Board Compensation - Reactions to Recent Media Attention

By: Paul R. Dorf, APD

Upper Saddle River, NJ - March 24, 2009 - The financial industry continues to be the topic of heated discussion, particularly when recipients of TARP funds paid huge bonuses and exhibited the fiscal restraints associated with the proverbial "drunken sailor".  Much of the finger pointing is aimed at the respective Boards that many feel allowed it to happen.  In addition, a number of recent articles indicated that some Boards are trying to set an example by cutting their own compensation.  While there are some Board members who actually live on their retainer (and cutting their compensation may be a tough pill to swallow), the 2.6 million wage earners who have been laid off in the last four months and the countless employees who have had their pay either frozen or cut most likely have it much worse.  The population as a whole expects, and in many instances, demands that Senior Management and Boards act in an honorary way and either freeze or cut their own pay. 

In light of proper governance, the responsibility of Board members has increased exponentially.  This begins by examining their own company's executive pay plans and to consider the alternatives that recognize real effort and contribution, with executive rewards based on justifiable performance.  When financial performance is lackluster and a company takes action to eliminate bonuses, reduce pay, and/or layoff employees, this may be the time for a Board to examine its own compensation and consider what may need to be done to reflect the actions taken throughout the company and among peers within their industry.  Striking a balance between competitive Board compensation and showing a commonality of interests with stakeholders, employees, and the media is posing a significant challenge.

If history repeats itself, which it normally does, the US and world economy will eventually spring back and probably be stronger then they were before the meltdown that started this economic crisis.  When industry is again humming and companies are making money, salaries, bonuses and incentives, and other forms of compensation will also spring back, or most likely go beyond.  But in the meantime, it is important for Boards to do the right thing and take a close look at both executive and Board compensation practices, to ensure that they are reflective of current financial performance and indicative of best practices within their industry.  Boards and their Senior Management must be proactive and show the leadership that is expected of them, to avoid knee jerk reactions later on from outside intervention.