Page 635 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

620 The Complete Guide to Executive Compensation

Board Questions and Requests. Typically, the questions and requests would be as a follow-
up to the earlier-mentioned committee responsibilities. Table 10–19 provides examples of the
type of questions and requests that the board might pose. The committee can minimize the
follow-ups by anticipating what might be asked and including the information in the data
provided. The list in Table 10–19, although representative, is far from complete.

DIRECTOR PAY

Pay Philosophy
The National Association of Corporate Directors identified five principles for setting
director pay in its 2005 Director Compensation Report. These principles are as follows: *
1. “Director compensation should be determined by the board and disclosed completely to
shareholders.”
2. “Director compensation should be aligned with the long-term interests of shareholders.”
3. “Compensation should be used to motivate director behavior.”
4. “Directors should be adequately compensated for their time and effort.”
5. “Director compensation should be approached on an overall basis rather than as an array
of separate elements.”

The report went on to list six best practices that boards should follow: *
1. “Establish a process by which directors can determine the compensation program in a
deliberative and objective way.”
2. “Set a substantial target for stock ownership by each director and a time period during
which this target is met.”
3. “Define the desirable total value of all forms of director compensation.”
4. “Pay directors solely in the form of equity and cash—with equity representing 50 to 100
percent of the total; dismantle existing benefit programs and avoid creating new ones.”
5. “Adopt a policy stating that a company should not hire a director or a director’s firm to
provide professional or financial services to the corporation.”
6. “Disclose fully in the proxy statement the philosophy and process used in determining
director compensation and the value of all elements of compensation.”
Reviewing director pay in relation to the earlier-described principles incorporating the six
best practices makes sense.

Determination and Disclosure

It would seem appropriate for the governance committee and the compensation committee
to work together to develop a timetable of respective responsibilities in reviewing director
pay and proposing appropriate changes. The compensation committee should assign its con-
sultant, or the corporate secretary might be asked to draw together competitive data from the
various published studies.
Probably the most prevalent method of paying board members is a combination of
annual retainer and meeting fee. Other arrangements could simply be one or the other.

* Reprinted with permission from http://www.nacdonline.org.