Robert Lemke Texas Tr Conf Handouts

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Texas Total Rewards Workshop

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Robert Lemke Texas Tr Conf Handouts

  1. 1. Top Ten Ways to Ruin Your Compensation Committee September 21-22, 2009 Robert W. Lemke rlemke@csonline.biz 630-719-1807 915 Burlington Ave., Suite C | Downers Grove, IL 60515 1 Today’s Topics • Identify barriers to Compensation Committee performance and effective governance; and • Build a game plan to manage effective relationships with your Compensation Committee. 915 Burlington Ave., Suite C | Downers Grove, IL 60515 2 1
  2. 2. Compensation Committees continue to evolve From: Role based compensation challenge: Mix of rewards that attract and retain To: directors vs cost of board service The role of Committee members is increasingly complex: • Greater time commitments • Growing legal exposure • Increasing director and committee member compensation • More direct related experience required 915 Burlington Ave., Suite C | Downers Grove, IL 60515 3 Committee dynamics at work Practices People Pay Policies 915 Burlington Ave., Suite C | Downers Grove, IL 60515 4 2
  3. 3. Top Ten 915 Burlington Ave., Suite C | Downers Grove, IL 60515 5 Top Ten 10. Limit discussions to executive compensation. 9. Let the chair orient new members. 8. Retain your own compensation consultant. 7. Let the chair prepare on his/her own time. 6. Provide plenty of supplemental handouts. 5. Keep them in the weeds. 4. Create your own language. 3. Promote the arithmetic. 2. Make it complex. 1. Keep them guessing. 915 Burlington Ave., Suite C | Downers Grove, IL 60515 6 3
  4. 4. 1 Keep them guessing. Ineffective Effective Ad hoc agendas Annual work plan Committee approval only Defined decision making boundaries List of financial terms Clear performance definition and exceptions List of programs Full disclosure 915 Burlington Ave., Suite C | Downers Grove, IL 60515 7 1 Keep them guessing: Examples Per As A c ti v i t y A n n u a lly s c h e d u le r e q u ire d M a rc h M ay S ept Dec G o v e rn a n c e R e v ie w a n d u p d a t e c h a rt e r X X R e v ie w c o n s u l t a n t p e r f o r m a n c e X X A s s e s s C o m m it t e e a c t i o n s a n d p r o c e s s i m p ro v e m e n t s X X D i s c lo s u r e F in a liz e P ro x y it e m s f o r i n c e n t i v e c o m p ( 1 6 2 m ) X X P e e r G r o u p & C o n s u lt a n t d a t a X x I n v e n t o r y m a j o r a n d m in o r c o m p e n s a t io n p r o g r a m s X X E x e c u t i v e T a ll y S h e e t s & C I C X X M a n a g e m e n t C o m p e n s a ti o n R e v ie w C E O a n d E x e c u t iv e p e r f o r m a n c e X X A p p ro v e E x e c u t iv e a n n u a l in c e n t iv e m e t h o d o l o g y X X A p p ro v e a ll e m p lo y e e R S U a w a rd s X X A p p ro v e a m e n d m e n t s t o l o n g t e r m in c e n t iv e p r o g r a m X X T a len t M a n a g e m e n t - S u c c e ss io n P lan n in g R e v ie w c r it i c a l p o s i t io n s X X T a le n t a s s e s s m e n t s - C r i t ic a l b e n c h X X 915 Burlington Ave., Suite C | Downers Grove, IL 60515 8 4
  5. 5. 1 Keep them guessing: Examples Clear Decision Rights Comp Management Issue Board Com CEO Fin HR Equity program structure: Design, A R I M I, M policies, allocation methodology. Executive employment agreements A R I M I, M Non NEO executive salary No action A R M I, M determination, increases, incentives, equity awards. Key: A – Approve R – Modify or revise I – Initiate M - Monitor 915 Burlington Ave., Suite C | Downers Grove, IL 60515 9 1 Keep them guessing: Examples Clear Performance Definitions Capital • Capital = Operating investment • Average Operating investment over prior 13 months will be used. • Does not include Corporate LBO Goodwill. Earnings • Earnings = After tax operating income (ATOI) • Earnings before deducting interest and goodwill amort., after taxes. • Same tax rate for 3 years. • Separate tax rates for all other countries. Capital • Capital charge = operating investment X cost of capital. Charge Economic • EV = ATOI – Capital Charge Value 915 Burlington Ave., Suite C | Downers Grove, IL 60515 10 5
  6. 6. 1 Keep them guessing: Examples Clear Exception Policies Goodwill • Goodwill (plus accum amort) will be included in Operating Investment. • Goodwill (plus accum amort) will be included in the EV goal setting calc. • Corporate LBO Goodwill will not be included. R&D • Annual R&D investment will represent an expense on the income statement and a deduction from ATOI. • Special R&D projects may be capitalized and amortized over three years, subject to corporate level approval. Windfall • large gains or losses not caused by major acquisitions, plant expansions, gains (or or plant closures will be included in ATOI with no adjustment. losses) 915 Burlington Ave., Suite C | Downers Grove, IL 60515 11 2 Make it complex. Ineffective Effective Dense presentations Concise Numerous data tables Charts and Graphs Non action items dominate Consider sequence Imbedded supporting Subsection material 915 Burlington Ave., Suite C | Downers Grove, IL 60515 12 6
  7. 7. 2 Make it complex: Examples One page To which meeting does the attached document relate? May 20, 2009 Compensation Committee Meeting executive • Board of Directors • Audit summary of • Compensation • Nominating and Governance each agenda What is the title of your presentation? Review of Compensation Committee Charter item and Is Board or Committee approval is being Approve updated Charter with proposed changes. supporting requested and, if so, what is the approval being requested? material Is specific Board or Committee feedback being Discussion to center on proposed changes to Compensation Committee requested and, if so, what is it? Or do Charter. you have specific questions you want answered by the Board or Committee and, if so, what are they? Is the attached document primarily for the Material supports requested action; includes mark up of current Charter. Board’s or Committee’s background information? 915 Burlington Ave., Suite C | Downers Grove, IL 60515 13 2 Make it complex: Examples Charts and Graphs of Key Compensation Issues 21% After 2012 2012 Vest Year 50% 2011 29% 2010 $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 14% Cash 17% Deferred Cash Stock 69% 915 Burlington Ave., Suite C | Downers Grove, IL 60515 14 7
  8. 8. 3 Promote the arithmetic. Ineffective Effective Tome of data tables Pay comparisons provided depicting 50th, 60th and 75th in easy to understand format percentiles Formula driven Compensation architecture that is defensible Peer groups based on Pay and performance revenue size alignment 915 Burlington Ave., Suite C | Downers Grove, IL 60515 15 3 Promote the arithmetic: Examples Consultant 1,076 1,428 4,189 $7,143 Direct Peers 962 2,320 4,005 $7,314 Estimated 75th Percentile $8,879 Service Cos 820 1,539 2,715 Proxy Cos 921 1,856 2,984 $7,009 Forecast compensation Forecast 750 750 300 is far below market benchmarks used to Target 750 2,700 2,600 400 establish target 2009 compensation levels. Consultant 921 1,047 3,145 $5,114 Direct Peers 839 868 1,891 $5,395 Estimated 50th Percentile Service Cos 712 989 775 $3,894 2,600 Proxy Cos 780 516 743 $3,608 Base Salary Annual Bonus Long Term - Cash Long Term - Stock 915 Burlington Ave., Suite C | Downers Grove, IL 60515 16 8
  9. 9. 3 Promote the arithmetic: Examples 2008 Performance Data Market Frames of Reference 35% 30% 25% 20% NewCo - 2008 15% Proxy-Cos 10% Service Cos 5% Direct Peers 0% -5% 2,600 -10% 1-Yr Revenue Grow th 1-Yr Net Income Grow th 915 Burlington Ave., Suite C | Downers Grove, IL 60515 17 4 Create your own language. Ineffective Effective Use company specific jargon Metrics discussion Understand implications of Construct your own the governors that influence Committee decision making 915 Burlington Ave., Suite C | Downers Grove, IL 60515 18 9
  10. 10. 5 Keep them in the weeds. Ineffective Effective Details, details, details Shareholder value Management intent Decisions made during Use of more executive meetings sessions No review or audit of key Self evaluation decisions actions, processes 915 Burlington Ave., Suite C | Downers Grove, IL 60515 19 5 Keep them in the weeds: Example • Many firms use double trigger events to accelerate equity vesting. Source: Equilar, Inc. Severance & Change in Control Snapshot of Fortune 50 CEOs 915 Burlington Ave., Suite C | Downers Grove, IL 60515 20 10
  11. 11. Provide plenty of 6 supplemental handouts Ineffective Effective Distribute action items at Submit supporting material Committee meeting well in advance Provide replacement pages Identify typos, errors within at meeting existing documents We found a better way No surprises for the Chair to…………… 915 Burlington Ave., Suite C | Downers Grove, IL 60515 21 Let the chair prepare on 7 his/her own time Ineffective Effective Our Committee material Preview with the Chair needs no explanation. Rely on consultant to keep Provide support to Chair on track. Committee Chair to keep agenda on track. Today’s agenda and action Maintain index of topics items is what counts. covered in prior meetings. 915 Burlington Ave., Suite C | Downers Grove, IL 60515 22 11
  12. 12. Let chair prepare on his/her own time: 7 Example Who Management Comp Committee What When Rep Chair Consultant 1. Review proposed agenda, and proposed supporting data Week 1 elements 2. Review completed supporting Weeks 5 – 8 data (content / format). Review (sometimes proposed new / modified plan iterative) designs 3. Discussions with Compensation Week 7 Committee 4. Review draft Committee meeting Weeks 9 – 10 material (sometimes iterative) 5. Meeting material sent Week 11 6. Committee meeting Week 12 915 Burlington Ave., Suite C | Downers Grove, IL 60515 23 Retain your own 8 compensation consultant Ineffective Effective Committee and Committee Chair assumes Management retain their lead role in the advisor own advisors relationship. Consultant/Firm regularly Service agreements. performs work for Committee Chair authorizes management. any additional services that might be performed by consultant 915 Burlington Ave., Suite C | Downers Grove, IL 60515 24 12
  13. 13. Let the chair orient new 9 members Ineffective Effective Standard Committee Formal on-boarding process meeting materials to ease integration Regular attendance at Ongoing director education Committee meetings and briefings 915 Burlington Ave., Suite C | Downers Grove, IL 60515 25 10 Limit discussions to executive compensation. Ineffective Effective Compensation experts Executive evaluation, succession planning. Short term orientation. Risk assessment. Similar industry experiences Profiles for selection ensure right mix of skills 915 Burlington Ave., Suite C | Downers Grove, IL 60515 26 13
  14. 14. Recap – Your Game Plan 1. Plan. 2. Be concise. 3. Pay and performance alignment. 4. Aware of compensation governors. 5. Deliver on shareholder value. 6. Submit meeting materials well in advance. 7. Preview with Chair. 8. Consultant independence. 9. On-boarding, plan for succession. 10. Broaden scope of responsibility. 915 Burlington Ave., Suite C | Downers Grove, IL 60515 27 A well governed Board is well correlated to better company performance and greater access to capital. 915 Burlington Ave., Suite C | Downers Grove, IL 60515 28 14
  15. 15. About the session leader………. As Managing Principal, Mr. Lemke is charged with the creation of strategic alliances, new business development, and the implementation of client consulting engagements for the firm. With over 20 years experience as a human resources executive and compensation consultant, Bob brings a breadth of knowledge to help solve complex business issues for his clients. Mr. Lemke is recognized for his results oriented approach to managing human resource operations and his ability to successfully navigate competing agendas and dynamic cultures. Clients appreciate his ability to execute and transfer knowledge to project staff. Select Clients: Jones Lang LaSalle Heidrick and Struggles Airtex Products Wells Manufacturing United Components, Inc. Champion Laboratories International Truck and Engine Neapco, Inc. Pioneer Automotive Covenant Healthcare Factory Card and Party Outlet Harlem Furniture ArborGen The Children’s Place Mr. Lemke is certified as SPHR, CCP and CEP by nationally-recognized human resource organizations. He completed his graduate studies in Industrial/Organizational Psychology at Illinois State University and the Securities Industry Association's Executive Development Program at The Wharton School. 915 Burlington Ave., Suite C | Downers Grove, IL 60515 29 15

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