March 2024
Chris Clark conducts interviews with leading corporate directors and subject matter experts for Stuart Levine & Associates, a global consulting and leadership development company. The Planet Governance™ interview series features the views of corporate directors, chief executives, and governance experts on timely issues from succession planning and executive compensation to stakeholder activism and geopolitical risk.
This CEO and board member says she does not see companies retreating from their commitment to environmental and social progress…
As the founder and CEO of Farient Advisors LLC, Robin Ferracone has led the strategic development and expansion of the executive compensation, performance, and corporate governance advisory firm.
With over 30 years of experience, Robin advises clients in business and talent strategies, executive compensation, organization, value management, and performance measurement. She is the author of Fair Pay Fair Play: Aligning Executive Performance and Pay (John Wiley & Sons, 2010). In addition, Robin has authored numerous articles, and is a regular contributor to Directorship magazine and Forbes.com.
Robin formerly served on the board of directors of Trupanion, Inc., where she chaired the compensation committee. In addition, Robin is a trustee emeritus of Duke University. She currently chairs the board of WildAid and is a member of 5050 Women on Boards, NACD, Women Corporate Directors, YPO Gold, and the Trusteeship. For 12 years, Robin has been named to the NACD “Directorship 100”, a list of the most influential people in corporate governance and the boardroom.
Robin A. Ferracone
Chris: Robin, are there trends you see that will impact compensation committees in the year ahead?
Robin: A continued trend is the intense competition for top talent. New hires often have more than one offer on the table, and companies are doubling down to retain their top talent. This has led to a rise in the use of specialized awards for talent management, including recruitment, retention, and corporate transactions. Approximately one-third of S&P 500 companies granted at least one Named Executive Officer at least one special award between 2020 and 2022. The key is to keep these awards reasonable, lest the company’s Say on Pay vote will come down. Another area that continues to evolve is ESG measures in incentive plans.
Chris: What do you see as the impact of the “anti-woke” movement on ESG initiatives?
Robin: It’s a moment in time. It seems that ESG has become a four-letter word in some circles. We are now seeing “ESG” being downplayed, and “sustainability” being substituted for ESG to gain greater acceptance in corporate reporting. Given the counterattacks on ESG, however, I don’t see companies retreating from their commitment to environmental and social progress. One proof point is that for the last four years, Farient, along with our partners in the Global Governance and Executive Compensation (GECN) Group, have collected global data on the corporate use of ESG measures in pay plans. In all regions, including the U.S., the number of companies using ESG measures in their pay programs continues to increase, with large-cap companies leading the way. The difference is that companies are now focusing more on finding measures that have demonstrable economic benefits for shareholders as well as benefits for other stakeholders. In doing so, they not only resonate with those who are focused on ESG, but also those who are believers in shareholder primacy. For example, we know of one company that adopted a goal to reduce its travel costs. The idea was that reducing travel would not only save expenses, but also shrink the company’s carbon footprint. It was a creative solution for balancing different interests. While the language of ESG is changing, the commitment to progress on ESG goals is not.
Chris: A board’s primary responsibility is to make sure the company has the right leadership. CEO tenures have shortened and churn in the C-suite has increased. What is your view on this?
Robin: In the last 10 years, the median CEO tenure at large companies has shrunk from six years to five years. The question is, “why?” I attribute it to a few things. First, the talent markets are robust, and talent at the top is scarce, so senior executives seem to have unprecedented opportunities. Second, the market is unforgiving, and activists stand ready to unseat CEOs who they deem are not optimizing performance. Third, Boards and CEOs need to make sure they don’t create a bottleneck at the top. They need to clear the way for the CEO’s successor, or risk losing that successor to a competitor. Fourth, the company may go through a transformation and the current CEO may not have the skills needed for the post-transformation world. And fifth, the CEO job is very demanding and can be tiresome. Once a CEO has created sufficient personal wealth, they may put a premium on stepping down and enjoying their wealth. We saw that happen recently when JetBlue CEO Robin Hayes announced his resignation to focus on his personal health and well-being.
What this means is that companies must appropriately compensate their CEO, pay for performance, and develop creative compensation arrangements that encourage smooth transitions when the time comes. They can do this, for example, with retirement provisions in equity plans or post-CEO roles (such as an executive chair of the board) that also allows for continued vesting in equity. Companies also need to ensure that good executives who may have wanted the CEO role, but were not selected for the top job, are retained through the transition and beyond, perhaps by giving that executive increased responsibility, compensation, and/or providing retention incentives.
Having said that, retention awards can be a bit dicey because they can fly in the face of what’s acceptable to proxy advisors and investors. In this regard, there are some “rules of the road” that compensation committees should respect if they want to offer retention incentives. Every board committee should consider developing guiding principles around when and how they will do one-time awards. Such principles might include things like having a compelling rationale for the awards, selectively and infrequently providing the awards, potentially not including the CEO, keeping the quanta reasonable, and providing a strong rationale for the awards, particularly if disclosure is required.
Chris: While the last year was sluggish for M&A due to the cost of capital, inflation, and a slowdown in the tech sector—the prognostications for this year show some signs of renewed activity. What role does the compensation consultant play when the deals are afoot?
Robin: The enemy to the success of any deal is uncertainty. It’s never too early to prepare and plan for the post-transaction company. The difficult conversations should take place early in the M&A planning process. The teams need to gain experience working together so that the combined company can hit the ground running once the transaction is complete. Retaining key talent is critical, and in most cases, retention awards are provided.
Most of our work is with the compensation committee where we focus on executive pay plan design. In any deal, there are three basic alternatives: you can develop an entirely new pay program, cherry pick elements of each entity’s pay program, or choose one entity’s pay program as the blueprint.
Post-transaction compensation strategies and plans are largely contingent on the type of transaction being executed, whether it be a strategic acquisition or transformation, a roll-up or consolidation, a merger of equals, or a spin-off. Each scenario has special considerations, but in all instances my advice is to do a deep dive into the compensation systems early, including a side-by-side assessment of compensation levels and design, risk orientation, change-in-control provisions, pay-and-performance calibration, and goal setting. Seeing these differences early on and making optimal choices for the post-transaction compensation system is critical to easing the transition and maximizing the value of the deal.
Chris: What was your last great adventure?
Robin: Three years ago, I asked one of my Farient colleagues, Randi Caplan, who is an adventurer, if she would consider joining me on a hike to the top of Mt. Kilimanjaro, which at 19,341 feet, is the tallest peak in Africa. Randi and I trained for a year and summited Kili in August 2022. My next big adventure will be of a different sort, a Mediterranean cruise with 18 family members. Fortunately, we all get along.
As to a future adventure, if I’m particularly ambitious, I may write a sequel to my book, Fair Pay, Fair Play: Aligning Executive Performance and Pay. While the quanta in executive pay have changed and the examples keep evolving since I wrote the book, the foundational aspects of pay and performance have not changed. It’s still the #1 issue with investors today.
Chris: Robin, thank you for your insights, board service, and zest for adventure.
Chris Clark joined Stuart Levine & Associates as a senior consultant after a distinguished career at the National Association of Corporate Directors (“NACD”). He is known for his prominent role in the creation of NACD’s “The Power of Difference”, “The Leading Minds of Compensation” and “The Leading Minds of Governance” conference series, “The Directorship 100”, and NACD Private Company Directorship.
Chris’ expertise ranges across a variety of disciplines including corporate governance with board assessments & strategic communication audits as cornerstones, conference management, and digital content creation.
