The Test of Time: How will board decisions you make today affect the board in three and five years?

• Author: Shaw, David
• Position: ENDNOTE

Boards are always walking the tight rope between short-term demands and the long-term health of the company, and its value to shareholders.

From what I've been hearing in my conversations with directors and corporate governance advisers, the last few months have seen many compensation committees struggle with how to pay and retain their CEO. With the stock market wobbling around all-time highs, some CEOs have been feeling their oats, and are looking to see larger-than-average increases in their total compensation, hinting (or more) that the labor market is tight and that executive search firms are swarming.

It's good timing on the part of these CEOs, given share and economic performance in the last year, and the deep uncertainty about whether the economy and stock market will continue to grow, and for how long. We have potential trade wars, Brexit, political turmoil, massive deficits, increasing interest rates ... if you know where the economy and stock market will be in June of 2019, please let me know!

And there remains the always-present institutional investor and proxy advisor watchdogs, say on pay votes, and the new releases of CEO pay ratios to median employee compensation. As many disclosures state, there is the strong possibility that recent share performance is no guide to future share performance.

So what's a compensation committee to do?

This issue was addressed at our April 18, 2018 Directors Roundtable in New York City, where director participants considered a hypothetical situation entitled "Determining CEO Target Compensation in a Competitive Labor Market." One of the key questions board member participants pondered was this:

"How will the CEO pay decisions that we make now stand the test of time?"

In other words, if we meet the CEO's pay requests (demands, really), what situation will the compensation committee be in three and five years down the road?

There are a lot of ideas on how to handle CEO compensation in our current situation in this issue of Directors & Boards, many of...