system of career vouchers by which the employee is able to utilize eight hours of individual career coaching in a recognized career center. The contribution of the employer is limited to only 80 euros, the remaining 1,100 euros is paid by the government.

The purpose of these vouchers is to concretely and efficiently help people who have questions about their professional careers. Because of demographic reasons, Belgium will have to deal with the fact that the coming decades a large part of the population retires, while there’s only a small inflow of younger workers into the labor market. Within this context, the government will take all kinds of mandatory and non-binding initiatives to make employees work longer and thus keep our social security system affordable. The career voucher system allows the government to ensure that employees are not only more active in the labor market but that they also stay motivated to reflect and work on their professional future on a regular basis themselves.

Employees with career vouchers can contact Ucare. Since the start of this project, we’ve been the absolute market leader in Belgium in assisting employees in their career through this system. Every day our specialized career coaches help hundreds of employees who have questions about their current or future job.

Even today, employers don’t often like that their employees opt for external career coaching. Usually they fear that their employees would discover that their professional future lies elsewhere and that they would leave the organization. Nothing could be further from the truth. Only 20% of the participants in career coaching are looking for a professional solution outside their current organization. 80% of employees wish to remain active with their current employer and are just looking for another implementation, another challenge within their company.

We also note that the latest generation of employees wish to have a good work-life balance and that a daily successful collaboration between four different generations (20-65 years old) of employees provides plenty of challenges in the workplace. 

On Track to Better Business Practices

How often have you heard that a successful business runs like a well-oiled machine?  Given that we’re in the month of May and anticipating “the greatest spectacle in racing,” the 100th running of the Indianapolis 500, the concept of a well-oiled machine plays out quite literally as we contemplate all that goes into a prosperous racing venture.  In fact, the more we examine just how seamlessly the various aspects of a racing operation come together, the more parallels we recognize to a flourishing business model.

Personnel

Take, for instance, the Crew Chief.  Relied upon to oversee all operations and provide guidance to the team as a whole, this head of operations calls the shots and serves as the backbone of the team.  He works with engineers, mechanics and the driver to compile data and elicit peak performance while at the track.  He also ensures strong communication throughout all levels of the team. 

Likewise, a good boss fosters a sense of leadership in his or her team.  A successful manager is able to communicate with employees at all levels of an organization, and recognizes the important role that each individual plays within the team as a whole.  He or she should be approachable and must gain the respect of colleagues by being open with them, trusting them, and relying on them to perform to the best of their abilities.

The Pit Crew performs an intricate ballet, every member having a specific job, yet each one integral to the overall operation of the team.  From the jack man to the tire changers to the fueler, each must rely on the others to complete their specific task accurately and efficiently before the driver can get back out on track.  And all members must anticipate the others’ moves so they are not tripping over each other in the pits, costing their driver valuable time.

Successful work teams function the same way.  When each individual performs his or her job function proficiently, the team comes together as one unit.  (Incidentally, that is also why you hear drivers, when giving interviews, using the term “we” instead of “I.”  Racing is truly a team effort.)  However, when there are “weak links” in the chain, the whole operation fails.  By anticipating the needs of other team members and cross-training staff, you can reinforce any weakness within the team.  With everyone supporting one another and working toward a similar goal, the process can run both effectively and efficiently.        

Resources

As with any job, a race team must have the appropriate resources necessary to perform at 100% efficiency.  While the racecar is a driver’s “office,” the cockpit must be set up strategically so all of his or her controls are within reach.  Also, the team must take into account which car setup will work best at any given racetrack, including aerodynamic configuration, tire camber and ride height.

Just like the cockpit, a cubicle or workspace also must be equipped with the correct tools.  From simple items such as a stapler or telephone, to more intricate needs such as adequate training and technology, an employee cannot perform at full efficiency without the proper resources.  Likewise, an effective team member must demonstrate flexibility to go off course from time to time to best meet the demands of an ever-changing workplace.    

Trust

Perhaps the most important tool of all is trust.  The driver must trust his or her spotter, or “eye in the sky,” to relay clear and accurate information on track conditions and surrounding traffic.  Likewise, the pit crew must trust the driver to stop on his marks each and every time he enters the pits or their lives could be in danger because the operation is not flowing smoothly and someone is in the wrong place at the wrong time.

Trust is also crucial in the workplace.  The key to building cohesive teams is trust amongst the members.  There needs to be an open flow of information in addition to respect between managers and their reports. 

Though you may have days when you feel like everything’s happening around you at 100 miles per hour, don’t forget to take a deep breath, check your mirrors and hold your line.  If the way you’re doing things isn’t working for you, take a moment to realign your configuration and get on the throttle again.  Before you know it, you’ll be taking the checkered flag and tasting victory in winner’s circle!