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Reader Profile

Steve Cross
President
Cogent Compensation Partners, Inc.

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase.

What trends in executive compensation will directors need to consider in 2008?

Let’s talk about one of the less publicized trends first. An unexpected trend resulting from the proxy disclosure rules is compensation plans becoming more generic or “middle of the fairway.” As directors, we need to be careful that we don’t let compensation programs become diluted in terms of their strategic relevance because someone said it wasn’t “best practice.”

Another trend most directors need to recognize is that shareholders are really tired of paying for “non performance,” especially when executives are on their way out. This is showing up in criticisms of executive severance arrangements, even sparking pressure to allow shareholders a voice in the approval of executive contracts and severance arrangements.

A potential blockbuster is legislation that would require companies to submit their executive compensation programs for shareholder approval, known as “say on pay” legislation.

Lastly, there is a trend to deemphasize perquisites and other forms of indirect compensation for executives. This trend is a direct result of the new proxy disclosure rules shining the spotlight on non performance oriented compensation.

Speaking of the new Proxy Disclosure Rules, do you have some suggestions to help directors navigate the complexity of the new requirements?

First and foremost, we stress to our clients that they need to have a thoroughly vetted, well articulated, and widely understood executive compensation strategy. This will aid tremendously in guiding pay decisions and in communicating those decisions to shareholders. This is an area we often spend significant amounts of our time when assisting clients – it really pays dividends.

Second, keep in mind that even though the compensation discussion and analysis (CD&A) is now technically a management report, it directly reflects on the members of the compensation committee. For this reason, I think it is perfectly reasonable for directors to ask management and their advisors questions like: “How will this program or decision be reported in the proxy? How does this decision line up with our compensation strategy”?

The last thing I will mention is, don’t be afraid to be different. Our experience with high performing companies is that they tend to be trend setters, not followers. If your company has well conceived compensation arrangements that work and benefit shareholders, then that message should come through the disclosures.

Has there been any real progress in establishing a reasonable, defendable “pay for performance” approach to executive compensation?

This is a great debate topic! Our view is that many companies have developed defendable and meaningful “pay for performance” strategies, but never get the headlines. There are plenty of great compensation committees out there who have put their time and effort into administering programs that work, where the results convincingly support this position, but the attention is too often given to the exceptions to the trend.

I have been involved in very significant research which demonstrates that, as a whole, corporate America is now doing a very good job in linking executive pay to performance. This has not always been the case.

The problem with which we have often struggled is in devising a defendable pay for performance approach and still keep it meaningfully motivational and reasonably simple - balancing the need for academic accuracy and behavioral impact!

How has the evolving regulatory environment changed the paradigm for board service and for participation on the compensation committee?

How much time do we have? The most obvious is the amount of time and level of involvement required. Another is the type of individual willing to take on board service. While many board members still enjoy some of the intrinsic rewards of board service, most recognize it is all about business. Today we are looking for a person who has the unique blend of service mentality, impeccable qualifications, and reasonable risk tolerance. There is significantly more risk associated with sitting on boards today, and yet, it is still considered “service.” Additionally we are looking for directors who are willing to step out of the group dynamics to challenge thinking when the situation calls for it, and yet understand the difference between managing and governing. This is an exceptional combination.

All these hold true for compensation committee members. Additionally, we see the need for directors who have meaningful experience with the complexities of executive pay programs. Today’s executive pay programs require volumes of information and directors who can readily digest large doses of it. The last thing I will mention is the need for directors who understand the difficulties in balancing the expectations of executives (and keeping them motivated), and the expectations of increasingly active shareholders.

Cogent Compensation Partners (“Cogent”) is a Houston-based management consulting firm specializing in independent executive compensation advisory services and corporate governance. Cogent provides comprehensive “independent” solutions to complex compensation challenges for companies ranging from the Fortune 500 to mid-size privately-held companies. The organization was established by Steve Cross, President, in early 2007. Since then, Cogent has grown into a team of seven full-time professional consultants. Cogent works with a variety of industry clients both nationally and internationally and is presently in the implementation stages of expanding its operation in major U.S. markets.

Cogent Compensation Partners is a wholly-owned subsidiary of National Insurance Partners, Inc., a risk management, corporate governance, and financial services firm with offices in Houston, Austin, and San Antonio, Texas.