Page 670 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 12. Summaries 655

Effective communication ensures that executives (and all other stakeholders) clearly
understand how the pay-delivery system works and what awards are available for stated
levels of performance. Both of these requirements must be done well. Failure to do so will
most assuredly result in an ineffective executive compensation program.

CHAPTER 10: THE BOARD OF DIRECTORS
Major responsibilities of the board of directors include hiring (and if necessary firing) the
chief executive officer, approving an annual business plan, and adopting a long-term
strategy. The board must also monitor the CEO’s progress and performance within the
framework of the approved actions. Traditionally, the CEO’s performance assessment was
converted by the board to an approved compensation package (normally, through an annual
review). However, Section 162(m) of the Internal Revenue Code now forces the compen-
sation committee to be responsible for determining the pay of the five named executive
officers in the proxy.
The role of the compensation committee is to take the corporate objectives established
by the board and relate them to a pay delivery systems that will reward in proportion to
accomplishment. Good corporate governance dictates that the committee hire an outside
executive compensation expert to work with management and the committee. This is a
change from earlier years when management hired the consultant. Not surprisingly, the com-
mittee rarely saw a proposal that was not endorsed by the CEO. Even with the recent change,
too much emphasis is still placed on what others are doing, as opposed to what is right for
the company.

CHAPTER 11: THE PAST, PRESENT, AND FUTURE

The chapter begins with a selected chronology of executive-pay-related events, beginning
with the pay of President Washington in 1789 ($25,000 a year) and ends with recent events
and a look at the future. The view of the present includes some reminders, cautions, good
and not-so-good pay practices, and Ellig’s laws. The future everview identifies some possible
threats to executive pay and some “laws” to keep in mind.

This book has identified and defined the basic elements of the executive compensation pack-
age. It has described their key features and the various forms each might take in a current or
deferred manner. Additionally, it identified the various stakeholders and rulemakers and
assessed their perspectives. It has examined various design considerations as well as the role
of, and pay for, the board of directors and its compensation committee. Communication and
disclosure aspects have been highlighted throughout. It has also discussed how accounting,
tax, and SEC issues affect compensation plans. Additionally, tax tables have been developed to
allow the reader to see the impact of subsequent changes.
The objective in all this has been to give the reader a frame of reference for sub-
sequently discussing any element or segment in comparison with the total package. While
the emphasis has been on concepts and approaches rather than specific solutions, it has been
liberally supported with figures and tables for those interested in a more detailed analysis.
Where specifics were added, you should remember that items such as accounting, legal