For both for-profit and not-for-profit organizations, governance of executive compensation and directors’ salaries can present major challenges. Disclosure practices may be scrutinized or subjected to ever-increasing requirements. Across the board, organizations need a clearly defined mission and vision that translates into concrete goals for measuring executive compensation and board of directors’ pay.
Effective governance is clearly the answer to resolving the pay-for-performance challenge. Each member of a board of directors owes a fiduciary duty to establish a compensation strategy that does not include excessive board compensation. The test of viability is the board’s ability to translate that strategy into performance metrics for executive and director compensation.
Executive compensation governance:
- Should be based on established and clearly documented performance-based metrics
- Executive compensation programs must provide reasonable and competitive rewards based on performance
Director compensation governance:
- Director compensation may be in the form of annual retainer
- Like executive compensation, should be based on established and clearly documented performance-based metrics
For any public organization, transparent disclosure of executive and director compensation is an essential component of good governance. In order to demonstrate accountability to stakeholders, organizations must employ disclosure practices that clarify and publically make known the roles and responsibilities of board and management with regard to director’s salaries.
They must also implement procedures to independently verify and safeguard the integrity of the company's financial reporting - including board compensation reports. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
Further reading - the Canadian Coalition for Good Governance (www.ccgg.ca)
In 2011 the Canadian Coalition for Good Governance released a set of principles for director compensation.
According to the principles:
- Director compensation should not be so high as to potentially compromise the independence of directors
- Compensation should reflect expertise and a director's actual time commitment to the board
- Director Compensation should vary for different roles
- Boards should consider requiring a minimum shareholding for directors, and encourage investment beyond the minimum
- Boards should minimize the complexity of director compensation structures
- Directors should consider periodically seeking approval for directors' compensation from shareholders.
Executive Compensation, what must companies disclose?
- Any significant change to executive compensation policy the company plans to make in the next financial year
- Whether or not officers or directors are permitted to hedge against declines in market value of equity securities received as part of executive compensation
- The aggregate value of vested share-based awards that have not yet been paid
- Information regarding how executive compensation decisions are made and how executive and director compensation relates to governance of the company