Athena Alliance works with experienced board directors, “Pioneers,” to host salons for our members. These events are an opportunity to connect with other members in an intimate setting and learn boardroom insights and best practices. The following is a recap of a recent salon.
Listen to the key takeaways from the event.
The Compensation Committee of the Board of Directors negotiates the CEO’s and executives’ objectives, sets target compensation and what happens when targets aren’t hit, and controls employee equity burn. Companies do—or try to do—what they get rewarded for doing, so the Compensation Committee owns balancing executive and shareholder rewards and risks. This event will pull back the curtain on how CC’s evaluate and implement executive compensation. We will talk about working with management, the role of compensation consultants, and that of the shareholder advisory services ISS and Glass Lewis.
Sharon Wienbar has extensive board governance experience in public and private companies. She currently serves on the Resideo Technologies, Inc (NYSE: REZI) board, where she chairs the Compensation Committee, and the Colfax Corp (NYSE: CFX) board where she is a member of the Compensation Committee. She served on both the Glu Mobile (NASD: GLUU) and Everyday Health (NYSE: EVDY) boards (from early revenue through IPO and beyond), chaired the Compensation Committee, and served on the Audit Committee of both companies. All of these public companies
executed numerous M&A transactions and capital transactions. Resideo spun out of Honeywell in late 2018. Click here to read more about Sharon on LinkedIn.
I have about 20 years of experience serving on corporate boards, both startups and companies that I invested in the company and sort of “bought” my board seat. I’ve served as an independent director in both startup companies and large public companies, and not for profits. And before that, I worked as a management strategy consultant. I worked as a line operating executive for a long time and then I worked as an investor. And, throughout all of those experiences, I just really enjoyed the process of developing strategy in the company and working with management to try and help them execute the strategy, whether that’s building talent or selecting markets to focus on. The compensation committee is the part of the board that works the most closely with management on those issues. So, I gravitated toward serving on or chairing the compensation committee on virtually all of my boards, and that was part of the reason why I brought this topic to Athena.
The board only has a few really official goals. Do we have the right strategy? Are we taking the right amount of risk? Are we appropriately capitalized? Do we have the right CEO? The compensation committee, through its various roles, works on many of those issues. At its core, we’re deciding who the people are and what we’re paying them to do. We’re the ones who work with the CEO on his or her objectives and the objectives of the management team. Are those objectives aligned with the corporate strategy? What do we want? And then we’re the ones who decide what we are paying people to do. Are we giving bonuses for growth or are we giving bonuses for profitability? Are we giving bonuses for success in a new market entry?
We’re driving the strategy. We’re deciding who our team is and we’re deciding how to pay our team, which is what makes them get up in the morning, other than the success in their role. That’s a very powerful role on the board, as opposed to [other roles] such as preventing the company from getting into trouble. When you’re auditing, you’re making sure that everything was done in accordance with good practices and good governance, but you’re not driving the business forward. I have a growth mindset and I like to work with companies on growth, whether it’s growth in revenue and profit or growth in people. I feel like that’s what the compensation committee does.
It varies a lot depending on the size of the company, but by the time you get to be a relatively large company, you generally target paying people a relatively comparable amount to their peer group. So, you select a peer set of companies that might be somewhere in the neighborhood of 20 companies or so that you think are a roughly similar size and market cap and growth profitability. You look at how much those people make, what their pay practices are, and you kind of use that as a frame of what’s down the middle.
How do we know what to pay so that we’re not doing something wacky? If you’re doing something wacky, you want to make sure it’s really good for shareholders and good for your management team, not just wacky for its own sake. There are zero points for originality in pay practice. You really want to know how you’re paying people. Is it aligned with shareholder value? You look at the demonstrated practices within your peer group and then bring that down to brass tacks. What is our budget? Where are the goalposts around the budget? Are we going to pay people some portion of a bonus, for example, for coming in below budget? What if we’re so far below budget that we’re below last year’s results? Is that a bonus-able event or not? Do we pay people for outside performance, meaning if we overachieve should we have accelerators, and how high do we go before we say that extra value that we’ve created really should go to the shareholders?
You’re looking at the comparable universe on typical kinds of pay practices and how you take the most relevant of those into your situation and turn it into a very specific target dollar amount as thresholds, et cetera, for your management team.
You’re also looking at typically three kinds of compensation—base pay, annual bonuses (which are usually paid in cash), and some kind of long-term incentive. In a startup, that would be your stock options; in a larger company, that’s something called a long-term incentive plan that is usually paid in equity or RSUs or some kind of performance-based RSUs. And what is the balance between how much compensation is fixed and how much is at risk based on performance? What are the metrics used for how much you pay people for their short-term performance versus long term performance? But you’re trying to balance being right in the short term and being right in the long term so that you don’t have people taking too much risk, where they would earn their bonus this year but the company would be in trouble next year, for example.
ISS stands for Institutional Shareholder Services. And then there is another company called Glass Lewis. Those are both consulting firms that advise large institutional shareholders. So pension fund endowments, hedge funds, mutual funds, and other entities that hold capital stock in public companies—ISS and Glass Lewis advise them in how they should think about the governance in the companies in which they hold stock. In public companies, especially after Dodd-Frank (a law enacted after the financial crash), there are rules about how things are done inside the company; for example, how often do shareholders have a chance to tell the company and the board of directors of the company what they think about how the executives are compensated.
Every year the directors or some portion of the directors stand for re-election. ISS and Glass Lewis evaluate should the stockholders vote for those directors when they’re coming up for election or should they withhold their vote. Should the shareholders vote for the hiring of the audit firm that’s doing the audit or should they withhold their vote? Part of what ISS and Glass Lewis look at is the company’s compensation practices, meaning “are we paying people a fair amount?” And “are we balancing risk and reward?” And “are we balancing shareholder value with executive compensation?” Again, if you implement those practices that we talked about earlier, you’re looking at a peer group of similarly situated companies and picking a “down the middle” compensation plan, and you’re paying around the median and you’re doing normal things. Then Glass Lewis is going to say “Okay, big green check, they’re doing the standard things, nothing is crazy. Vote yes on for the directors who are on the compensation committee standing for re-election.”
Where companies worried, and where Glass Lewis and I get worried, is if the company is doing something that is extraordinary and it’s not obvious how that’s beneficial to shareholder rights. For example, if a company said we decided to give our CEO an extra $100 million of stock because we want the company to be worth another billion dollars and we think giving 10 percent of it to him or her is the right thing to do. We’re going to make a qualitative assessment in three years whether the CEO has earned that or not. They’d look at that and say, “It’s a really large amount of money. They haven’t decided upfront on the objective measures by which to assess whether it has been earned or not.” They would likely come back and say, “Vote no on that pay vote.” That’s part of the reason why you’re trying to just do things that are standard practice and adhere to good governance, then the ISS’ and Glass Lewis’ of the world are going to be supportive of you.
We didn’t talk about this explicitly, but it’s an implicit thing. To be a good director and to be a good member of the compensation committee, you have to be comfortable talking about money and talking directly about people’s pay. You can’t blanch at saying, “CEO, you’re getting a 3 percent raise this year and your salary is going to be X.” You have to be comfortable talking about those things. More importantly, you have to be comfortable saying where the board and where the compensation committee draws the line on compensation. I find this especially in entrepreneurial high-risk companies where the CEO is bashing his or her brain, trying to make something happen in the market. Sometimes those CEOs have an outsized assessment of their value and they think that they are deserving of these extraordinary rewards. They will be and they will get them when their company grows and succeeds. But they’re often still in this fledgling state. Sometimes the compensation committee has to just say no to management.
It’s a bit uncomfortable because you want to generally be supportive of management. Whenever you can as a director, you’re trying to get them to do the right thing and get them to do the right thing on their own. So, you don’t want to say no very often. It can feel like you’re being an impediment to their progress. Yes, sometimes it’s our job to say no. And that’s the flip side of the power of the compensation committee. You have the power to say no. You try to engineer it so that you don’t have to very often because it’s demoralizing to everybody but you’ve got to. You have to be comfortable just saying, “I’m here for all of the shareholders, not just the management shareholders, and we have to do what’s appropriate for everybody.”
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