Finding the Proper Balance of Legal and Consulting Advice for Compensation Committees

 Jeremy D. Erickson is counsel, Ena Kaur is an associate, and Jonathan M. Ocker is a partner at Pillsbury Winthrop Shaw Pittman LLP. This post is based on their Pillsbury memorandum.


  • Executive compensation counsel taking minutes of compensation committee meetings and working with the compensation consultant to make sure the meetings go smoothly with informed decisions translates into a better proxy and a winning say-on-pay vote.
  • Equity plan proposals are more likely to win shareholder approval and less likely to attract proxy trolls when executive compensation counsel and the compensation consultant collaborate in advance on the appropriate plan modifications and disclosures, determining whether the equity plan with its proposed modifications will pass shareholder advisor tests.

Executive compensation counsel and compensation consultants are useful resources for compensation committees when developing and approving compensation arrangements. A compensation committee can maximize the benefit provided by both advisors by setting up a collaborative process with executive compensation counsel, the compensation consultant, and internal company professionals. The following examples show how integrating both advisors into the decision-making process can benefit a compensation committee.

1. Making Room for Advisors Inside and Outside the Boardroom. Expanding the channels of communication with a compensation consultant and executive compensation counsel both inside and outside the boardroom can enable a compensation committee to implement programs that achieve their recruitment and retention goals and are more likely to gain investor support. A compensation consultant is equipped to pinpoint the executive compensation programs that are competitive, while executive compensation counsel can speak to shareholder concerns and ensure the programs are designed to address shareholder sensitivities.

An equity plan proposal can help illustrate how a compensation committee most effectively achieves its goals by making room for the input of executive compensation counsel. Poorly drafted requests for additional shares, inclusion of problematic plan provisions, and failure to draft proposals/plans in a manner to improve the shareholder approval percentage may result in unnecessary time and expense. By consulting with executive compensation counsel in advance, a compensation committee can avoid filing an amended proxy and/or implementing shareholder outreach campaigns to fight for shareholder approval on proposals with problematic disclosure. Additionally, the compensation consultant and executive compensation counsel can also assist in determining what it will take to make sure the proposal will receive ISS/Glass Lewis approval before the proxy is filed.

2. Going Beyond Benchmarking and Peer Group Practice. Executive compensation counsel and a compensation consultant can help tremendously when a compensation committee seeks new ways to retain and recruit executives. A compensation consultant does a phenomenal job of gathering peer company information and keeping abreast of the latest trends. Meanwhile, executive compensation counsel is uniquely qualified to tease out important investor relations, stock exchange rules, and tax and legal considerations associated with compensation programs.

Adoption of severance plans and the payment of severance upon retirement are just two examples of arrangements that, if implemented based on their frequency among peer companies, can blindside a compensation committee later. A severance plan is often adopted by peer companies with certain upsides in mind, which may not be apparent to a compensation committee. Executive compensation counsel can unveil the important aspects of adopting a plan, such as: a plan creates a contractual obligation lacking discretion to pay less for poor performance, a plan may become subject to ERISA compliance rules, and a formal plan is subject to disclosure requirements that do not apply to severance guidelines. Armed with this information, a compensation committee is in a better position to truly assess the appropriateness of the arrangement for the company—that is, whether the severance plan (versus discretionary guidelines) is worth the increased burden.

Severance payments to retiring executives also raise issues that a compensation committee may not immediately appreciate. Executive compensation counsel is best suited to explain the issues shareholders might have with such payments and help reshape severance payments to avoid shareholder challenges.

3. Advance Modeling of Disclosures. Having executive compensation counsel collaborate with a compensation consultant to model how different executive compensation decisions will be disclosed in a Form 8-K filing or in the proxy statement, specifically the Compensation Discussion and Analysis, prior to approval is a great way for a compensation committee to screen out decisions that may garner scant support. This exercise eliminates the headache of drafting and defending poor or rushed executive compensation decisions at the end of the year after those decisions were made. Additionally, with the early exposure of gaps in potential compensation decisions, the two advisors can then work together to prepare an executive compensation decision that will receive better support.

For example, it is not uncommon for a chief executive officer to receive an above-target bonus. However, depending on the unique circumstances of the company, such as low total shareholder return, poor operational results, or performance goals without sufficient rigor, approval of an above-target bonus may not be appropriate. Preparing a model of the decision in the Compensation Discussion and Analysis with a side-by-side view of total shareholder return, operational results, and the proposed compensation can give a compensation committee a preview of the explanation for the decision. The committee can then evaluate whether the justification for the decision will pass muster and modify the decision, if necessary, to avoid investor challenges.


A compensation committee should review its current decision-making process to determine how it can benefit from the combined efforts of a compensation consultant and executive compensation counsel. One simple step can have an immediate impact: giving both advisors seats at the table when holding compensation committee meetings and external discussions so together they can guide a compensation committee to make decisions that are competitive, satisfy shareholders, and avoid preventable issues.

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