2020 Executive Compensation Amid Market Uncertainty

by Paul Gryglewicz | Mar 30, 2020 | Executive Compensation, Market Trends

Effects of COVID-19 on Executive Compensation

With a global pandemic upon us, the world is a very different place, at least right now. However, just like there is no need to hoard cans of tuna and cases of toilet paper, we at GGA believe that it is not advisable at this juncture, to call off your organization’s executive compensation program plans for 2020. In fact, it is times like these that corporate governance, risk management, technology and innovation and board oversight are imperative to preserving shareholder value, while also and most importantly ensuring the health and safety of our employees.

What we know from other market crises, is that corporate governance and executive retention are high on the list when navigating black-swan events. If there ever was a black-swan event, COVID-19 may have now assumed the definition.

We suggest that as long as the Board and/or the CEO maintains the ability to use their judgment on implementation timing, eligibility, etc., for example, then plans should proceed. There are obvious exceptions to this where an organization may not have the available cash flow due to this ‘black swan’ event (e.g. airlines, tourism companies, etc.).

In the interest of brevity, this piece is meant to cover only high level corporate governance and retaining key talent, but we understand that there are broader considerations when factoring in an organization’s complete workforce as many companies may have to layoff some of their staff due to decreased demand for their products/services and the corresponding decrease in cash flow for the business (as we write this a number of immediate family members and friends have already been impacted directly). While we cannot predict the future, we at GGA can share our observations within the marketplace and areas for consideration as boards make decisions over the next few months relating to corporate governance and executive compensation. So far, within the mining and broader commodity businesses, we have seen some proposed delays in work or a cautious movement forward, as planned.

Areas for consideration during these difficult times include:

Board Oversight

Businesses are continuing to try to make the best of a bad situation and effective corporate governance needs to continue, within reason, in the same spirit, to ensure effective oversight of the organization. How easily is your board able to meet remotely as opposed to in-person? What decisions can be made via consent resolutions versus requiring a full meeting? Have you stress tested the impact of black swan events on your company’s operations? What plan do you have in place to deal with black swan events in a crisis and who is responsible for what?

Retention of Key Talent

Strategies for attraction and retention of executive talent are critical as even in immediately affected companies, the demands on executive teams are typically extremely high, more so than in normal market conditions, to chart out a path forward. If your board has observed a gap to market from a pay perspective, how are you going to let your executive team know that you recognize this gap, but also are taking into account the current market conditions? Some organizations will choose to “stay the course” and implement any compensation adjustments that were determined at the past meeting. Others may choose a more conservative route and announce salary freezes or even rollbacks, depending on the cash flow concerns of the business. A good middle ground might be to approve compensation adjustments in principle but hold off on formally enacting the adjustments for a few months until market conditions have stabilized and better financial projections can be made. In terms of Long-Term Incentive (LTIP) grants, previous grants may have been made at significantly higher share prices so you must also consider what value, if any, executives still have within their LTIP and what the prospects are for this value to rise over the next few months or even years. If you are only granting Stock Options, is there a chance for underwater options to get back in-the-money or is the probability low? If the probability is low, then executives are a flight risk as competitors will be able to offer them new LTIP grants at significantly lower exercise prices than if they stay with your organization. This may necessitate discussion on the need for new retention grants which can be made at a lower share price and increase the likelihood of long-term value to executives, thus acting as a retention device during this period.

Retention Strategy

While retention LTIP awards seem like a good idea in the current environment, these awards must be balanced with the equity dilution level of the organization under its existing equity compensation plans. At lower share prices, the level of equity dilution can increase dramatically and use up much needed room for LTIP grants in the future. In a time like this, stress testing of the impact on equity dilution levels of proposed grants is an important step that boards must conduct before approving regular or retention-based LTIP grants. If proposed grants are too dilutive then consideration of a fixed number of options or units to be granted, that will allow an organization to retain room for future grants, is something that should be considered in the interim until market conditions stabilize. For many organizations, dilution will also not support additional retention awards, so a board may need to consider a performance cash based award, that is granted outside of the shareholder approved equity plan. At all costs, while option surrender programs continue to be allowed by the regulator, categorically shareholder advisory firms consider this an option re-pricing problematic pay practice.

Performance Evaluation

If performance expectations under the Annual Balanced Scorecard have already been approved, the Board should evaluate the performance expectations set and determine whether those expectations are still reasonable in the ever-evolving environment. If expectations are now deemed to be unreasonable in the Board’s view, consideration of revised performance targets based on the new reality should be discussed to ensure executives are still motivated to achieve important objectives over the remainder of the year.

Remember that while retaining key talent is imperative and in shareholders long-term interests, the board must also give consideration to the shareholders who have potentially lost material amounts of their portfolio. These executives are tasked with not only mitigating the financial blow in the downward market, but also to generate value when markets return. Ensure your board is not making compensation decisions in a vacuum during these challenging times. Seek the independent support necessary to give appropriate back testing and scenario analysis prior to making any potential retention decisions.

Contributing Authors:

Paul Gryglewicz, Senior Partner
Arden Dalik, Senior Partner
Peter Landers, Partner

5 Trends for Executive Compensation in 2019

by Paul Gryglewicz | Dec 17, 2018 | Executive Compensation, Governance, Market Trends

USMCA, Cannabis, Energy Sector, Government, Say on Pay All Have an Impact

Several developments over the last year will have an impact on trends in executive compensation for 2019, including the North American Free Trade Agreement (NAFTA) revamp — upgraded to the United StatesMexico-Canada Agreement (USMCA) — increased scrutiny of cannabis companies, “say-on-pay” adoption, and a downturn in the energy sector.

High-sector growth will also drive additional upward pressure on talent and compensation into 2019, which will have a retention impact on the pharmaceutical, fast-moving consumer goods and tech sectors.

Tariffs and USMCA

While the full effect of U.S.-imposed tariffs on aluminum and steel and the new USMCA remain unclear, they could have an impact on how executive compensation is structured for 2019. In late 2018 and early 2019, compensation committees will be working with their advisers and CEO to determine key performance objectives for 2019 for the C-suite. This will include discussions around performance expectations for 2019 to achieve “target,” “threshold” and “superior” performance as part of finalizing the annual performance scorecard used to determine 2019 short-term incentive payouts. With U.S. tariffs and the new trade deal threatening certain Canadian companies, committees are expected to take this threat into account and set performance expectations accordingly. An emphasis on measures such as earnings or revenue may be lowered, with more put on maintaining market share, developing new markets for products or cost-cutting measures to deal with trade concerns.

Cannabis Sector

2018 has seen the continued rise in share prices of cannabis companies, leading up to the legalization of recreational cannabis use as of Oct. 17. Many of these employers have witnessed such rapid growth that their compensation programs have been unable to keep up. They have been playing catch-up by trying to implement more formalized compensation structures for executives and staff. This has forced companies to review the dilution of current equity incentive plans (for many companies, stock options only) which have been highly diluted by equity grants made to attract key executives and staff at much lower share prices. This means current equity pools have little room left to make future grants for new hires heading into 2019. Companies are forced to review who has and has not received equity grants in the past year, and also the share price these grants were made at, to determine who is in most need of a grant to keep them engaged, as well as allow for the equity pool to eventually be replenished and provide the right pay-for-performance balance.

Aside from the cannabis sector, it’s expected companies across Canada (especially small- to mid-cap companies) will review the dilution level in current equity plans when developing 2019 recommendations. For companies looking for shareholder approval of equity plans at the annual general meeting in 2019, conducting this review against Institutional Shareholder Services (ISS) and Glass Lewis guidelines will be imperative to ensure they receive positive vote recommendations and have their plans approved. In addition to equity plans, more structure is expected through the development of balanced scorecards identifying five to seven key corporate and individual performance measures for 2019 to be put in place for cannabis companies to measure 2019 performance and determine 2019 short-term incentive payouts at the end of the year. This trend is expected to grow in prevalence across Canada for all industries as ISS, Glass Lewis and shareholders demand more rigor and structure be put in place to align executive pay with performance — both on an annual and long-term basis.

Downturn in energy sector

The Canadian energy sector has witnessed another downturn in share prices, especially in the energy equipment and services industry. In 2019, energy companies are expected to review executive compensation levels and determine whether downward adjustments (similar to earlier this decade) are required to send a message to shareholders that executives are feeling the pain, too. Companies are expected to review whether short-term incentives should be paid for 2018 at all, or whether deferral into a long-term incentive grant to preserve liquidity for the business and tie executives more to the company’s long-term performance makes more sense. Employers will also face dilution concerns due to lower share prices, so they need to be diligent in ensuring they do not overly dilute their equity pools and restrict their ability to make grants in future years. Focus on the retention of critical talent and high-potentials will be imperative in 2019.

Government intervention

Government scrutiny of executive compensation has received much attention in recent years. During 2018, the Doug Ford government in Ontario rallied against executive compensation at Hydro One which led to the removal of many executives and board members. In Alberta, the NDP government has also shown a willingness to intervene to control executive compensation at universities, colleges, agencies, boards and commissions. With less than one year before an election, will the NDP government implement more rules on executive compensation in Alberta? And will Ford look to intervene in other quasi-public sector organizations? Only time will tell.

Say-on-pay adoption

Say-on-pay failures continued in 2018 with Crescent Point Energy, IMAX and Maxar Technologies each receiving less than 50 per cent approval. While say-on-pay adoption has stagnated of late, the recent announcement by Alimentation Couche-Tard that a say-on-pay vote will be held at its 2019 annual meeting sparked hope that other companies will follow. In looking at Canada’s top 100 companies, close to 30 have yet to adopt such a vote, according to Global Governance Advisors, including corporate titans such as Power Corporation of Canada, Rogers Communications, Canadian Tire and Loblaw.

Will Alimentation Couche-Tard’s decision influence these companies or will these companies continue to lag behind other large companies in Canada? With all these developments, companies are rethinking the structure of their executive compensation programs in terms of the type of compensation offered and metrics used to measure performance. And with the changing economic outlook, they are also determining how to best attract and retain the key talent needed to successfully handle the new reality.

Paul Gryglewicz is a senior partner and Peter Landers is a partner at Global Governance Advisors in Toronto, a human capital management firm providing boards of directors and senior management teams with advisory and technology solutions. For more information, visit www.ggainc.com.

The Secret to Successful CEO Succession

by Paul Gryglewicz | Aug 15, 2018 | Board Dynamics, Governance, Leadership, Succession Planning

“Tim Hortons is hiring — Canada’s No. 1 coffee chain is looking for a new leader after the abrupt departure of its CEO. The company announced Wednesday that Don Schroeder, 65, no longer serves as president and CEO after three years at the helm and two decades as an employee.” ¹^[i]said in a 2015 press release.

The board’s number one responsibility is CEO succession planning, yet so many boards ignore the criticality of proactively discussing the senior leadership succession plan. While industrial psychologist researchers have identified that some of the most successful CEO successors are those that have been hired from within, most organizations do not have the depth of talent necessary to identify the new captain of the team.

The Case For Internal Succession

When a board is confident in the direction of the company’s business strategy and it is staffed with a suite of executive team leadership, selecting a current team member who demonstrates the competencies and leadership capabilities generates the greatest chance of continued success of the organization. When a board is put to the task of selecting its next CEO, many boards in this case will evaluate one or two internal executives through a series of interviews and competency profiling tests to determine who would be best fit for taking the next CEO role. For year’s now, HR leaders have discussed the infamous “horse race” set up by Jack Welch at General Electric. The basic truth is that few organizations are the “General Electric of a bygone era. All of my experience led me to the conclusion that unsuccessful searches revolve around a chasm between the financial expectations and performance criteria of the final candidate and the board.

The “Secret Sauce”

This blog focuses on how boards must get the uncomfortable conversations out of the way, before starting the negotiations with the desired candidate. We call this the “board’s CEO negotiation playbook”. It is the secret saucethat increases the probability of closing the candidate and getting the talent you want and mitigates the risk of the wrong candidate getting the offer.

The absolute worst-case scenario for any board (and their recruiting strategy) is when your best and final job offer of compensation, benefits and perquisites isn’t “good enough” for the candidate receiving the offer. This is not a discussion about an employee earning $100,000, rather a CEO’s executive compensation package that is in the realm of a multi-million-dollar contract with sign-on equity and bonus guarantees. That’s right, the next leader to drive shareholder value!

Our observations of the many boardrooms when the CEO succession is underway is that the board, rightfully, structures an ad hoc CEO search committee and that committee works in isolation with an executive recruiter. What the executive recruiter seems to never get right is that because the paycheck for the recruiter is a function of the CEO’s compensation, the recruiter fails to get into the uncomfortable budgetary conversation as the search begins. Boards often do not have a solid frame-of-reference on competitive pay structures for the CEO of their future. They know only what they were paying the prior CEO, but they lack context of competitive pay levels and pay structures within the candidate pools of talent.

The Independent Compensation Advisor: Hired to Bridge the Gap

When conducting an external search, the board must hire a reputable retained executive recruiter to validate the CEO competency profile and to help craft the CEO search strategy. The search strategy will often identify a few industry sectors in which qualified candidates may be working.

That said, each industry sector may present a unique pay level that is materially different to the current executive pay being offered by the organization hiring the CEO. When we work with our clients, we conduct a compensation review for each of the sectors of interest. The compensation review would cover not only active CEO’s within the industry, but other key executive roles – to help understand the various pay levels by industry and by executive. This review enables the board to understand how competitive their current compensation/incentive plan was for the former CEO. In some cases, the compensation sector review may identify that, within the search strategy, some industries pay materially higher than the former CEO was compensated, or vice versa. The compensation review also identifies compensation structure trends by industry and can help paint the picture of what is “market normal” in the broader sea of executive talent.

After the compensation review is completed, it is critical to sit down with the Board and articulate the “realistic” budget for the new CEO. The market data is very helpful in validating the reality of the compensation and incentive levels for CEO candidates. The peer compensation data provides an understanding of the market spectrum the viable candidate may consider. Are they at the top end of the market range or the bottom? After the broader compensation “bookended” budget is identified by the compensation review, the next layer is to understand the current governance trends around the “deal breakers”. Here is where the independent advisor can really show their courage and brevity in advising the board.

The negotiation deal breakers are the one-time requests made by the candidate. These include: buying out the executive’s forfeited equity he or she may lose when resigning at his/her company, guaranteed bonus period, crediting years of pension service in the company’s pension plan, paying for excessive perquisites etc. The board’s advisor will have a strong understanding of the capital market appetite for recruiting. However, the board often ignores these critical conversations up front, which is one of the leading causes for failing to close the desired CEO candidate. For the board members reading this blog, we challenge you to ask some of your board colleagues to discuss how much are they willing to offer in a sign-on situation. Our experience – two very different perspectives.

The Negotiation Rule Book

Once the compensation review is presented, the bookended CEO compensation budget is identified and the board is aware of the market appetite on one-time sign-on agreements; the board needs to come to a unanimous view of what the board will ultimately be willing to offer to close the right candidate. This conversation is most helpful when done before the search is started and best when the recruiter is not present, to help avoid any unnecessary conflict of interest. After the board comes to an agreement on the go/no-go recruitment offerings, then the negotiation rule book can be formulated and presented to the recruiter.

The recruiter will benefit from understanding the totality of the “rules of the search”. The recruiter is your front-line representative that is doing the hard work to find the candidate. According to Jay Rosenzweig, founder and CEO of Rosenzweig & Company, the world’s leading boutique executive recruitment firm, “a key component in structuring a successful search is establishing, in advance, realistic compensation parameters. This allows the recruiter to better target the most relevant candidates, which typically saves time and produces more satisfying results for all parties. As with so many things, strong up-front research and a common understanding of objectives can make or break an executive recruitment project.” When the recruiter understands the entire truth of the budget, they will temper the candidates’ expectations early in the recruitment process. When a recruiter does not fully understand the budget, or the one-time requests that might be offside, the recruiter may land in uncomfortable situations where they promise the world, but can only deliver an island. The negotiation rule book also aids in how the recruiter uses their network throughout the search. The recruiter can pivot from potential candidates that will simply be “too expensive” for the role and can convert them into a connector for referrals. This is gold for the company and the recruiter.

Board of Directors REMINDER! – When you find yourself in the position of needing to search for your next CEO – invite your independent advisor into the process early and use them as a partner to develop the negotiation rule book that is right for your organization.

Determining Executive Compensation

by Paul Gryglewicz | Jul 9, 2018 | Executive Compensation, Governance, Leadership

Guidelines to Establishing Executive Compensation

This year’s FIFA World Cup highlights the importance of using defense to create a top-notch offense. The same can be said for Boards of Directors. The board’s best offense is a good defense, and good defense starts with a great fundamental base. That base, in the world of compensation, is the Compensation Philosophy, and that philosophy needs to mirror the business strategy of the company.

Two critical roles of the board of directors are establishing CEO succession plans and establishing executive compensation plans that both attract and retain executive talent and deliver the outcomes that align with the goals set by the board. While the board may act in good faith, there are times when there is shareholder push back. How can the leading boards of directors develop executive compensation plans that are shareholder friendly? Let’s take a deeper look at how executive compensation should be established in order to better align executive pay with shareholder returns.

The data from CEO compensation research continues to illustrate that the top paid CEOs have many layers of executive compensation. When a board’s Compensation Committee finally agrees on how executive compensation is determined, it must ensure that it is market defensible and will pass the seemingly infinite views on “appropriate compensation”.

Four Steps a Board Should Follow

There are four steps a board should follow when determining executive compensation:

Establish the compensation philosophy and peer group;
Review current executive compensation against market practice;
Assess the business impact before making final approvals;
Report the process and compensation results to the executives and shareholders via the annual Proxy.

Establish Compensation Philosophy and Peer Group

The compensation philosophy for the company is the foundation the board needs to ensure so that the outcome, at the end of the process, is highly defensible, if ever scrutinized. The compensation philosophy must account for the business strategy, risk appetite and the principles and objectives of the total compensation program. This philosophy can and will be unique to every business – even those competing within the same sector. Take two of the Top 4 tech companies: Amazon and Facebook. Amazon has stated that its business culture and strategy is built on experimentation, and as a result they do not believe in rewarding top executives with an annual bonus. They have claimed, in the 2018 Proxy Circular (DEF 14A), that some of the examples of successful experimentation include the creation of Alexa.” Alexa…how do you define executive compensation?” …you might ask. In contrast, Facebook says that it acknowledges the business still being in the early stages of its journey, and that it must hire and retain people who can continue to develop the strategy, quickly innovate and build new products, bolster the growth of the user base and user engagement and constantly enhance the business model. To achieve this, Facebook believes in more equity compensation, so it has further stated that it intentionally positions the cash compensation (base salary and annual bonus) below market but provides more of a heavy focus on equity-based compensation. Overall, Facebook has stated it wants its executives to be bold, move fast and communicate openly. In contrast to Facebook let’s examine Amazon and its approach to motivating executives.

Amazon, in line with its compensation philosophy, expressed that an annual bonus paid to the top executive officers is counterproductive to supporting an experimental business, and that short-term objectives will only focus on the “known.” Amazon says that without a bonus program, the executive team will be more willing to truncate projects when early failure is detected. Amazon states, in the proxy, that by not having a bonus program, it allows the executive team to abandon “failed” experiments, to focus on the “winning” ones. One example that Amazon states, in the proxy, is that the management team was able to exit its auction type business early and focus on other winners such as Amazon Web Services (AWS), which has become a dominant force in Amazon’s revenue growth. In lieu of the use of an annual bonus, Amazon has focused on a reasonable base salary but a dominant equity-based compensation arrangement, that ultimately will link future realized income for executives tied to the future Amazon share price (positive or negative).

What each board has demonstrated is that while Amazon and Facebook both compete for exceptional executive talent, the compensation philosophy has been customized to reflect the unique business strategy each company is employing.

Your board, with the aid of the Chief Human Resource Officer, CEO and a knowledgeable independent executive compensation advisor will work through the process of coming to an agreement on the compensation philosophy that best fits your organization.

My advice is to be bold, dive deeper, and ask the hard questions about the business strategy to eventually arrive at the strong foundation level that the executive compensation program will be based upon.

After the compensation philosophy is established the peer group will start to gain clarity on finding the best organizations a company needs to benchmark against. It’s important to understand that the peer group itself can be used in a few ways. First is the obvious, the peer group helps to identify market pay levels of similar executive roles within the industry. Second is perhaps less obvious, and that is that the peer group helps to establish market precedence and pay structure trends. This is one of the most valuable pieces of information for the board to understand when determining how its executives should be paid. The peer group can help give clarity on the use of various bonus and incentive awards, such as the general structure of the annual cash bonus plan, the use of stock options, restricted or performance shares, the use of pension and benefits etc.

A deeper dive in the peer group data helps to appreciate where the market is today and where it is heading tomorrow. The latter of course, is best interpreted from an independent advisor that has a pulse on market trends before they are made public.

Review Executive Compensation

Now that the foundation is laid, and the board and management are in agreement with the overarching compensation philosophy, it’s time to compare current pay levels and structure with the market.

As mentioned earlier, the peer group data is highly valuable in multiple ways. The independent advisor plays a key role to guide the board through identifying gaps between the current executive compensation program with the compensation philosophy and business strategy.

Depending on the gaps identified, the advisor will need to prepare some stress tested recommendations that will bridge the gap between the current and future executive compensation program. Here is where a board can get nervous, as it may be reluctant to wake the sleeping giant. The giant being the mass of shareholders, of course. However, in order to drive management behaviour and shareholder returns, the compensation program needs to reinforce those behaviours that drive success. In Amazon’s case, it’s experimentation that leads to life changing technology ~ “Alexa, is the blog almost over?” “Yes, you’re almost done.” ~ and therefore counter to the market norm – rewarding executives using an annual cash bonus. Amazon boldly linked more of the compensation to long-term shareholder value creation by awarding more of the total executive compensation program in equity.

Assess the Business Impact Before Making Final Approvals

Now that the process has clarified the business strategy and its impact on the compensation philosophy and the peer group is examined, the board will face decisions to potentially modify pay levels, pay structure or both. When the board considers modifications, it is important that the board weighs the impact of those recommendations. As I reflect upon pay adjustments, I place these adjustments into two broad categories – “opportunity” and “actual”. The recommendations we make today are nothing more than an opportunity for the executive to receive the compensation. As we know, it is common that more than 80% of an executive’s pay is at risk, so “opportunity” is nothing more than that. The “actual” is the real impact on the business financials, share price and dilution levels, and to the executive.

The board must see a scenario analysis and stress test of the various impacts any compensation adjustments will have today and in the future under various scenarios of success or failure; and the potential financial impacts on the business and shares.

Lastly, the stress test should examine shareholder advisory firm guidelines to focus on potential areas of risk that the compensation arrangements may trigger.

Report the Process and Compensation Results to The Executives and Shareholders via The Annual Proxy

Now to the fun part – reporting. The board has the duty to shareholders to disclose in “plain language” the executive compensation program. The fundamentals of great shareholder communication fall into three key categories. To ascertain if the company’s proxy has done an effective job at communicating and rationalizing the executive compensation to shareholders, the board (at the end of reading their Compensation Discussion & Analysis section of the Proxy) must have a comprehensive understanding of the answer to these three key questions:

How did the executive get compensated?
What is the rationale behind that executive compensation?
How much did the executive receive?

A quick read of Facebook and Amazon’s proxy help to illustrate the rationalization of rewarding pay packages in the echelons of $20+ and $30+ Million (Facebook’s Sheryl Sandberg 2017 reported compensation of $25,196,221 and Amazon’s Andrew Jassy 2017 reported compensation of $35,609,644). For reference, Facebook passed its last say on pay vote in 2016 with a 91% YES and Amazon passed the say on pay vote in 2018 with a 98% YES.

Remember to examine the performance metrics within the bonus plan, the types of equity used, and if performance conditions are attached to the vesting criteria. The board must understand that even when the future share price is higher or lower than the grant date, the board must be comfortable with the level of pay the executive may receive.

Final Words of Thought

At the end of the day, it is highly unusual for a board to be successfully sued for how much compensation they elected to award to executives. However, that does not mean they will not find themselves under shareholder pressure from time to time. After all, the board’s best offense is a good defense, and good defense starts with a great fundamental base … the four steps every Board of Directors should follow when determining executive compensation.

How to Adopt a Dynamic Approach to CEO Compensation

by Paul Gryglewicz | Jul 5, 2018 | Board Dynamics, Executive Compensation, Governance, Leadership

Mitigate Risk and Improve Compliance

CEO compensation governance is fast paced, and it can be seemingly impossible to stay ahead of the ever-changing industry trends. The industry tends to move so quickly that a seasoned executive may not even be aware that they are at risk for creating a Board that is non-compliant when creating dynamic incentive plans for the CEO and other key senior managers.

“Many classical models of CEO compensation consider only a single period, or multiple periods with a single terminal consumption. However, the optimal static contract may be ineffective in a dynamic world. In reality, securities given to incentivize the CEO may lose their power over time: if the firm value declines, options may fall out-of-the-money and bear little sensitivity to the stock price. The CEO may be able to engage in private saving, to achieve a higher future income than intended by the contract, in turn reducing his effort incentives. Single-period contracts can encourage the CEO to engage in short-termism/myopia, i.e., inflate the current stock price at the expense of long-run value. In addition to the above challenges, a dynamic setting provides opportunities to the firm, the firm can reward effort with future rather than current pay.” Alex Edmans, Xavier Gabaix, Tomasz Sadzik, and Yuliy Sannikov; Harvard University

Global Governance Advisors (GGA) provides a wide-ranging review and evaluation of board structure, director pay, governance policies and board performance. We also help to define and articulate each client’s organization compensation philosophy in terms of desired pay positioning, peer group, short and long-term compensation, performance management, succession, retention and recruiting strategies.

Global Governance Advisors works with its clients to address the challenge of creating and maintaining a compliant Board room, by helping Corporate Directors prioritize the following 4 Ps of Effective Corporate Governance:

1. Participation

An impactful Corporate Director will foster an environment that encourages open dialogue between the Board and management and urges them to engage in human capital discussions. The dialogue and advancement of strong corporate governance is fundamental – not only to your bottom line for the next quarter, but to the long-term goals of your organization for many years to come. All in all, participation is needed to ensure that the Board and management are steadily collaborating to fulfil their compliance requirements.

2. Perception

It’s essential for a Corporate Director to understand his or her shareholders. To accomplish this, Corporate Directors need to work hand in hand with their IR and Corporate Secretary to efficiently monitor the institutional and retail shareholders along with advisory firm guideline changes.

3. Preparedness

Preparation breeds success. To maintain compliance, Corporate Directors must stay prepared and ahead of industry trends including shareholder perspectives, industry, capital markets and exchange rules.

4. Proactivity

Corporate Directors are responsible for completing an annual risk assessment, which includes the production of an annual work plan. Since compensation adjustments work in annual cycles, Corporate Directors need to carve out a sufficient amount of time to efficiently develop annual work plans, prior to the beginning of the new fiscal year. At a minimum, the work plan should reflect the compensation committees charter. To accomplish this, they need to appoint their compensation advisor early so that he or she has ample time to prepare preliminary drafts for the Chair’s review and schedule any pre-meetings. Compensation trends move relatively quickly, and an active advisor with access to deep resources can be invaluable to directors and help management get ahead of potential issues before they may arise.

Global Governance Advisors (GGA) is a top 5 North American Human Capital Management firm that services boards of directors and senior management by providing transformative Human Capital Management governance advisory services.