Executive and Director Compensation in ESOP Companies

From chapter 1, "Overview of Executive Compensation for ESOP Companies"

Company boards must decide whose pay they will be determining. Most often, it is only the CEO, with the CEO then setting pay for everyone else. In some other cases, the pay of other officers, most often the CFO or COO, is set as well. More often, a board becomes involved in non-CEO pay when it seeks to attract a key executive, especially one who might become the CEO’s eventual successor. Decisions here involve not just the level of pay, but its components, including incentive pay, equity, relocation costs, sign-on bonuses, etc.

Even if boards do not set compensation for executives other than the CEO, they still have an obligation to determine that such compensation is appropriate. Directors should monitor the compensation of all executives, but they should also be involved in defining a compensation philosophy and setting the parameters within which the CEO sets the compensation of other executives.

The set of executives will not be uniform in the type of compensation they should receive. Personal differences matter, of course, such as a person’s age, lifestyle, or level of risk aversion. Their position also matters: in some companies it makes sense for the executives in charge of sales or operations to have high degrees of profit-linked pay because they can have a profound and direct effect on profitability. A CFO may be no less important, but have a far less direct impact on the company’s profits.

From chapter 3, "Fiduciary Issues for Trustees Regarding Corporate Governance and Executive Compensation"

One of the main responsibilities of the board of directors is overseeing the CEO and executive management team. Executive compensation for the CEO and other members of the executive management team is therefore the primary ongoing responsibility of the board. The courts have been clear that the setting of executive compensation properly rests with the board of directors and that the board, in setting executive compensation, does not implicate a fiduciary duty under ERISA. This responsibility increases the need for independent directors or may cause a board without any independent members to rely on outside compensation consultants. Despite the clarity the courts have provided as to executive compensation being the responsibility of the board, the courts have noted that “there is no precise formula or test by which the reasonableness of the compensation of corporate officers is to be measured.”

The trustee does not have the right to attend board meetings, but if agreed to by the board, the trustee should participate at least once a year in key board meetings (in person or virtually) to allow the trustee to fulfill its duty to monitor the board. The trustee should be concerned if the board does not agree to allow the trustee to attend meetings or at least provide the trustee with copies of discussion materials and minutes of the board meetings. It would be desirable to get a commitment from the board at the time of the trustee’s acceptance of the appointment that the trustee will be able to attend board meetings as a guest and will be provided with minutes of the meetings.

From chapter 8, "Director Compensation"

The survey asked about six types of pay for directors. Figure 8-5 details the percentage of respondent companies that offer each category. Most companies pay their directors a retainer and/or a fee per meeting, although some also pay equity or deferred compensation. Larger companies are more likely to offer equity compensation: 24% of companies with more than $50 million in revenue offer equity compensation to independent directors, compared with 6% of companies with $50 million or less in revenue.

Table 8-1 shows percentiles of amounts paid for each of those components for each type of director. (Percentiles are not shown for categories with fewer than 10 respondents.)

From chapter 9, "Findings from the NCEO’s ESOP Executive Compensation Surveys" (tables omitted)

Table 9-3 presents a summary of total compensation. Total compensation is calculated by summing base pay, cash incentive pay, and stock-based compensation for each executive at each company and then calculating percentiles. Deferred compensation is excluded from the total pay calculation.

Following this is a more detailed picture of the compensation data. Tables 9-4 through 9-8 show compensation percentiles for base, incentive, and stock-based compensation for each position, broken down by company revenues in the most recent fiscal year. Note that some companies offer all three categories of compensation, while others do not; therefore, the total pay at a given percentile is not necessarily equal to the sum of the three corresponding compensation categories in the table.

Note, too, that percentiles for each pay category are calculated among only those respondent companies that offer that pay category, and exclude respondents who entered a zero or left their response blank. For example, cash incentive pay for CEOs among all respondents is $100,000 at the 50th percentile (median), but this is the median among only those companies that pay cash incentives to their CEO.