Executive compensation management is a two-way performance based street

by on June 30, 2009 · 1 Comment POSTED IN: HR Info Center

Callback policies in executive compensation management

This is becoming more and more of a common theme in executive compensation management. In fact, over the past three years, the prevalence of callback provisions for executives has tripled. And as we say, due to increase scrutiny in legislation, I think there’s also just a public perception in the public outcry associated with some of the things that are in the newspaper on a regular basis.

What a callback policy or provision in an executive compensation management system does is it allows the company to recoup dollars whether that be base pay, bonus or any type of performance based compensation from an executive who breaches any type of policy.

Many Fortune 100 companies of these have adopted this as part of their corporate governance going forward. Generally speaking, a callback provision requires executive to repay compensation. As we say here, it could apply to severance or benefits as well. Recent example is Chevron has a cause for many callbacks if the executive commits illegal acts, fraud, embezzlement, et cetera which resulted in a restatement of financials.

Front end call back provisions in executive compensation management

In financial services, there’s been a disconnect historically between the risks that the company assumes with different products. They have a five year window where the company has capital at risk. But the executive is being paid based on the immediate results of the sale of that product or the purchasing or the closing of that deal.

Rather than do true callbacks, what we’re starting to see is that those incentives are all being changed so that they look like callbacks. In other words, they’re matching the risk window to the corporation with the payout period. So in the some new additions to compensation management policy for executives, there’s a five year risk window, closing that deal that may have paid a bonus of say $1 million for closing the deal, that’s going to be $200,000 a year over the period of five years.

If the deal falls apart, if we have as a company some sort of a risk or exposure that causes the deal to fall apart, it’s going to cause the bonus to fall apart as well. Kind of a proactive club act so to speak.

It’s also part of the increasing disclosure from the SEC that they’re looking for discussion in compensation management of recovery policies. They’re looking for this type of information to be disclosed, oftentimes, in the proxy statement.

All of these things in executive compensation management seem to have started with Enron whether it be Sarbanes-Oxley or increased disclosure.

Enron was kind of the case that started it all. And when I think about the history of executive compensation management, there’s almost the pre-Enron and the post-Enron because of the changes that resulted

Edited remarks from the Rapid Learning Institute webinar: “Executive Compensation Trends: New Benchmarks & Changing Regulations” by Edward Rataj and Kevin Nussbaum

1 Comment on This Post

  1. jeanne
    June 23, 2011 - 8:21 pm

    i m facing a problem about discussing the role and importance of practicing corporate governance in executive compensation management! and also key elements in the executive compensation management that facilitate effective linking of the compensation strategy to the organzation performance!
    where can i do more research??

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