Pay for performance – where shareholders and others link at least part of top executives’ compensation with the company’s performance – has been having an impact on many general counsel at Fortune 500 companies.
There are multiple ways the trend involves GCs. They are often among the highest paid officials in a company, oversee an increasingly large budget and staff for compliance and legal affairs, and their responsibilities are increasingly important for the company’s bottom line.
So many GCs are finding their salaries/compensation will be affected by pay-for-performance initiatives involving the C-Suite.
Cynthia Lee Dow, an executive search consultant for Russell Reynolds Associates, where she heads up the legal and compliance practice for the United States, says the pay-for-performance trend is one that is here to stay, especially for top paid executives.
“Their compensation will be under scrutiny,” she said in an interview with InsideCounsel about GCs. “They’re in the same position as other top-paid executives.” These may include such officials as the CEO, CFO, or head of human resources.
The trend became more apparent at many companies as many activist shareholders and shareholder advisory firms held top executives and board members accountable for the company’s performance.
During the financial crisis as well as the AIG controversy and bailout, there was an increasing awareness of salary levels at companies, and concerns were voiced to boards that results were weaker but top executives’ salaries appeared high.
Now, the pay for performance trend is found in many Fortune 500 companies. “It’s part of the fabric of good corporate governance,” Dow said.
She explained that GCs total compensation package includes: the base salary, target annual incentives and target equity (which includes grants of stock and stock options.) The actual base salary is only 25 to 30 percent of the package. Much of the compensation comes as a result of company performance.
One approach used in pay for performance is to compare salary and compensation with comparable peers.
Also, in a recent report, CFO explained that board compensation committees are looking for more comparative data when it comes to compensation and performance. Audit committees are looking at executive pay as it relates to risk assessment, the report adds. And annual proxy statements are including more explanation of salary levels. In fact, the Securities and Exchange Commission has been urging companies to offer increased explanation and analysis of their executive compensation.
In addition, an Aon Hewitt survey of 294 directors and 294 executives revealed that pay competitiveness was the top compensation-related issue. After that, directors ranked pay for performance.