Compensation packages need to be more transparent: report

Six-step exec compensation analysis process for all companies

A new standard for transparent executive compensation and guidelines for companies to better link compensation with company performance is needed, according to a new report.

The Institute of Corporate Directors, a Toronto-based association that represents Canada's director community, released a report on executive compensation based on research done at the Richard Ivey School of Business at the University of Western Ontario in London, Ont.

The report also calls for improved financial and human resources literacy among members of compensation committees.

"Accountability and pay for performance were the two main themes we repeatedly uncovered through our research and consultation with leading experts, directors and market participants," said Richard Ivey School of Business professors Murray Bryant and Stephen Sapp in a statement.

"Executive compensation, if designed properly, plays a pivotal role in motivating management to create shareholder value."

The report suggests that executive compensation can be more accurately aligned with investors' interests if compensation is defined relative to well thought-out metrics and preset targets to capture varying levels of performance.

The report recommends a six-step compensation analysis process:

1. Obtain an in-depth understanding of the business model, strategy and goals of the firm.

2. Develop appropriate executive performance metrics (both quantitative and qualitative) to support the business model, strategy and goals.

3. Determine the appropriate weighting for each performance metric and develop relevant targets.

4. Assess what it takes to motivate an executive with respect to compensation given the mobility of executive talent and other elements.

5. Evaluate whether or not the total compensation arrangement is in accordance with the performance targets and aligns the executive's incentives with the firm's business model and objectives.

6. Objectively stress test the entire plan to see if it is fair to the CEO, the firm and investors.

The report recommends that all relevant sources of compensation be provided in a single, easy-to-read table to ensure investors understand the total compensation for senior executives.

It also recommends that directors, on behalf of investors, should be able to claw-back bonuses and long-term incentive payments on the basis of malfeasance or when significant accounting adjustments warrant.

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