The Board of Directors and Management – Part 1

When you consider the functions of a Board of Directors, you’re reminded that they are a select group of individuals with the skills and expertise to oversee management activities. Board members are chosen because of their understanding of the specific business or its industry sector; their business acumen; their financial or legal training; their ability to reach a consensus with fellow Board members in the oversight of corporate activities; and/or their ability to work closely with the management team. Whether they are recruited or they volunteer, we should not lose sight of the fact that these individuals spend increasing amounts of their time serving as Board members; and that they must perform their duties in cooperation with the management team.

The priorities from the perspective of the management team should be:

Does the Board member have the right skill set?

Do Board members contribute to the oversight process; i.e., are they engaged?

Are Board members appropriately rewarded for their time and effort?

The priorities from the perspective of individual Board members are:

Does management run the company without incurring undue risk?

Is management committed to the strategic plan of the Board?

Does the company continue to be viable and strong?

The relationship between Board members and the management team is at times symbiotic. Neither can perform their own role in the corporation without the other and it must be a mutually beneficial relationship.

Management Priorities

The management team should constantly be on the look-out for potential Board members who can serve the company objectively. Typically, Board members are selected from the local community, the industry, or even from the ranks of retired company officials. These people should have an understanding of company activities and ideally know what makes this particular company successful.

While the Board members are certainly evaluated on their attendance at Board and Committee meetings, they should also be evaluated by the level of attention they pay when at these meetings. A simple check of the level of engagement is whether their Blackberry is shut down as the meeting starts. A more convincing test would be each member’s level of contribution to the deliberations of the Board.

Board members take time out of their daily activities to serve on the Board. An appropriate level of compensation should take into consideration their opportunity costs or what they could be earning if they were not attending a Board meeting.

Board Priorities

What is the management team doing to effectively advance the company, build value, and maintain financial stability. Is the management team incurring undue risk? This can mean different things in different industries. For financial services, it might mean compliance with all regulations. In the manufacturing sector, it might mean maintaining strong relations with labor groups. The management team must constantly assess whether it can achieve the Board’s strategic plan without compromising the intrinsic value of the company.

With regard to the strategic plan, Board members want to know whether management can support and achieve the plan that they’ve established. The management team implements this plan through a variety of tactical measures and these become the method upon which the Board evaluates management team effectiveness.

And, the number one priority for the Board, does the company remain viable and strong? Virtually everything that the management team does is evaluated by the Board. Board members have a duty to constantly check in with management, to see if assistance is required, and to report back to fellow Board members that they’ve fulfilled their oversight obligations with management.

The relationship between the Board and management is complex. Each side has the responsibility to consider the other’s performance and to constructively work at improving their own performance. The management team typically has a description of duties and responsibilities as well as annual performance objectives and Board members need to annually evaluate management’s performance. The Board members have a charter and a strategic plan and should periodically assess their own effectiveness. Common sense would suggest that Board members and the management team all have a vital stake in conducting evaluation sessions and assessing Board effectiveness in the best interests of the company.

By Paul Gavejian - Managing Director of Total Compensation Solutions
- 914-730-7300 www.total-comp.com

Now Available TCS' 2010/2011 Board of Directors Compensation Report

Performance Management - Part 1

The economy seems to be picking up; however the news on the employment front continues to forecast more downsizings and higher unemployment. When a company is in a position where it has to downsize staff, it can be more difficult if the company does not have a credible and valid performance system.

What constitutes a performance system that can be useful in making employment decisions? In our experience a company that uses a performance management process is well situated to identify and differentiate among performance levels.

Performance management starts with setting performance expectations so both employee and manager agree on how good performance will be recognized. Unlike the once-a-year performance appraisal, performance management systems have built in touch points throughout the year. A keystone of performance management is “no surprises.” At year end, both employee and manager participate in developing the year end assessment and setting expectations for the next year.

If you would like to learn more about developing a performance management system for your organization, call Martha Glantz at Total Compensation Solutions at 914-730-7300.

Martha Glantz is a senior director at Total Compensation Solutions (TCS) http://www.total-comp.com/ TCS is a full service compensation consulting firm specializing in Executive Compensation, Board Compensation, Performance Management, Bonus/Incentive Plan Design and Broad-based Compensation.

AIG - Retention Bonuses vs. Performance Bonuses

The President, the Congress and the average American on Main Street are outraged at the top business story of the week which is: “AIG pays $165 million in bonuses to employees.” Why is everyone outraged? Well, to date, the United States government has given AIG over $170 billion to keep the company from collapsing. This fact has some asking, “why are bonuses being paid at a company that is being bailed-out?” The answer might not be so simple.

When the media reports on the AIG bonus story, it calls them bonuses. AIG, on the other hand, calls the bonuses in question “retention bonuses.” You might ask “What is a retention bonus and what’s the difference?” Let’s define the word bonus first. A general definition for the word “bonus” could be an additional reward for a job well done. However, in the area of employee compensation there are different types of bonuses. In this article, we will consider two types of bonuses: Performance-based and Retention.

Performance-based bonus: This type of bonus rewards accomplishments and is typically what most would think of as a bonus. For example, the company, the department or the individual has performed well and that performance is rewarded with additional compensation (cash, stock options, stock awards, etc.) paid in addition to base salary. However, even within this category of bonuses there are sub-categories: Formal and Discretionary:

Formal Bonus/Incentive Plan: These plans tie bonus/incentive payments to specific pre-determined performance goals. These goals may apply to company, department, team, individual or a combination. In these formal plans, ideally the company and the employees can calculate the amount of bonuses based on whether they have achieved the stated goals. The goals should be measurable and clearly defined and often are set around performance metrics such as: revenue growth, net income growth, new system implementation, expense reduction etc. The key is to select performance measures that if achieved result in improved performance.

Discretionary Bonus Plan: Some companies prefer to have more latitude over bonus/incentive payments. In these organizations, management determines bonus amounts or percentages based on its perception of how the company, department or individual performed. In this approach bonuses are usually determined after the fact and it is more difficult to predict what bonus one may get.

Retention Bonus: This type of bonus, sometimes called a stay bonus, is not performance based. Rather it is used to get an employee, or group of employees to stay with a company for a specific time period. . These bonuses are discussed in advance and are often stated in a formal agreement or contract. Martha Glantz, a senior director with Total Compensation Solutions (http://www.total-comp.com/) has seen retention bonuses used in several ways.

“In my experience they are used in the following cases:
1. A Company is being sold and it wants certain employees to stay until completion of sale.

2. A Company/division/department is moving and it wants certain employees to stay until the move is completed.

3. For a special project: a company may offer retention bonuses to keep people through the end of the project. This is often critical because completing the project means their jobs will end.

4. A Company is in financial trouble and it needs certain employees to stay to improve the business.

In the above cases, often the employee will get a retention bonus and severance, but if the employee voluntarily leaves before the end date, severance and retention bonuses are forfeited. There is nothing odd about a retention bonus; companies use them all the time.”

There are conflicting reports about who in the government knew about the AIG retention bonuses before they were paid out and who did not. Some are even saying that the bonuses were a small price to pay to retain people who can help sort out the financial matters at AIG. Regardless of how you feel about the AIG retention bonuses, Total Compensation Solutions thinks it is worthwhile to point out the different types of bonus payments being used generally and the bonuses paid specifically in the AIG story.

In the coming months we may hear about other types of additional compensation, or bonuses; e.g., a hiring bonus, sign-on bonus, referral bonus. These bonuses are used to attract employees to a company where the future might be questionable. Like retention bonuses, these are strategies that a company might use to help it attract, retain, and motivate top flight candidates for open positions.

If you have any questions regarding this article or bonus/incentive plans in general please call or email Tom Bailey at Total Compensation Solutions at 914-730-7300 or tbailey@total-comp.com

TARP Limits on Executive Compensation

On February 17, 2009 President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA of 2009). This act is more commonly known as the Stimulus package or the Stimulus bill. The main purpose of the act is to stabilize the US economy with a large injection of federal funds. However, the ARRA of 2009, does also address issues with the “Trouble Asset Relief Program” (TARP) enacted in fall 2008 which was part of the Emergency Economic Stabilization Act (EESA). The media more commonly refers to TARP as the Banking Industry Bailout.

The main focus of this writing is to summarize Title VII of the ARRA of 2009 called “Limits on Executive Compensation.” This title specifically focuses on requirements and/or restrictions put on banks that have or will receive TARP assistance from the US Treasury. Section 7001 of ARRA of 2009 amends Section 111 of the Emergency Economic Stabilization Act of 2008. Please note that the amount of TARP assistance taken by an institution will determine which officers and employees are covered by this section (see Table 1). The most important requirements and/or restrictions are listed below:

• “Prohibition on paying or accruing any bonus, retention award or incentive ompensation to senior executive officers”

• “Prohibition on making any golden parachute payment to a senior executive officer or any of the next 5 most highly paid employees”

• Provision for “Clawback Rights” “on any bonus, retention award or incentive compensation paid to a senior executive officer and any of the next 20 most highly compensated employees based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate”.

• Annual Limit of $500,000 of deductible compensation for some senior executives as applicable to section 162(m)(5) of Internal Revenue Code of 1986

• Requirement for both “the Chief Executive Officer and the Chief Financial Officer to provide written certification of compliance to the rules of this section.”
o Publicly Traded companies must provide certifications to the Security and Exchange Commission with other required filings
o Private companies must provided certifications to the Treasury Secretary

• Requirement to “establish a Board Compensation Committee comprised entirely of independent directors for purpose of reviewing employee’s compensation plans.” “The compensation committee shall meet at least semi-annually.” Non-SEC registrants that have received $25 million or under of TARP assistance can have their full board of directors carry out the duties of a compensation committee.

• Requirement to have a company policy regarding excessive or luxury expenditures as determined by the Treasury Secretary which may include:
o Entertainment or events
o Office and facility renovations
o Aviation or other transportation services
o Other activities or events that are not reasonable expenditures for staff development

• Provision for what is being called “Say on Pay”. Which is a requirement to ‘permit a separate shareholders vote to approve the compensation of executives.” However this vote is non-binding.

• Provision that states “the Treasury Secretary shall review bonuses, retention awards and other compensation paid to senior executive officers and the next 20 most highly compensated employees prior to the enactment of the ARRA of 2009.”

Exceptions to the Prohibitions on Bonuses

There are two notable exceptions on the prohibition of bonuses in section 7001:
• Prohibition on bonuses does not include payment of long-term restricted stock, provided that such long-term restricted stock:
o Does not fully vest during TARP assistance period
o The value is not greater than one third (1/3) of the total amount of officers and/or employees annual compensation
o Is subject to other terms and conditions determined by Treasury Secretary to be in the public’s best interest.

• Prohibition on bonuses does not include payments required to be paid pursuant to a written employment contract executed on or before February 11, 2009

The American Recovery and Reinvestment Act of 2009 has clearly introduced new challenges to the issues of Executive Compensation and Corporate Governance. At this time, these requirements and restrictions only apply to companies who currently have or will have outstanding obligations of TARP assistance. Title VII, section 7001 of the ARRA of 2009 leaves certain issues open to the determination of the Treasury Secretary. Therefore we anticipate there will be updates over the next year.

Total Compensation Solutions is available to review any compensation issues regarding TARP compensation rules or any other compensation issues. Call Tom Bailey at 914-730-7300 or go to www.Total-comp.com

"Bailouts, Layoffs and Stimulus Packages" Employee Compensation in an Economic Downturn

If you’ve watched or read business news in the last six months, you might get the impression that no one has a job anymore. However, this perception is simply not true. Overwhelming numbers of Americans are still employed. Therefore, there is still a great need for companies to implement good compensation strategies to help keep their current workforce focused and engaged.

When the headlines are dominated by bailouts, layoffs and stimulus packages, it’s very easy for employers to take the “you’re lucky you have a job” approach towards employees. And yes, companies can forgo salary increases, cancel bonuses, cut benefits and/or layoff employees and those actions could all be valid for the survival of the business. However, these approaches should be considered as a last resort because they could have long term adverse effects on your most valued employees. Martha Glantz, a senior director at Total Compensation Solutions, has been involved in several significant downsizings for major corporations and she has seen the fallout from these actions. “They might stay through the hard times but you have also given them reasons to be resentful and/or to start looking elsewhere.” says Glantz.

In a time of economic downturns, it is imperative that companies retain their most productive and valuable employees. Because even when the economy is sluggish, organizations still need to continue operations, maintain business relationships, provide good products and services and find new avenues of business. These goals cannot be accomplished unless you have your best people in place.

So what are good compensation strategies during down times? Companies need to answer these questions:

1. Do we have a strategy to attract, retain, and motivate our employees? Are we losing talent or not getting talent that we need?

2. To what degree does our compensation philosophy help us to achieve our objectives?

3. Do we have the tools in place to recognize and reward our top performers?

4. Do we regularly survey the market to assess the competitive level of our compensation programs?

5. Do we communicate to our employees the value (in dollars) their total rewards package (cash compensation, retirement benefits, health benefits etc.)?

These questions are designed to help companies think of compensation as more than a cost of doing business. Compensation as part of a total rewards strategy can facilitate employees who are engaged with the business which in turn leads to better performance and business results.

If your company feels the need to implement more dramatic approaches such as downsizing, wage freezes, lower or no bonuses, a third party can help you to think through the alternatives. For any change, communication is the key for the employees who remain with the company. If they understand the reasons behind the decisions being made, you may keep these employees motivated and engaged at least for the short-term.

Please call Tom Bailey at Total Compensation Solutions at 914-730-7300 to learn more about good compensation strategy or assistance with any of your compensation issues.

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Tom Bailey is a compensation consultant at Total Compensation Solutions (TCS). TCS is a full-service compensation consulting firm specializing in Executive compensation, Board-based compensation, Non-profit compensation, Board of Directors Compensation & Governance, Deferred Compensation, Bonus/Incentive Plan Design and Review, Severance Planning and Custom Salary Surveys. TCS has offices in Armonk, NY, Philadelphia & Los Angeles. For more information call 914-730-7300 or visit us at http://www.total-comp.com/