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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,*,Corporate Governance and Executive Compensation,Current Compensation Committee,and Executive Compensation,Issues,Executive Compensation is in a State of Flux,Institutional Investor Activism,NYSE & NASDAQ Listing Requirements,Stock Option Accounting,New U.S. Governance,Legislation,Loss of Investor Confidence,Uncertain,Economy,Executive Compensation,2,Some of the Governance,Concern,s that have been Expressed:,Executive Pay:,Not linked to performance,Escalating ratio of executive compensation to the pay of other managers, workers,What is a CEO worth?,Executive loans,Stock Options:,Absence of accounting charge,has,facilitate,d,excess use of options,Equivalent cash value of a stock option to an executive is less than its economic cost to the company,A rising tide floats all boats,3,Governance Concerns (Contd),In the Boardroom:,The culture of most,Boardrooms,makes it easier to go along with Managements,requests,than to reject or reduce them,Compensation consultants are,usually,not independent of management,Improper use/overuse of compensation surveys cause a “ratchet,ing,” effect in executive compensation,Many compensation committees lack the experience necessary to analyze complex proposals and to develop informed opinions,pro or con,4,Meanwhile, Company CEOs also Have Concerns,Impact of new legislation and standards on governance and day-to-day operations,Articulating corporate strategy in shareholder terms, with more Board involvement,Achievement of financial results in an uncertain environment,Shortened careersproduce or else,Attraction, motivation and retention of key executive talent,Cash compensation vs. equity incentives,Other issues: succession, etc.,5,Shareholder Objectives for Executive Compensation,Build,real,long-term,growth in,shareholder value,Competitive, performance-aligned compensation,Avoid,corporate future,financial hardship as a result of special compensation arrangements,Pricing relative to the market,proper use of compensation instruments,Truly i,ndependent Compensation Committees,F,ull,truthful and,straightforward disclosure,of,The p,rinciples and structure,s,of executive compensation system,s (i.e., no “boiler plate”),Decision-making process for current year awards,6,Examples of Shareholder Resistance,CoolBrands,: 21% drop in stock price following request for more options,CHC Helicopters,: “No” to 11% option dilution proposal,ATI Technologies,: Only 54% shareholder approval for new options,Fairvest/Institutional Shareholder Services,: use of the ISS option valuation model leads to more “No” recommendations,Teachers Pension Plan,: option grants should be proportional to executive ownership,Angiotech Pharmaceutical,: “evergreen” stock option replenishment rescinded due to institutional shareholder concerns and negative press,7,The Canadian Coalition for Good Governance is Gaining Clout,Launched last year,Brainchild of Steve Jarislowsky and Claude Lamoureux,Consists of Canadas largest pension funds, mutual funds and money managers,Purpose is to share information and take the initiative to hold management accountable for growing long-term shareholder value,The Coalition will support compensation schemes that reward employees for sustained performances,Successfully attacked Angiotech proposal,8,New Legislation and Standards are Affecting Executive Compensation,U.S. Sarbanes-Oxley Act,Proposed Changes to NYSE and NASDAQ Listing Rules,Canadian Securities Administrators Disclosure Concerns,International Stock Option Expensing Proposals,Repap Court Case,9,Shareholder Disclosure Concerns,Canadian Securities Administrators Nov. 5, 2002 press release:,Sample of 76 publicly-traded companies,95% had “inadequate” disclosure,Watson Wyatt Proxy Circular Review,272 TSX companies in 2002,48% had no disclosure annual incentive determination,10,Stock Option Accounting Standards,S,tock option,expensing,is just around the corner,!,International Board,is going to,mandate,international stock,option expensing,standards this year,Canadian Board,has announced intention to require stock option expensing before the U.S. acts,U.S. Accounting Board,is considering mandatory adoption,Many large North American corporations (over 150) have already,decid,ed,to expense options,:,Boeing,(first),Coca-Cola,Canadian Banks,A,Ford,GE,Inco,GM,Wal-Mart,Sun Life,BCE,11,Meeting Shareholder Concerns with Options: Pros and Cons,Indexed options,Premium-price options,Performance-vested options,Greater stock ownership,Restricted stock units,Cash long term incentive plans,12,Meanwhile in the Courts:The Repap Case,New Chairman was a retired U.S. lawyer; no experience in Repaps industry,Summary of his contract:,A multi-million dollar “market capitalization bonus” not linked to financial performance,Shares and options amounting to 13.4% of the companys stock,Immediate pension credits of 8 years,A “single trigger” change-of-control severance package worth about $27 million,Ontario Trial Court Judge set aside Chairmans compensation agreement because the directors had not spent sufficient time analyzing and discussing the contract,In doing so, she set aside the “business judgment rule” that normally protects directors from being second guessed,13,YES, Executive pay is under the microscope, BUT .,Canadian and U.S.,Watson Wyatt studies* show that:,High,er,CEO compensation opportunity,is correlated with,high,er,Total Shareholder Returns (TSR),High,er,CEO and Executive stock ownership,is correlated with,high,er,TSR, EPS, ROE, ROA,Higher stock option opportunity,is also positively correlated with,high,er,TSR, EPS, but,T,here is an optimal level of stock option,“,overhang,”,above or below which,shareholder,value is eroded,* “,Corporate Governance In Crisis; Executive Pay/Stock Option Overhang 2003”,and “,Monitoring,Canadian,CEO Pay and Performance, 2002”.,14,Enter the Compensation Committee.,15,15,Purpose of the Compensation Committee,The primary purpose of the Compensation Committee of the Board is to determine and oversee the compensation policies of the organization,Duties include:,Developing and setting compensation philosophy and policies,Deciding upon compensation levels and incentive opportunity levels for officers,Reviewing performance levels of company and compensation mechanisms and levels,CEO performance evaluation,Management development and succession planning,Communication to the full Board,Compensation of the Board,16,Strategic Executive Compensation Framework,Critical Factors,Specific Executive Compensation Philosophy,Strategic Implications on Programs, Policies, Practices,Strategies/,Plans,Management,Philosophy,Organizational,Design,Ownership,Structure,Marketplace,Dynamics,Companywide,Linkage,Objectives,for Pay,Compensation,Elements,Competitive,Positioning,Commitment to,Communication,Base,Salary,Short-Term,Incentives,Benefits/,Perquisites,Long-Term,Incentives,17,Strategic Executive Compensation Framework,Specific Executive Compensation Philosophy,Supportive of Companys mission and values,Consistent with Total Compensation Philosophy,Flexible to adapt to unique organizational and individual circumstances,Companywide,Linkage,Objectives for Pay,Differentiate from competitors,Focus on company goals,Align with organizational success,Attract new talent,Motivate and reward improved performance,Retain high performers and key contributors,Provide security and wealth-building opportunities,Ensure executives understand and appreciate compensation and benefit programs,Competitive Positioning,Establish relevant peer group(s) and reference points,Appropriate positioning relative to reference points,Methodologies and sources of market data,Compensation Elements,Desired pay mix (fixed vs. variable, short vs. long-term),Role of base salary,Objectives for short- and long-term incentives,Selection of incentive plan performance measures and goals,Competitive benefits and perquisites,Commitment to Communication,Companys philosophy on executive compensation,Linkage between corporate strategies and rewards,Objectives for program elements,Processes for managing pay,Performance measures that affect compensation,Total compensation personalized communications,18,Strategic Implications on Programs, Policies, Practices,Strategic Executive Compensation Framework,Best understood element of pay,Represents a significant portion of compensation opportunity,Serves as an index for incentive and benefit values,Affected by:,Philosophy,External competitiveness,Internal considerations,Incumbent experience and performance,Base Salary,Short-Term Incentives,Objectives,Eligibility,Award potentials,Performance measures and goals,Award determination,Form/timing of payment,Affected by:,Company strategies,Compensation philosophy,Market values,Measurement tools,Long-Term Incentives,Objectives,Eligibility,Award potentials,Program vehicle(s),Performance periods, measures, and goals,Retention elements,Affected by:,Company strategies,Compensation philosophy,Market competitiveness,Availability of stock or equity substitute,Benefits/ Perquisites,Objectives for,Health care,Retirement income,Survivor income,Disability income,Deferred compensation,Affected by:,Company strategies,Compensation philosophy,Statutory considerations,Perceived value,19,Watson Wyatts View,In the final analysis, executive compensation arrangements must reflect good governance principles,Strength and independence of the,B,oard is key,Credible and consistent compensation data and advice is crucial,Accountability to owners and transparency is more important than sophistication of design and tax advantages,Options will continue to be used, but more prudently,20,Practical Things to Review,Where is your,stock option,dilution,level,relative to the market,and institutional shareholder comfort levels,?,What is your executive pay mix?,Have you disclosed your executive compensation policies to your shareholders in the manner required by the regulators?,What impact,could,stock option,a,ccounting,expense,have on your P&L,?,Who is on your Compensation Committee and what,is his or her,relationship to the company?,Does your Compensation Committee have a,up to date,charter?,21,Practical Things to Review,Are compensation proposals carefully reviewed by the Compensation Committee and the related discussions properly documented?,Does your Compensation Committee meet in closed session?,Does it have direct access to compensation consultants? What level of detail does it provide to the full Board?,Can your compensation philosophy stand up to scrutiny?,Who is listed,on your proxy,as a,“named,executive officer,”,?,What are the reasons for,the,executive loans your company has made over the past two years?,What levels of executive,share,ownership,currently,exist,excluding,unexercised,options?,22,
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