Executive compensation—particularly within publicly traded companies—has come under increased scrutiny in recent years as the economy has faced significant downturns. As a result, corporations need to focus attention on whether their executive compensation aligns with the goals of the organization and its shareholders, says a panel of experts at an Osler, Hoskin& Harcourt LLP seminar on executive compensation strategies for growing companies held yesterday in Toronto.
Andrew MacDougall, a Toronto-based partner in Osler’s corporate and securities law practice, said people increasingly recognize a connection between executive compensation and the risk that can have on a company’s financial performance. “Every time we have a financial crisis, executive compensation is blamed as the cause of it,” he said.
Consequently,according to MacDougall, companies are increasingly focused on managing the risk involved in their compensation decisions. He said one of the best ways for corporations to mitigate compensation-related risk is to make sure compensation measures are aligned with the organization’s strategies. “Are you giving [executives] the incentives that will lead to the performance metrics you’re trying to achieve?” he offered as a key question those in charge of compensation practices should ask themselves.
“Often, we move away, for a variety of reasons—simplicity of measurement, disclosure—from looking at measures that align with our strategy. But that is the clearest way that [companies] can make sure they’ve addressed risk in compensation,” he says.
While small-but-growing entrepreneurial companies may believe too much corporate structure can hinder their organization’s growth prospects, putting that structure in place early can be helpful where compensation is concerned, said Sandra Cohen, an Osler partner and leader of the firm’s U.S. compensation and benefits team in New York City. “If there’s no pay structure, pay bands or performance standards, then everything’s up for negotiation [in annual compensation discussions], which breeds inequity and discontent,” she said.
She presented some governance practices that corporations, even smaller ones that may be short on resources, can take advantage of to make sure they’re able to make sound decisions around executive compensation:
- Build in more lead time around compensation decisions.Compensation-related decisions that are made at the last minute can increase organizational risk. “You could be thinking now about next year’s rewards. Add in another board meeting, or another compensation committee meeting. Don’t surprise your board with a binder of final proposals from management the night before for approval at a board meeting,” she said.
- Use checklists and tally sheets. Those responsible for making compensation decisions should do so while keeping in mind what incentives have been granted previously, and how these and any new decisions align with the company’s overall strategy and could affect its shareholder perception and bottom line.
- Involve legal review teams. Legal advisors should be part of compensation decisions—especially early in a young company’s growth history—since they can help identify pay practices that might harm an organization’s image, before such practices are implemented and become entrenched in future compensation expectations.