For companies in the eye of the executive compensation storm, the solution is to change the dynamic and put the focus on performance, identify the objective metrics, and make transparency an important element in the debate.

 

The top five elements executive compensation communications:

 

1) Put the focus on performance. The key is to link executive compensation to the company’s performance. Nobody cares that CEOs work hard. What they do care about is the results – results that are profitable for all constituents. Over the years, corporate kingpins like Bill Gates, Steve Jobs, and Sam Walton have rarely if ever been criticized for their own wealth, precisely because their good fortune was everyone’s good fortune. When you’re able to present results-oriented figures to the marketplace, the entire dynamic changes for the better.

 

 

2) Identify the metrics that best define performance. Too often, the only performance indicator that gets any attention is a company’s stock price. In fact, the best corporate managers want to be, and ought to be, evaluated against an array of reasonable criteria. For example, have your executives provided excellent returns on invested capital? Have they strengthened the company’s ability to acquire other companies? Have they created jobs? If so, by articulating these achievements, you paint a broader and more accurate picture that, in turn, is a real justification for compensation.

 

 

3) Avoid legalese. Investors, regulators, reporters, and consumers appreciate straightforward information, so give it to them. Attempting to mask pay practices under a cloud of jargon and statistics will heighten suspicion and jeopardize the trust of those the company relies on for success.

 

 

4) Post pay package information on your Website in plain English. If an investor, reporter, regulator, or consumer wants this information, they are going to get it; it’s all publicly available. Posting this information in plain language allows a company to get its message out first and demonstrates commitment to full disclosure. If your company has not yet been in the spotlight, that’s all the more reason to move now.

 

 

5) Follow the rules – and stay under the radar. While corporate executives have some legitimate gripes about the level of disclosure that’s now required, the fact remains that the best way to stay out of the news on executive compensation issues is to meet and fully satisfy compliance and reporting deadlines. Here is certainly a case where the less said, the better.

 

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Industry Insight: Interview with Jeffrey Cunningham, Chairman and CEO of NewsMarkets, LLC, publishers of Directorship Magazine

 

Jeffrey Cunningham advises boards of directors on executive compensation policy and has written extensively on the subject. Here are his tips for better communicating executive pay policy.

 

 

Jeffrey Cunningham: A CEO who’s under siege for compensation has to deal with that problem directly. And if they are, in fact, overcompensated, they need to be able to win the battle of justification with every constituency.

 

There’s no tolerance for overpayment of a public company’s CEO – and I say that regretfully because the one incentive people had for becoming a CEO was that you could make a pot full of money. That’s just not the case anymore. You can still make a pot full of money, but you have to be able to justify it and relate it to performance.

 

That being said, I’d posit that activist shareholders are a constituency with a whole lot of ammunition on their side. They’ve got direct access to the media and, in many cases, they also represent the pension fund holders. With both media attention and shareholder backing, they represent a very tough customer – and they don’t play softball. When they come at a company, they are very well researched, they understand how the game is played, and they know the corporate governance rules inside-out.

 

 

Jeffrey Cunningham: I think we’re entering an era of demarcation with the new regulation in that the days of trying to put compensation into so many buckets that it couldn’t be aggregated are likely over. Typical things like corporate apartments and personal use of the corporate plane – while not major in terms of the dollars they represented – became very annoying to shareholders who thought that people making tens of millions of dollars should be spending tens of thousands of dollars of their own for these types of services.

 

That era is going to vanish and disappear. I think we’re going to see a coming together of private equity compensation and public equity compensation where there’s a reduction in cash and an increase in long-term equity with very few tax gains and very few parlor games like the ones I mentioned. It won’t necessarily be less compensation for the CEO, but [it will mean] disclosure upfront so that, with large compensation, there won’t be surprises. There will still be complaining, but there won’t be a sense that somebody tried to get away with anything. I think that’s better for us all.

 

 

Jeff Cunningham: The tendency used to be to hunker down. CEOs being attacked for their compensation weren’t able to come back and say anything. Now CEOs have to build into their compensation plans the willingness to defend them and the willingness to go out publicly and say, dollar for dollar, here is why I earned it and here is why it’s good for shareholders.

 

A proper compensation plan should provide all the answers you need and make criticisms melt away.

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Today, the mainstream media are by no means the only auditors poring over proxy statements in search of the next executive compensation poster child. Bloggers also play a critical role in breaking and shaping these stories online – and they’re under no particular obligation to present a fair and balanced report.

 

Here’s a look at three blogs that companies facing an executive compensation crisis should be monitoring:

Truth on the Market
www.truthonthemarket.com/
An influential, well-ranked collaborative blog network, this resource offers academic insight and opinion on headline news, court cases and corporate developments, along with abundant commentary on law, business, economics and antitrust issues.

The Corporate Counsel
www.thecorporatecounsel.net/blog/
An oft-cited source and industry must-read, this veteran law blogger and former in-house and SEC counsel provides rich resources and coverage on breaking developments in corporate and securities law, corporate regulation, crisis management and actions.

 

Harvard Law School Corporate Governance Blog
blogs.law.harvard.edu/corpgov/
Resource-rich academic blog on corporate governance by Harvard CG program associates, affiliates and guest writers, designed to facilitate research and public discourse.

Footnoted
footnoted.org/
Named a Top 10 business blog by Business Week, CNN and FT, oft-quoted expert's footnotes are a "guide to finding the stuff that companies try to bury in routine SEC filings."

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Stop the Presses: The Crisis and Litigation PR Desk Reference is a survival manual for corporate leaders, board members, lawyers, and communications specialists. This book provides the dos and don’ts of crisis planning and communications and articulates the essential strategic guidelines for navigating bet-the-company issues. Stop the Presses looks at cross-border issues, SEC investigations, product liability situations, antitrust matters, a range of health care issues, and more, for companies and their counsel. Order your copy today. >>

 

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“Being compliant is the most powerful weapon against investigations and shareholder litigation,” says Steve Anderson, Executive Managing Director of Beecher Carlson’s Executive Liability Practice. “We want to make it easy and convenient for Directors to stay current on recent regulatory and legislative developments, board governance issues, and industry requirements.”  Learn more about TopBoards. >>

 

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What’s next?

Resolutions calling for advisory shareholder votes on executive compensation (also known as “say on pay”) began showing up in proxy statements in significant numbers for the first time in the spring of 2008. More than 100 companies are currently grappling with the issue, and many more soon will be – leaving boards of directors with a most difficult choice.

 

They can:

 

• Agree to investors’ demands and commit to taking the result of say on pay votes into account when making executive pay decisions. However, in doing so, they risk setting a dangerous precedent that will encourage shareholders to seek ever greater leverage in corporate governance;

 

• Agree to the votes with the strong caveat that the results are strictly informative. However, in doing so, they risk the perception that they’re only paying lip service to their shareholders; or

 

• Stand fast and hope that say on pay is just a passing fad. However, in doing so, they risk becoming a symbol of corporate greed run amok and the perception of being out of touch with shareholder sentiment.

 

No matter what course of action a company chooses, there are specific communications strategies for minimizing the respective liabilities.

 

• Companies that embrace say on pay votes and are willing to be bound by the results should emphasize that the decision is meant to serve the cause of openness and transparency. At the same time, their language must be sufficiently specific to discourage unwonted expansion of shareholder prerogatives.

 

• Companies that choose to embrace say on pay in a strictly advisory fashion must make it clear that, while the board remains the ultimate arbiter of executive pay, shareholder input is always invaluable.

 

• Companies that choose to resist must do so by relying on sound business principles arguments. They must emphasize the need to be competitive in attracting top talent while highlighting any policy safeguards against excessive executive compensation that may already be in place.

 

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Future High Stakes ™ issues

This summer’s Olympic Games are sure to fix the media spotlight on China and its human rights issues. What can companies with close ties to China learn from the corporate behemoths sponsoring the games?

 

Bankruptcy:
As the economy continues its downward turn, companies on the brink must understand how effective communications can transform a story of imminent downfall to one of anticipated comeback. Can you keep investors, analysts, and reporters on board when filing for, and emerging from, Chapter 11?

 

Data loss and theft:
The number of companies and institutions affected is staggering. Are you prepared to respond to the crisis that may likely lie ahead?

 

More to come:
• Accidents and Disasters
• Antitrust
• Board or Board Member Liability
• Class Actions
• Coming to America
• Crisis
• Diversity
• Education
• Energy
• Executives Behind Bars
• FCPA
• Food
• Global Capital Markets
• Intellectual Property
• Internal Communications
• Internal Investigations
• Labor & Employment
• Monetizing Moments
• Money Laundering/Money Transfers
• New Media/Social Networking
• Product Liability
• Professional Services Crises
• Public Equity
• Qui Tam (Whistle Blowers)
• Reputation Management – Celebrity
• Reputation Management – Corruption
• Reputation Management – SEC Investigations
• Tourism
• Trade

 

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