Responsible Executive Compensation for a New Era of Accountability

Responsible Executive Compensation for a New Era of Accountability......Page 3
About the Editor......Page 5
About the Contributors......Page 6
Contents......Page 11
Introduction: Responsible Executive Compensation for a New Era of Accountability......Page 17
1 Creating Value for Shareholders: From Measurement to Management......Page 25
1.1 What Value Is and Why It Matters......Page 27
1.2 Primary Forces that Affect Value Creation......Page 37
1.3 Link between Strategy and Value......Page 42
1.4 A Managing-for-Value Mind-Set......Page 46
1.5 Value Drivers......Page 49
1.7 Case Study: Global Financial Institution......Page 52
2.1 Value Creation Objective......Page 55
2.2 Performance Measurement System......Page 57
2.3 Selecting Performance Measures......Page 59
2.4 Building a Performance Measurement System......Page 69
2.5 Goal Setting......Page 71
2.6 From Performance Measurement to Performance Management......Page 73
2.7 Conclusion......Page 75
3.1 Objectives of an Executive Pay Assessment......Page 76
3.2 Evaluating Current Program Understanding......Page 77
3.3 Validation of Compensation Strategy......Page 80
3.4 Pay Levels: Competitiveness and Alignment with Compensation Strategy......Page 83
3.5 Pay and Performance Relationship......Page 87
3.6 Pay Practices......Page 91
3.7 Regulatory Requirements......Page 98
3.8 Communication......Page 99
4.1 Introduction......Page 100
4.2 Role of the Board and Management as Fiduciaries......Page 101
4.3 Sarbanes-Oxley Act of 2002......Page 102
4.4 Stock Exchange Listing Requirements......Page 106
4.5 Effect on Compensation Committee Procedures......Page 119
4.6 Conclusion: The Moving Target......Page 120
5.1 Introduction and Objectives......Page 121
5.2 Mandate for More Thorough and Disciplined CEO Evaluation......Page 123
5.3 Clarifying the Purpose of the Process......Page 124
5.4 Defining Performance Dimensions and Measures......Page 126
5.5 Selecting Objectives and Specifying Measures......Page 128
5.6 Leading and Participating in the Process......Page 130
5.7 Implementing a CEO Evaluation Process......Page 131
5.8 Summary......Page 134
6 Executive Pay and the Shareholder Perspective......Page 137
6.1 Overview of Key Trends......Page 138
6.2 Understanding the Key Stakeholders......Page 139
6.3 Overview of Key Stakeholders......Page 140
6.4 Understanding Shareholder Policies......Page 142
6.5 Red Flags and Emerging Compensation Concerns......Page 143
6.6 Reaction to Other Compensation Elements......Page 151
6.7 Shareholder Proposals......Page 152
6.8 Communicating with Investors: Avoiding Pitfalls......Page 154
6.9 Conclusion......Page 157
7.1 Background......Page 159
7.3 Option Valuation Basics......Page 162
7.4 Valuing Employee Stock Options......Page 169
7.5 Varying the Assumptions......Page 174
7.6 Incentive Plan Implications......Page 177
8.1 Overview of Trends in Equity Compensation......Page 183
8.2 Factors Influencing Change......Page 184
8.3 New Role of Equity......Page 186
8.5 Challenges for Decision Makers......Page 193
8.6 Conclusion......Page 194
9.1 Introduction: Current Difficulties with Pay for Performance......Page 196
9.2 Economic Rationale for Relative Performance Evaluation......Page 198
9.3 Measuring and Understanding Performance Risk......Page 202
9.4 Key Questions for Implementing Relative Performance Evaluation......Page 207
9.5 Constructing the Peer Group......Page 208
9.6 Measuring Relative Performance—Risk-Adjusted Measures......Page 216
9.7 Mechanisms for Introducing RPE in Stock-Based Incentives......Page 222
9.8 Conclusion......Page 223
10.1 Program Objectives......Page 225
10.2 Base Salary......Page 229
10.3 Annual Incentive Plan Design......Page 230
10.4 Long-Term Incentives......Page 234
10.5 Executive Benefits and Perquisites......Page 240
10.7 Shareholder Expectations......Page 241
11.2 Factors Influencing Changes in Director Compensation......Page 243
11.3 Current Compensation......Page 247
11.4 Trends......Page 254
11.5 Developing an Outside Director Compensation Program......Page 258
11.6 Conclusion......Page 259
12.1 Importance of Board Assessment......Page 261
12.2 Risks and Opportunities......Page 262
12.3 Viewing Board Assessment in Context......Page 263
12.4 Board Assessment Process......Page 268
12.5 Three Approaches to Evaluation......Page 270
12.6 Feedback—A Crucial Step......Page 273
12.7 Variations on the Board Assessment Process......Page 275
12.8 Director Peer Review—The Extra Step......Page 277
12.9 Summary......Page 279
13 Creating Value with Communication......Page 280
13.1 Communication Leverages Plan Design......Page 281
13.2 Mercer Study Raises Concerns about Executive Views......Page 283
13.3 What’s Unique about Executive Compensation......Page 285
13.4 What Works with Executives......Page 288
13.5 How to Communicate for Impact......Page 290
13.6 The Importance of Personalization......Page 294
13.7 Communication Challenges in a Tough Environment......Page 296
13.8 What’s at Stake......Page 297
14.1 Importance of an Independent Perspective......Page 299
14.2 Maintaining Independence and Avoiding a Conflict of Interest......Page 301
14.3 Selecting a Compensation Consultant......Page 306
14.4 Criticisms of Compensation Consultants......Page 307
14.5 Establishing a Consulting Foundation: Constructing the Fact Pattern......Page 309
14.6 Compensation Consultant as a Trusted Advisor......Page 311
Index......Page 315