Top 10 Considerations for Establishing an Executive Compensation Philosophy

by Peter Lupo

Under SEC disclosure rules, the annual proxy must disclose the key principles and factors underlying a company’s executive compensation policies and decisions.  Establishing a meaningful compensation philosophy is a highly effective way for Compensation Committees to clearly communicate complex, high-level pay programs to investors, their advisors and regulators.  By clearly explaining the principles on which executive pay decisions are based, the company can provide a persuasive rationale for how the resulting programs drive a company’s strategic goals and needs.

This article suggests 10 recommendations for establishing a thoughtful compensation philosophy: 

• Discuss Targeted Pay Levels
• Define the End Points
• Keep Goal-Setting Consistent with the Compensation Philosophy
• Seek Management’s Views
• Consider Governance Groups’ Policies
• Regularly Seek the Full Board’s Input
• Discuss the Pay Philosophies Annually
• Devote One Meeting Triennially Exclusively to Pay Philosophy
• Don’t Assume Directors are Current with Industry Practices and Trends
• Develop a Director Pay Philosophy