Proprietary Methodologies

Communicating that you are doing the right things right just got easier

Farient’s Alignment Model™

Research indicates that alignment between performance and pay is a significant issue among institutional investors.  “Aligned” or “fair” pay is when total compensation, after performance has been factored in, is both sensitive to company performance over time and reasonable relative to the market for executive talent and for the performance delivered.

In response, Farient has developed the Farient Alignment Report™, a proprietary Performance and Pay Alignment tool. This model provides a means to quantify and visually illustrate the degree to which a company’s executive compensation program is aligned with total shareholder return over time.

With the passage of the Dodd-Frank Act, shareholders will have a non-binding “yes” or “no” vote on executive compensation packages.  This change takes effect on January 21, 2011. In addition, the SEC is expected to issue rules requiring pay and performance disclosures.  Our Alignment Model produces a truly robust indication of the long-term relationship between performance and pay and provides a standard way for both Boards and Shareholders to assess the executive compensation package.

Farient’s Quantitative Risk Assessor™

In light of the new disclosure requirements and an increasing focus on risk management by Boards of Directors in general, Farient developed a proprietary Quantitative Risk Assessor™ that helps compensation committees answer the following questions:

• “How much risk are we taking on?”
• “Is it appropriate?”
• “Does our compensation program encourage appropriate risk-taking relative to the business risk?”
• “Do we want to change our business risk appetite?”
• “What corresponding changes to the compensation program may be necessary?”

Farient’s Quantitative Risk Assessor™ works by first evaluating the riskiness of our client’s business. We do this by comparing the company’s growth, size, financial leverage, volatility, capital intensity, and other risk indicators to the S&P 1500 to determine the long-term risk profile of the business. We then quantify the total direct compensation package in terms of leverage, upside potential, performance measures, goals, time horizon, and other risk indicators to assess the compensation system’s effect on risk-taking. Finally, we compare the business risk to the compensation risk to highlight any areas that should be “on watch,” and suggest any changes that should be considered.

Copyright 2011 - Farient Advisors, LLC

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