Page 626 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 10. The Board of Directors 611

should be more interested in how she will justify that type of plan within the company than
surprised that she recommends such a program. She has a solution in search of a problem.
Unfortunately, unless the problem meets the definition, the misapplied solution subsequently
becomes part of the problem.

Consultant Alternatives. It would be logical to engage an executive compensation specialist
as a consultant to the compensation committee. The chosen specialist should be neither
an employee nor engaged in consulting assignments with the company, thus avoiding
potential conflict-of-interest situations. The individual could be employed to review the
quality of recommendations and/or to develop specific recommendations based on com-
mittee objectives.
An extension of this would be to appoint the consultant as a permanent member of the
committee, with the written agreement that the person will not work for management. As
indicated earlier, an executive compensation expert in the employ of another company outside
the industry might also be a candidate for membership in the compensation committee. Even
combining these two sources, there are many more opportunities than there are knowledgeable
individuals.
On the other hand, some companies look to the auditing firm to comment on the
appropriateness of the design of a pay package and its level of payment. This is a logical
extension of what they may later have to comment on anyway; the reasonableness issue is
one that will have to be addressed with the IRS if not with shareholders. The auditing
firm has an advantage over another consulting firm in that it already knows the company
rather well.

Company Compensation Expert. Even if management consultants are employed, it is crit-
ical that a large company have an internal executive compensation expert. To be successful,
the individual must have sufficient rapport with counterparts in other companies to be able
to obtain needed data. In addition, the person must be articulate in oral and written commu-
nication, analytical but practical, and emphatic but independent. Ideally, the individual
should also be sufficiently versed in all forms of executive pay to provide another dimension
to material advanced by the external consultant. As indicated earlier, having this person
report directly to the committee rather than to management would certainly improve the face
validity of the individual’s recommendations.
The companies with top-flight executive compensation pay planners appear to have a
distinct advantage. Since the supply is significantly less than the increasing demand, it is
predicted that a two-tier market in levels of pay will emerge, separating the “pros” from the
“adequates.” Internal relationships will be reassessed, and many will see that an additional
increase in pay for such a person is extremely cost-effective given the total executive payroll.
It is also less than might be incurred in consulting fees.

Shareholder Matters

Committee Report to Shareholders. A Table 10-3 resolution stated “that said committee
is to prepare a report to shareholders in accord with the Securities and Exchange
Commission rules.” This is consistent with a 1992 SEC requirement that a report from the
compensation committee must be included in the shareholder proxy. This was to be consid-
ered a “furnished,” not a “filed,” document. Among the requirements was to note whether