July 7, 2016
Compensation committees must follow strict independence rules, and company executives may not serve on their own compensation committees due to the conflict of interest arising from executives setting their own pay. Although public companies must abide by these strict standards of independence, many enlist compensation committee members who currently serve as executives at other public companies.
Outside Executives on Compensation Committees
A recent Equilar study found that 37.5% of S&P 500 companies have at least one compensation committee member that is a named executive officer (NEO) at another public company. Of those boards, 27.8% had one outside NEO on their compensation committees, while 8.3% had two sitting executives on their compensation committees. Three or four outside executives served on 1.4% of S&P 500 compensation committees.
Of the 2,064 total seats on compensation committees in the S&P 500, 11.8% were occupied by a sitting NEO. Most of those are CEOs, and in fact, currently serving CEOs occupied 9.3% of compensation committee positions in the S&P 500.
Furthermore, NEOs held 9.9% of S&P 500 compensation committee chair positions, and 7.7% were held by an outside CEO.
Sitting Executives on Multiple Compensation Committees
With many directors serving on multiple compensation committees, the number of individuals differs from the number of total positions available. In the S&P 500, 1,800 unique compensation committee members served on boards, compared to 2,064 total positions. Seventeen of the unique compensation committee members serving as NEOs at other companies—or 7.0%—held seats on multiple compensation committees, including 13 CEOs (representing 7.3% of outside CEOs that served on compensation committees). Meanwhile, there were 471 unique compensation committee chairs overall in the S&P 500, with 10.2% of those being NEOs and 8.1% being CEOs. No outside CEO chaired more than one S&P 500 compensation committee, while one NEO chaired two compensation committees.
While appointing outside executives to the compensation committee may not pose an immediate and direct conflict of interest, attentive corporate governance stakeholders scrutinize compensation committee composition. On the one hand, these executives are subject to the decisions of their own companies, implying familiarity with current compensation practices. However, a more indirect conflict of interest may arise if these individuals directly benefit from systemically escalating pay. Furthermore, if personal or networking opportunities interfere with decision-making, then the independence of the committee may endure further compromise.
Given shareholder scrutiny of director independence and executive pay, keen observers will continue to follow developments and fluctuations in the participation of currently serving executives on outside board compensation committees.
For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at email@example.com. Dylan Lennard, research analyst, contributed to this post.