Annual Survey Shows the Emergence of New Compensation Practices and the Adoption of Formal Policies on Board-Shareholder Engagement

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Nov 02, 2011, 10:32 ET

NEW YORK, Nov. 2, 2011 /PRNewswire/ -- According to a report released today by The Conference Board, the global business research and membership organization, most U.S. public companies believe that their top executive compensation programs do not pose the risk of a material adverse effect on the business. In addition, the study revealed the emergence of new compensation practices and the adoption by some boards of directors of formal policies on how they should engage with shareholders.

The 2011 U.S. Director Compensation and Board Practices Report is based on a survey of 334 public companies jointly conducted by The Conference Board, NASDAQ OMX, and NYSE Euronext between April and June 2011. The Harvard Law School Forum on Corporate Governance and Financial Regulation, Stanford University's Rock Center for Corporate Governance, the National Investor Relations Institute (NIRI) and the Shareholder Forum each endorsed the survey by distributing it to their members and readers. Participants in the survey (corporate secretaries, general counsel, and investor relations officers) were asked to provide information on a wide range of corporate practices, including: board composition and leadership, director election practices, anti-takeover practices, compensation practices, risk oversight practices, CEO succession planning practices, board-shareholder engagement practices, and policies on director performance assessment and retirement. Findings constitute the basis for a benchmarking tool with more than 120 data points searchable by company size (measurable by revenue and asset value) and 20 industrial sectors.

"Since its first release in 1939, this annual study by The Conference Board has become a highly regarded resource on corporate governance practices for regulators, governance experts and academics," said Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board and an author of the report. "This year, we are proud to join forces with NASDAQ OMX and NYSE Euronext in consolidating a source of information that we believe our respective members will find of great value when facing decisions regarding their corporate governance structure and fiduciary responsibilities."

"We're extremely pleased to partner with The Conference Board and NYSE Euronext to produce a tool that has traditionally been instrumental in helping public companies make imperative decisions with regards to their corporate governance structure and ethical duties," added Ed Knight, Executive Vice President and General Counsel, NASDAQ OMX. "NASDAQ is committed to providing public companies with relevant resources that help them more effectively navigate today's changing corporate governance landscape. We are pleased to have the opportunity to offer to our listed companies this highly valuable and insightful report."

"The study's findings underscore that corporate boards, in general, are continuing to strengthen and modernize compensation, governance and shareholder engagement practices," said Scott Cutler, EVP and Head of U.S. Listings at NYSE Euronext. "By offering a comprehensive review of current practices, boards will have more information to help them determine the best practices for the individual companies they represent. We greatly appreciate the valuable input of our listed issuers, and welcomed the opportunity to collaborate with The Conference Board and Nasdaq OMX."

Major findings include:

Director compensation correlates more with company size than with industry. Median total compensation to board members ranges from $46,843 in the smallest companies to $190,000 in the largest. The range narrows when you look across industries: cash retainers, in particular, vary from a low average of $21,138 for commercial banks to a high of $78,848 in the retail trade industry. "This finding underscores a likely correlation between the rising director compensation levels observed in the last few years and the expanding array of governance and compliance responsibilities expected of boards," said Tonello.

Computer services is the sector that most emphasizes equity-based compensation. When it comes to compensation mix, computer services is the industry with the lowest percentage of total director compensation awarded in cash retainer (26.6 percent); however, it is also the sector that placed the greatest emphasis on equity-based compensation (stock awards and stock options), which surpasses 70 percent of the total. Directors at smaller financial companies (with assets valued at $1 billion or less) were, on average, compensated more in cash, while larger financials were more likely to compensate their board members in stock and stock options.

Boards continue to strengthen their member independence. In approximately one-third of companies in the financial services sector and one-fourth of those in manufacturing and nonfinancial services, boards adopt a policy on independence setting standards that are even more stringent than those established by the security exchange on which the company is listed.

Majority voting is the predominant model of director election in the largest revenue group, but it remains rare for a director to fail to receive the required vote. There is a direct correlation between company size (measured both by annual corporate revenue and asset value) and the adoption of majority voting policy for director elections. In the largest revenue group, for example, 80 percent of companies adopt some form of majority voting; of those, 86 percent supplement it with a mandatory resignation policy. However, only 3 percent of companies (all in the manufacturing sector, and mostly with annual revenue of less than $500 million) reported having one or more members of their board standing for reelection in the 2010 proxy season who failed to receive the required majority vote.

Reimbursement of proxy solicitation expenses remains uncommon. The reimbursement of proxy solicitation expenses remains a marginal practice. The sector reporting the highest level of adoption of such a policy is the financial services sector, with a meager 7 percent. The policy tends to be favored by smaller companies.

Board portals are more widely introduced by large financial companies. Less than a majority of corporate boards across industries use a board portal, where directors can securely access board documents and collaborate with other board members electronically. However, this technology is more widespread in the financial services sector, where it has been introduced by almost 73 percent of companies with asset value of $100 billion or greater.

New compensation practices are emerging. A range of one-fourth to one-third of surveyed companies have an anti-gross ups policy in place, with the percentage of companies adopting the policy increasing with corporate size (as measured both by annual revenue and asset value). Approximately 24 percent of financial services companies impose a retention period for stock awarded to employees as part of their annual compensation, with a concentration among the largest companies (73 percent in the group of those with asset value equal to or greater than $100 billion). Despite growing interest in the practice among compensation experts and advisers, bonus banking remains uncommon; even in the financial sector, only 7 percent of respondents reported having such a policy in place.

Peer-group benchmarking is widely used to determine executive compensation. More than three-quarters of companies reported in their proxy statement the names of individual companies composing the peer group used for compensation benchmarking purposes; the larger the company size, the higher the percentage of companies providing this type of disclosure. The responsibility of determining the peer group is most frequently assigned to the compensation committee; however, 40 percent of manufacturing companies and 38 percent of nonfinancial services companies reported that their senior management was also directly involved in the selection process.

Most companies conclude that they are not exposed to a material compensation risk. Across industries and size groups, a large majority of companies, after reviewing their compensation policies and practices, concluded and disclosed that such policies and practices are not reasonably likely to have a material adverse effect on the company.

Compensation consultant fees tend to be lower than the amount for which disclosure is required. Across industry and size groups, a large majority of companies did not disclose the aggregate fee paid during the reportable fiscal year for compensation-related services and for additional consulting services, since the fee amount was lower than the $120,000 threshold for which securities laws mandate disclosure.

Financial companies widely rely on a dedicated chief risk officer. When analyzed by size, nearly all of the financial companies with asset value of $100 billion or greater avail themselves of a dedicated chief risk officer, and in most cases (70 percent) the CRO reports directly to the CEO.

Smaller companies review their CEO succession plans less frequently. The revenue analysis reveals an inverse correlation between the frequency of the review and the company size, with 32 percent of companies with annual revenue of $100 million or less indicating that their boards review the CEO succession plan not annually but only when a change in circumstances warrants it (e.g. retirement, sudden death or illness, or other emergencies).

Formal board/shareholder engagement policies begin to emerge. About a quarter of surveyed companies adopt a board/shareholder communication protocol, with the highest percentage found in the financial sector (27 percent) and among the smaller size group (42 percent of companies with annual revenue below $100 million, and 34 percent of companies with an asset value between $1 billion and $9.9 billion).

Source:
The 2011 U.S. Director Compensation and Board Practices Report
Report #1486-11-RR
The Conference Board

About The Conference Board

The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States.

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SOURCE The Conference Board