“Trust In Corporations Can Be Fully Restored”
Jonathan Spector, chief executive officer, The Conference Board, said a new era in corporate America is beginning as a result of the financial crisis. He said many Americans have simply lost trust in their corporate institutions and that this loss of trust is not limited to big financial institutions. Spector said this trust “gap” is largely due to issues surrounding executive compensation, and trust in corporations can only be fully restored if the institutions themselves take meaningful action.
To restore trust and confidence in the private sector, Spector offered five recommendations for companies to follow from The Conference Board Task Force on Executive Compensation.
The first principle is to be very clear about how compensation supports a corporation’s long-term strategy, properly incorporates risk, and pays only after performance has actually been delivered.
Second, corporations should ensure the compensation they are delivering is affordable over the long term, he said. “[Corporations] should hold [themselves] to a high standard,” Spector said. “[Corporations] must be able to convince skeptical shareholders that you could not have achieved the same performance with a lower compensation structure.”
Third, using compensation practices that conflict with fundamental notions of fairness and pay for performance. Spector indicated that golden parachutes, overly generous severance arrangements, and golden coffins are examples of compensation vehicles not always directly tied to performance.
The fourth principle is to proactively demonstrate credible board oversight of executive compensation. “The members of the comp committee must be fluent in the strategy of the company,” in regard to compensation, Spector said.
Fifth and lastly, compensation programs must be understandable and effectively communicated to shareholders, and that when questions arise, boards and shareholders are able to engage in meaningful dialogue.
Spector concluded by stating that the principles would allow committees to make choices that fit their own companies while inspiring greater trust and confidence.