Benefits and Compensation

Executive Pay: The Evolution of Compensation Committees

Most of us will work our entire lives without ever being present at—let alone participating in—a Board of Directors’ meeting. However, Robin A. Ferracone, chief executive officer and founder of Farient Advisors, has been in more compensation committee meetings than she can count over the course of her career.

We spoke with Ferracone in an effort to peek behind the curtain into the mysterious world of executive pay. She shares some insights about her firm, how a trusted compensation consultant can add value, and how even smaller companies may benefit from developing that kind of relationship.

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BLR: In your career, you’ve been an employee and an employer, having started and run two successful compensation consulting firms, as well as worked for others. When you started Farient Advisors, you had something a little different in mind. How do you approach consulting?

Ferracone: In 2007, when I decided to start Farient Advisors, the environment had changed pretty significantly, not just around how pay programs were going to support strategy and maximize performance, but also how pay strategies were going to mesh with responsible corporate governance. The need to discourage too much risk taking was a big emphasis at that point, in 2008 and 2009.

The economy wasn’t doing well, and it was—and is—important to compensate the executives in a way that encourages them to be good citizens in the larger scheme of things. So I designed my firm to not just support strategy and look after shareholder value, which is extremely important, but also to preserve value by making sure that the compensation plan wasn’t encouraging undue risks.

BLR: You have said that you are in boardrooms with your clients a lot—on average, once a week. What are some of the changes you’ve seen, considering the big focus in the last few years on executive compensation?

Ferracone: When you’re in the boardroom all the time, you get very familiar with what goes on there. Dodd-Frank really raised the whole game around the compensation committee. The chairperson of the compensation committee, in particular, has to be really a skilled, knowledgeable, and appropriately sensitive force in the room; the person needs to be awake to key issues.

Before, in the old days, every once in a while, I’d actually see compensation committee members go to sleep in compensation committee meetings. I don’t think that was because I was particularly boring, I think it was the nature of who the directors were. Now there is a whole new standard around the directors, and things are operating at a much higher level.

It used to be a typical practice for the CEO to appoint friends to the board. It hasn’t gone away totally, but what happens more and more is boards have a nominating and governance committee that is tasked with figuring out who the board members should be. So yes, they want board members who can come in and get along, but they also want board members who are really independent and aren’t the CEO’s friends.

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BLR: You wrote an interesting blog post about the particular skills necessary to serve on a compensation committee these days, specifically for the position of compensation committee chair. Can you brief us on those?

Ferracone: In my opinion, even when a board is willing to conduct an executive search, the searches tend to be a little too narrow. Everybody’s looking for a sitting CEO. That’s fine, but there are only so many of them to go around—and, frankly, not all of them have the sort of expertise you need on a compensation committee. They might have the business skills, but others do, too. People want digital skills, global skills, financial skills, and compensation skills.

That’s what I was trying to convey in that blog: The compensation committee chair role isn’t for beginners; it’s for somebody who knows compensation but doesn’t just know it technically. It should be someone who can really thread the needle as it relates to the political and the psychological ins and outs of compensation.

Tomorrow, more on these “psychological ins and outs” of compensation and an introduction to Employee Compensation in Your State.