The Analysis: Thumbs Up on Proposal, Process

If you have the right compensation package, you can look investors in the eye

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When I first heard about Dan Amos' and Aflac's decision to voluntarily adopt a say-on-pay measure letting shareholders vote on executive compensation, I thought this was a really interesting call. There's a lot to like about not only the decision, but also the process that Amos and his compensation committee went through to come to it.

The first thing Amos did, which I think is important for any board wrestling with this issue, was to be very inclusive of shareholders. When he heard from Boston Common Asset Management, he opened a conversation with them. What was this all about? What issue were they raising? Did they have a question about his compensation or was this just good governance?

It turns out it was the latter. But Amos didn't just reach out to institutional shareholders. He called individual shareholders as well, and in doing so, got different answers. Individual shareholders said, "We could go either way on this, but it looks like the right idea." Institutional stock owners were much clearer in what they felt: They thought this was a really good idea.

A Shareholder-Friendly Compensation Package

Now, in my opinion, Amos was playing a bit of a dangerous game here. There's always a risk shareholders are going to tell you something you don't want to hear. You're going to have a hard time explaining it if you turn around and don't do what they want.

But that brings us to the second thing Amos did really well. He knew he could get shareholder input because he had done his homework. He had already asked Boston Common this question: "If you look back at my pay for the last two years, would you have approved it?" They said they would have. Guess what? That's really important data when you're looking at a decision like this.

He also knew he had a good story to tell. He has a lot of tenure. He's created a lot of value for shareholders. I looked at his compensation package, and it is reasonable. It's shareholder-friendly. There's a lot of at-risk compensation, and it could potentially zero out if the company doesn't create value. So the third thing Dan did really well is examine whether he had a good story to tell. He recognized the upside of being the first company to voluntary adopt say-on-pay. They have gotten a lot of positive press from this.

Sending a Message of Confidence

But in addition to the positive PR, he also sent a strong message to different communities and constituencies. The message to employees is, "We have confidence in our program and our program is going to hold us accountable just as we hold you accountable." The message to shareholders is, "We've got nothing to hide." But it also tells shareholders, "We have trust you're going to do your own due diligence. You're going to understand the nuances of our pay program, and make the right decision when you approve or vote down the compensation package."

One thing we didn't hear much about is the actual decision-making and governance process in the boardroom. It sounds as if they spent a lot of time making this decision—they had four meetings to discuss it. But what did it actually look like around the table?

One of the things we at the Hay Group look at is something called "institutionalized conflict." That's where you sit around the room, and ask people on the board to play different roles. People over here support the issue, and people over here are against it. They have it out, make sure every argument gets onto the table, and every issue is looked at from every angle. You have to make sure that whenever you're making a decision of this magnitude—when you're giving shareholders this kind of power—that you've looked at it from every angle.

You Know What the Right Package Is

At the end of the day, is this the right decision for every company? Probably not. There's a lot to like about say-on-pay. I think anything that gives shareholders more of an opportunity to have an impact can be a good thing. However, it's not for everybody. You don't want a situation where board members are making decisions only to satisfy short-term shareholder wishes, rather than doing what they've been elected to do, which is to put in the right program for the company at this time.

To sum up, if you can't look your shareholders in the eye and feel good about your executive compensation package, then it's probably not the right package. This is a very difficult governance environment for executive pay. You must have a program you can feel good about, that lets you look shareholders in the eye and justify its worth.

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David Wise is a senior consultant at the Hay Group, a management consulting firm that also advises boards on executive pay.