Navigant - "Say on Pay"

I have many observations and concerns with the Navigant Compensation Report and will address them in multiple postings. This first posting is about the Compensation Committee Principles that were espoused on page 3 of the provided document. The very first principle stated that director compensation should be determined by the board and disclosed completely to members. While I agree in large part with the statement, it got me thinking about a recent segment on KUT 90.5 about “Say on Pay”.

“Say on Pay” is a buzzword for the practice of allowing members, shareholders or stakeholders the opportunity to vote on what a board of director’s compensation package should be. The purpose of “Say on Pay” is to hold directors accountable for their performance and then to tie their pay to the value that they provide. It is typically non-binding but I believe it to be more effective than symbolic based on my research.

The Navigant Report stated on page 15 that compensation was increasing at a rate of 10% per year for the last 5 years. I believe that for most people in the workplace a 3-4% increase in their salaries is considered normal and anything above that would be part of a promotion package or a result of some pre-defined and documented goals contract. I also found it ironic that the average total compensation packages for the PEC directors decreased in 2007. Is this because of the increased scrutiny from the members and the media? And why would Navigant include the aforementioned statement in the report anyway? Did they do that specifically to ensure that their “normalization” algorithm would be accepted? As I have discussed in earlier posts, compensation issues have become increasingly political and controversial due to the incessant upward trend of director compensation despite the national trend of stagnant worker wages.

There are a number of companies worldwide that are allowing shareholders to voice their opinions on compensations. Just this year, Aflac became the first company in the U.S. to allow the voting to occur. The stockholders overwhelmingly gave a strong show of support of the directors and their respective packages…probably due the fact that the stock price and values were at an all-time high.

Some believe that once the chairman of the compensation committee understands that when their decisions are subject to a membership vote of confidence, they will try harder to get it right. Conversely, there are others who caution that the members should not be given the right to usurp board authority on issues. I, personally, am in favor of allowing membership vote on compensation. If the board presents objective, accurate, and relevant data and then makes justifiable decisions, then there should be no concern about membership feedback. If this is a concern then maybe it is in the best interests of all to let their votes count at election time by removing the directors who are not making the grade and allowing membership feedback to factor into their decisions.

Although we at PEC are not truly in a “Say on Pay” situation we do have the opportunity to voice our opinions of the board, their salaries, and their respective performances through the Navigant feedback section on the PEC website. I believe that “Say on Pay” is potentially a great tool. It can be valuable way of measuring member confidence and PEC should adopt this method not just now, but for the future. So, please, go to the PEC website and leave a comment that reflects your beliefs on compensation. And then put your board election vote to work by electing directors with relevant experience, who will make changes for the better, and who have leadership skills that will work for you.