Strong, independent board is key to fair executive compensation, expert says
Problems with executive compensation generally signal corporate governance issues, expert says.
Federal regulators provide guidance on how companies should set executive compensation, but there is room for variance.
Wages are set by a board's compensation committee, often after comparing with other similar companies.
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While benchmarks are important, the most important factor when setting executive compensation is a strong board of directors, according to Wayne Guay, Yageo Professor of Accounting at the Wharton School at the University of Pennsylvania.
“Typically you have a compensation committee that hires outside consultants to do benchmarking for that firm against other firms in the area,” Guay said. “There will be a variety of differing components. They'll debate and discuss the appropriate performance measures.”
A truly independent board is essential to setting fair compensation, Guay said.
“If the firm is broken, it's anybody's guess where the compensation comes from,” he said. “In that case, the problem is a governance issue, not compensation. The broader issue is whether the firm is well-governed.”
TPG-Axon has claimed that SandRidge's directors are not independent.
The company reports that six of its seven directors — all except CEO Tom Ward — are independent, stating that they have “no material relationships with the company other than as directors and stockholders of the company.”
While the six directors have no direct connection with the company, at least three have had outside financial relationships with the company or its CEO.
Everett Dobson and Ward are members of the Oklahoma City Thunder's ownership team.
SandRidge discloses the relationship in its proxy, stating that the board has determined the relationship is not material because Dobson's “minority ownership interest in the team is relatively small in value compared to his other business interests” and because the value of SandRidge's gains from sponsoring the Thunder is relatively small compared to its other operations.
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