National Association of Corporate Directors 2008 NACD Corporate Governance Conference

A Roadmap for Executive Compensation

Plenary Session

Tuesday, October 21, 8:00 AM

Digested from the panel discussion:

Reatha Clark King:
On Sunday, we asked and found out that 75% of us at this conference think it is very likely there will be new regulations in targeted areas of governance. And I think compensation is targeted. And further inspiration came last night from John Whitehead-how grieved he is to see excessive greed surrounding executive compensation. We took some excellent food for thought from the Board-Shareholder Communications session, which talked about say-on-pay. Now, in this session, we are looking for a roadmap to executive compensation.

Q: Generally, the level of compensation for CEOs of major U.S. corporations, relative to performance, is:

Too high	65%
Somewhat high	29%
Just right	6%
Somewhat low	0%
Too low	0%
Total Responses: 290

James Melican:
It's obvious to everyone in the world that when talking about executive compensation, we're on a chipping and changing landscape. It's impossible to predict how this is going to come out. In all probability, we will see legislation.

If you look at last October through the end of September-the value of people's equities is down 24%, even before this month. People are angry; they want something to be done. A challenge directors face is that they need to be looking now at what they are going to be doing this year. If the performance criteria the board is using to determine compensation is built on shareholder return, you know the CEO will say "This decline was world-wide and does not reflect this company." The board will be faced with what to do: Stay with the formula? Try to iron it out?

Nell Minow:
What has been more shocking to me than the failures of Wall Street, is the subsequent failure of Wall Street to demonstrate any leadership role. If you corporate directors do not take a leadership role, you are in for a world of pain-no matter who gets elected.

Two weeks ago, I testified before Congress before Waxman's committee, and I'd like to go over what I said (aside from "I told you so"). I said, if you're paying people on the volume of transactions rather than quality , you're in for a lot of trouble.

I'm going to introduce you to a new term I coined: Forensic Corporate Governance. That's what we're going to be doing to figure out what when wrong.

Somebody once said, "True change comes about when something which has been perceived as unfortunate is now perceived as an injustice." That's where we are now. I think say-on-pay is inevitable. You'll see a lot of "no" votes for compensation committee members. Clawbacks will be universal. Again: Act now, you don't want to have this forced on you.

David Swinford:
What I'd like to do is talk about what compensation committee members in this room might want to think about for this year-which will be the most heavily viewed (and reviewed) set of compensation decisions people in this room have ever made. The new administration-no matter which party-will be anxious to solve problems of their constituents.

I believe the first rule is that you have to adhere to your plan. You have disclosed your plans and explained them to your shareholders, and you've disclosed the plans in a way that attempts to convinced shareholders that this plan adheres to the business strategy.

You have to follow your own rules. If this year's bonus will determine whether an executive stays with the company-you are in a very unfortunate situation. We need to give people reasons to build careers with our organizations-reasons going beyond pay. If you're giving people substantially more options or shares because share prices are down, you are going to be accused of being not very sympathetic to shareholders.

I believe we'll see a lot of focus (as you design plans for 2009 and beyond) on multiple measurement systems. We're focused on short-term goals right now because management consistently tells us they can't set good 3-year goals. Not all of us are fortunate enough to have long-term looking, career building management teams.

We need to extend the time frames of most of our incentive plans. I think that extending the time frame of performance will help you explain to investors why this represents a good long-term investment in management, and your ability to look at long-term risk management. Most decisions we make have long-term tails-and our incentive programs need to measure those tails.

Audience Question: 94% of people in the audience felt CEO compensation was high. Since compensation is set by the compensation committee, this seems not like a CEO problem, but a committee problem.

Nell Minow:
I believe the answer to CEO pay is majority vote. If shareholders can replace directors that do a bad job, directors will do a better job. In my testimony on Lehman Brothers and AIG, I included the names of every member of the board as my "Hall of Shame."

James Melican:
You put a plan in place last February, and the world has changed. Performance objectives that seem reasonable probably won't be attained. You will have executives saying "What are you going to do for me?" You have to say, "The world changed for investors, too." This is not the time for giveaways. I think we all agree-this may be your last opportunity to do it. Next year you may be under legislation.

Audience Question: How much is too much? What do you expect to see happen with compensation trends in the new environment?

David Swinford:
Base salaries will be very conservative-but not awful. Annual incentives are going to be down-I believe companies will respond by giving bigger opportunities next year, or setting softer goals.

How much is too much? People don't criticize executive pay when the company is performing well, and when pay moves in the same direction as shareholder returns. People are becoming less tolerant when they see people walking away with a consolation prize. Committees need to focus on change in control and severance clauses-because that's where you will be sued, and that's where you will be personally embarrassed when things go wrong.

Audience Question: Next week I have a board meeting, and executive compensation is the number one topic. Our consultant will recommend that we baseline salaries consistent with our industry. Do you think this is a good idea?

David Swinford:
You have to decide on your compensation philosophy. You're philosophy may be to pay below the industry, it may be to pay above. You have to be able to explain to your investors what's really going on. If you think you've got the right argument, you stick to your guns.

Audience Question: Present outrage isn't just due to pay for performance. Present outrage is also due to the inequality gap-don't you think the salary gap needs to close?

Nell Minow:
I am all for Bill Gates and Steve Jobs or Walt Disney coming up with a great idea and making a bazillion dollars. But the injustice and barbarity of the current system is ruining our credibility in the world.

Audience Question: Can you comment on the role of the outside compensation consultant?

James Melican:
No matter what the consultant comes in with-what data he or she has-the board needs to say, "Here's what we're interested in, and we're relying on you to provide that."

Nell Minow:
They are important service providers with important information, but as I said before, boards can't outsource their judgment.

Audience Question: What do you think about director pay being tied to performance?

David Swinford:
I think directors should be paid in shares. I think they should be required to hold their shares until they retire. I don't think directors should be paid for short-term performance; I want our compensation committee to be real, real straight.