2002 turned out to be a year full of bad news for business. It also turned out to be a recipe for big changes for executive compensation.
Enron was just the beginning. Throw in a few more record-breaking restatements and bankruptcies. Add the Sarbanes-Oxley Act, which, among other things, prohibits loans to executives and requires swift notification of insider trades.
Then, the option-expensing debate grew more intense than ever, complete with voluntary expensing by a parade of companies like Coca-Cola. After that, the New York Stock Exchange and Nasdaq revised listing requirements to force greater controls on compensation practices. Big headlines exposing indulgent executive-compensation policies, like Jack Welch’s retirement package, didn’t exactly put critics in a better mood.
And of course, all this took place against a backdrop of a stubbornly sluggish economy.
Reform in executive compensation never looked more inevitable, according to a new report by compensation consultancy Watson Wyatt.
What to do to prepare for the changes? Stay calm, says the consulting firm. Assess executive compensation at your company to determine what will fly in the new environment, and what won’t.
Here are ten things Watson Wyatt recommends thinking about when reviewing your executive and director compensation programs:
1. Define “loan.” What constitutes a loan, and what alternatives are out there?
2. Do your incentive programs really demand and reward performance?
3. How should underwater stock options be handled?
4. What is your current dilution relative to the market?
5. What would be the affect of FASB on your stock option and Employee Stock Purchase plans?
6.Is there enough executive ownership? Should the company require more? Are there enough opportunities for executives to buy and hold stock?
7. Does the current long-term incentive plan allow the flexibility required for the future?
8. Is your board and the compensation committee up on current issues? Consider a systematic way to keep them educated.
9.Does the compensation committee charter outline the committee’s process, purpose, roles, and responsibilities? This is important if your company plans to be listed on a major stock exchange — they’re a key part of the new listing requirements.
10. If your compensation plan needs a complete tear-down, have you thought out a strategy for the demolition? Early planning leads to less pain later..
(Editor’s note: To find out about the growing sway of compensation committees, read The Gorilla Across the Table, a CFO.com exclusive.)