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Directors Looking Beyond Dodd-Frank Act to Fix CEO Pay
Majority of directors believe U.S. company boards have trouble controlling CEO compensation

By Stephen Miller  11/5/2010
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Directors of U.S. companies overwhelmingly believe that CEO pay policies could be reformed by such measures as setting minimum stock ownership guidelines, re-evaluating compensation benchmarks and devising realistic peer group comparisons, according to consultancy PricewaterhouseCoopers' (PwC) Annual Corporate Directors Survey 2010.

PwC research found that 58 percent of the 1,110 directors surveyed felt that U.S. company boards are still having trouble controlling CEO compensation effectively. The boardroom directors surveyed said the three most important factors that should be considered by compensation committees to improve CEO pay policies are:

Ensuring that peer group companies are realistic (83 percent).

Re-evaluating compensation benchmarks (82 percent).

Setting minimum stock ownership guidelines and/or holding periods (65 percent).

“The corporate governance provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act focused on policies such as 'say on pay' and clawbacks,” said Catherine Bromilow, partner in PwC’s Center for Board Governance, referring to financial regulatory legislation enacted in July 2010. “Our survey uncovered other areas that may go further to address CEO pay. As compensation issues continue to be a concern, boards will be well served by closely examining their compensation policies and how well their rewards link to company performance.”

Directors on Key Issues

Despite significant changes to corporate governance regulation in 2010, directors displayed confidence in their governance regimens. This was particularly evident in the following areas:

Risk management. Sixty-eight percent of directors believe that their boards are able to monitor a risk management plan that would mitigate corporate exposures, and 73 percent do not feel their boards should have a separate risk committee.

Director experience mix. More than three-quarters of directors (76 percent) see no need to rethink their mix of directors in light of the new proxy disclosures they made about director experience and skills. Further, 74 percent of respondents feel that their nominating committee is very effective at creating a board with a balance of needed skills and diversity.

New directors and board diversity. Sixty-four percent think that racial diversity is the most difficult attribute to add to boards, followed by gender diversity (53 percent). However, 86 percent of respondents rely on existing board contacts to recruit directors, indicating that they might not be tapping new, more-diverse resource pools.

“Despite increased scrutiny from shareholders and new [Securities and Exchange Commission] mandated proxy disclosures about board diversity, racial and gender diversity continues to be a key recruiting challenge for boards,” said Bromilow. “As boards are held more accountable for their composition, this issue will require increased attention.”

Red Flags Spur Action

When considering instances where they might need to increase board involvement, directors identified the following “red-flag” indicators for action:

The company has to restate earnings (95 percent).

Charges are brought or an investigation is initiated (95 percent).

Multiple whistle-blower incidents occur (88 percent).

Directors and their companies will need to ensure that their internal whistle-blower processes are extremely robust, because the whistle-blower provisions of the Dodd-Frank Act have the power to undermine them, Bromilow said.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Reporting CEO-Employee Pay Ratios: Navigating the Minefield, SHRM Online Compensation Discipline, November 2010

Fewer U.S. Companies Offered Executive Perks in 2010, SHRM Online Compensation Discipline, October 2010

Few Prepared for Executive Say-on-Pay, Survey Finds, SHRM Online Compensation Discipline, July 2010

10 Executive Comp Issues for Aligning Pay Strategy, SHRM Online Compensation Discipline, July 2010

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