The task force’s report and recommendations set forth five guiding principles, which it believes, if appropriately implemented, can restore corporate credibility with shareholders and other stakeholders and trust in executive compensation pay processes and oversight. The report provides guidance to boards, compensation committees, and management in implementing these guiding principles, and its appendixes contain additional information on executive pay practices and standards.
The Guiding Principles state that public companies should:
- Principle One: compensation programs should be designed to drive a company’s business strategy and objectives and create shareholder value, consistent with an acceptable risk profile and through legal and ethical means. To that end, a significant portion of pay should be incentive compensation, with payouts demonstrably tied to performance and paid only when performance can be reasonably assessed.
- Principle Two: total compensation should be attractive to executives, affordable for the company, proportional to the executive’s contribution, and fair to shareholders and employees, while providing payouts clearly aligned with actual performance.
- Principle Three: companies should avoid controversial pay practices, unless special justification is present.
- Principle Four - credible board oversight of executive compensation committees should demonstrate credible oversight of executive compensation. To effectively fulfil this role, compensation committees should be independent, experienced, and knowledgeable about the company’s business.
- Principle Five - compensation should be transparent, understandable, and effectively communicated to shareholders. When questions arise, boards and shareholders should have meaningful dialogue about executive compensation.
The full report is available to current London Business School students, faculty, staff and alumni from the Conference Board Research database which can be found on the A-Z list of library databases via Portal.
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