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Excerpts from Letter to a Fortune 100 Compensation Committee Chairman (circa early 2000s)

Dear Compensation Committee Chair:

In light of the Company’s Compensation Committee agenda for its upcoming meeting, Ron and I wanted to offer our viewpoint regarding the role of external consultants and the sources of value such trusted advisors can bring to the Committee.  While we will be available during the meeting by phone, this memo outlines our beliefs based on our widespread experience working with compensation committees.  Your proposed process of encouraging the Committee to come to agreement on this topic is a commendable objective and ensures that both the Committee and management have a clear understanding on the role of the outside advisor, including who the consultant ultimately reports to and the scope of services provided.

As described below, we believe our involvement adds value in four principal ways, including offering outside technical expertise, providing objective external compensation and performance benchmarking, ensuring clear alignment of total rewards with performance, and facilitating shareholder communication, not necessarily in that order.  Ideally, this external perspective best adds value when we, as the trusted advisor, understand the Company’s business strategy, value creation process, and the opportunity to use rewards that support these outcomes.

Technical Expertise

As an advisor, we provide the Committee with a technical resource that appreciates emerging issues and implications for the Company’s executive compensation programs.  Specifically, we expect to periodically:

- Offer an overview of general trends and creative approaches, such that the Committee understands not just current practices but appreciates where the market for executive compensation is heading.

- Provide technical assistance with complex compensation issues, such as performance-based equity programs, qualified performance-based compensation, stock option expensing, dilution methodologies, and equity incentive valuation.

Competitive Pay and Performance Benchmarking and Program Evaluation

An outside advisor can educate the Committee on the overall compensation market place, and explain variations across industries, thereby creating contextual understanding and ensuring that Committee members have a broad perspective beyond their specific industry background. Specifically, the advisor can:

- Screen and identify relevant peer sets to gain Committee consensus on competitive sets for pay and performance comparisons.

- Assess the executive compensation strategy and program in light of the current environment.

- Provide a balanced and objective assessment of the appropriateness of the executive compensation program relative to the external environment and internal business context.

Pay-for-Performance Alignment

One of the highest return opportunities where we add value is through our examination of the Company’s performance measurement framework and its alignment with expected behaviors and results. As such, we bring the shareholder viewpoint to the table on both the performance side of the equation (i.e., measures and target-setting) as well as the pay side.  Ideally, we help to ensure that measures align with value creation and that goals are set with the proper degree of difficulty to correspond with executive rewards.  As an outcome of this process, we typically:

- Identify key gaps in the current program and directional refinement in programs for the Committee to consider.

- Assist with implementation of any changes agreed to by the Committee and management based on our experience with other clients.

Shareholder Communication

Recently, we have noted a favorable view within the institutional investor community that the Compensation Committee should have access to independent advisors to ensure credible calibration of pay with performance and to deliver independent, objective input to the Committee’s decision-making process.  In particular, we endeavor to safeguard the Company’s Committee from a governance perspective by:

- Helping the Company to “see around the corners” when we see issues emerging on the horizon (e.g., a negative ISS recommendation or the expected shareholder reactions to certain actions or proposals).  For example, if the Company were to adopt employment agreements, we would insist on not only looking at competitive provisions, but also calculating potential liabilities under various scenarios, particularly negative ones like termination for bad performance.

- Supporting effective governance processes through use of executive sessions and other forums that ensure independence of Committee thought on highly sensitive matters.

- Noting where the Company might be challenged regarding its compliance with the spirit of disclosure, accounting, or shareholder approval matters.

For this process to work most effectively, we prefer continuity of the relationship, which means being present at most Committee meetings, even if only participating through a listening role. Obviously, we need not join if the agenda is particularly light and administratively oriented for certain meetings. Ideally, our involvement is best determined through an annual planning meeting of the Committee calendar, which we have suggested with the head of HR and the head of Executive Compensation as an outcome from the next Compensation Committee meeting.

We look forward to the outcome of your discussions of this topic among the Committee members and trust that you find our insights on this topic helpful. If you would like to discuss this topic in advance of, or during your meeting, please do not hesitate to call either of us.

Best regards,

Robin A. Ferracone

Executive Chair, Farient Advisors LLC

cc: Ron Bottano

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Robin A. Ferracone is the Executive Chair of Farient Advisors, LLC, an independent executive compensation and performance advisory firm which helps clients make performance-enhancing, defensible decisions that are in the best interests of their shareholders. Robin Ferracone is the author of a recently published book entitled “Fair Pay, Fair Play: Aligning Executive Performance and Pay,” which explores how companies can achieve better performance and pay alignment. Robin can be contacted at robin.ferracone@farient.com and click here to sign up for Farient’s electronic newsletter.