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Director Compensation Alignment

Director Compensation Alignment

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Board of director responsibilities are increasingly being scrutinized in the face a new round of financial mismanagement and high profile corporate failures. The Sarbanes-Oxley Act of 2002 attempted to address many issues to inhibit corporate finance mismanagement, however many corporations did not correctly align directors pay with both appropriate corporate financial management and with reaching the corporation’s strategic goals.
Board of director responsibilities are increasingly being scrutinized in the face a new round of financial mismanagement and high profile corporate failures. The Sarbanes-Oxley Act of 2002 attempted to address many issues to inhibit corporate finance mismanagement, however many corporations did not correctly align directors pay with both appropriate corporate financial management and with reaching the corporation’s strategic goals.

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Published by: Dr. Earl R. Smith II on Dec 29, 2008
Copyright:Attribution Non-commercial

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07/19/2009

 
Director Compensation Alignment
By Dr. Earl R. Smith IIDrSmith@Dr-Smith.comwww.Dr-Smith.comBoard of director responsibilities are increasinglybeing scrutinized in the face a new round of financialmismanagement and high profile corporate failures. The Sarbanes-Oxley Act of 2002 attempted to addressmany issues to inhibit corporate financemismanagement, however many corporations did notcorrectly align directors pay with both appropriatecorporate financial management and with reachingthe corporation’s strategic goals. Corporate director’sactions, loyalties, corporate director pay, and ethicsare being reviewed. Issues raised by Congress and the media drive thisprocess.Director’s compensation generally involves a combination of meetingattendance fees, annual equity bonuses, retainer fees and othercompensation as deemed appropriate by the board’s CompensationCommittee. The Sarbanes-Oxley Act of 2002 required an annualassessment of the board’s performance. However, many boards failedto tie the annual assessment to the board’s actual performance. Inmany recent high profile failures, directors, CEO’s and other topmanagement received large bonuses without regard to the financialperformance of the company or the company’s stock price. Decisionsto pay large bonuses to top executives when obvious poormanagement of corporate affairs has occurred, leads to a lack of confidence by stockholders in the board’s governance ability.Good board governance and diligent oversight could avoid many of these problems. The granting of stock options is one common practiceused to align the interest of the directors with those of theshareholders. This practice of paying directors with equity in thecompany motivates directors to make decisions that will enhance thestocks long-term value. One noted problem with this form of compensation is the practice of equally distributing options to alldirectors. Stock options can certainly be effective in motivatingdirectors to work to enhance stock value, but the CompensationCommittee should evaluate director’s contribution to decisions thatenhance stock value as well as decisions that have negative impact onthe company’s performance.A strong Compensation Committee will evaluate director participationin committee meetings and the ideas generated by committees. The
 
Compensations Committee can review strategies and tie performancebonuses to achieving strategic goals. The Compensation Committeecan review minutes and other documents and highlight participation indiscussions that work to further the objectives of the committee andthe board. The research done can then be used to evaluate individualperformance of directors and bonuses awarded based on thisevaluation. Promoting this thorough evaluation will build confidence inshareholders and should entice investors wishing to invest in well-managed companies to buy the company’s stock, thereby enhancingits value.Directors charged with management assessment and oversight andwith setting strategies for corporate growth should receive particularrecognition. The Compensation Committee evaluates corporatemanagement’s performance and issuing recommendations formanagement bonuses based upon their assessment of corporatemanagements reaching the goals and milestones set by the board. Astrong strategy gaining in popularity is to apply the same principal todirector bonuses. Many boards perform only a cursory boardassessment designed to meet the Sarbanes-Oxley assessmentrequirement. However, boards following the same assessment modelfor directors as is followed for management generally return higherdividends to stockholders than companies with minimal assessmentcriteria. Corporate governance is too complex and to closelyscrutinized to not have documented evidence of excellent service bydirectors when paying large bonuses.Directors are compensated for their time and expertise. Companiescannot operate in a complex environment without a wide set of business experience to draw on. However, in a society accustomed toinstant detailed news companies must be able to justify director andmanagement assessments and bonuses.~~~~~~~~~~Related Articles:

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