Compensation discussions in the board room

Michelle Cain, BridgeTower Media Newswires

Did you ever ask your parents “How much do you get paid?” If you did, you probably got the same response I did, which is awkward silence followed by, “It’s not polite to ask people what they get paid.” Lesson learned: Pay is not a polite subject of conversation, not even among family members.

Nearly everyone has had similar parental or societal guidance on the subject of pay. Employees squirm before those periodic “pay discussions” with their supervisors. Many supervisors squirm more than the employees with whom they are having these discussions. Even CEOs and board members will confide that this “pay discussion” is always a bit different than any other that will arise in the course of business. Board briefing materials, consultant reports and presentations can “set the table” by forestalling the topic, but eventually it must be discussed and a decision made.

There seem to be several different patterns of avoidance behavior in the boardroom as these pay discussions arise. It might be helpful to describe some of the more common avoidance behaviors in order to better understand the dynamics (or lack thereof) of pay discussions, and to offer some suggestions that might engage directors and make pay discussions more effective.

“What are we doing for everyone else?”

This question is often asked after a prolonged pause in the discussion when the subject of a pay recommendation for the CEO or other senior staff members is raised. To break the uncomfortable silence, some brave soul asks this question. The rationale implied is if it is OK for the staff, it should be fine for the top executive(s). It also requires no additional research specific to the executive(s) in question. It might also require no further discussion than “All those in favor…?”

“Let (fill in board member name) handle it”

In this situation, the entire matter is delegated to a single member of the governing body. That person is believed to be more knowledgeable on the subject or is the individual who historically has been tasked with this chore or the poor soul now “taking his/her turn” with this duty. Whether the individual is formally or informally charged with the responsibility and authority to address this matter with the CEO, the other board members may have no further involvement in the process other than hearing the percentage or dollar amount of the change made in pay.

“Ask the consultant”

At a loss for an answer or a volunteer, the board turns to the consultant to break the silence. The board seeks “expert” advice and feels absolved of any disappointment or problems that might arise from the answer provided. After offering whatever information the consultant can provide, with a unanimous vote, the issue is considered closed.

“The CEO will tell us what to do…”

In some cases, the CEO will be willingly obliged or bold enough to provide the information to substantiate a specific recommendation to the board or simply answer the board’s “What should we do?” question. Having received the CEO’s information, the board is then strangely left to simply approve it or awkwardly question or change it, if they dare.

Certainly all boards or compensation committees are not as dysfunctional as what is being implied above when addressing this important duty assigned to the governing body. However, it is not unusual for some of the behaviors described above to appear in the course of board discussions and decision making regarding pay, even in otherwise effective boards.

The critical success factor for effective governance/oversight of executive pay is engagement of the board in the process. One of the best signs of engagement is the level and extent of dialog among board members as the process is carried out. The subject of executive pay is a subject for discussion among the board members, not simply a well-orchestrated chorus of “I move the motions,” “seconds” and “ayes.” In order for engagement to occur, there are a number of necessary conditions:

Board members/compensation committee members must understand the role/responsibility they are expected to play in the process.

Clear statements of decision making authority for each step in the process need to be defined. Some organizations prepare charters for the committees engaged in compensation decisions similar to ones used by other committees (e.g. audit, finance, etc.).

A specific process should be defined for use in the governance and administration of executive compensation.

Organizations sometimes prepare a calendar describing two or three meetings per year that are devoted to executive compensation. The calendar lays out a schedule for the year as well as the activities, objectives and decisions associated with each meeting. Establishing a calendar is particularly effective for engaging board members. It provides clarity on the purpose of each meeting and will focus directors on the matter(s) at hand.

Organizations often establish formal pay policies/guiding principles that articulate the organization’s beliefs about pay and the particular factors that will be considered when pay decisions are made.

Developing these points of view on a formal basis rather than on a case-by-case basis goes a long way toward establishing a sound business rationale for pay and promoting consistency from one decision to another. A formal policy can also support consistency from the standpoint of turnover on the board, committee assignments and management. New members can also review ­documentation ­pertaining to the compensation program and quickly begin to participate in the process without the need for lengthy “oral histories” to prepare them to engage.

With these necessary conditions satisfied, board members are well-positioned to engage in the governance/administration of executive compensation. With the benefit of clarity on key aspects of the process, questions for more information and comments offered on various topics should come more freely and more often. Those questions and comments are exactly what engagement implies. When engaged, all parties involved in the process, especially board members, demonstrate that they are involved in the issue and not simply performing the “review and concur” role so often associated with board membership. Good questions and thoughtful opinions are essential for effective management of executive pay. The key takeaway is that in the boardroom, pay is a topic of conversation and a very important one.


Michelle Cain, CPA is a partner with Mengel, Metzger, Barr & Co. LLP.