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.
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.
SandRidge also has disclosed that director Roy Oliver has an ongoing business relationship with the company. SandRidge for the past six years has leased office space from Oliver's R.T. Oliver Investments Inc. for $510,000 a year. The regulatory filings do not state which building is leased.
SandRidge said that relationship, too, is immaterial because the deal has “a relatively small value compared to Mr. Oliver's other business interests.”
In a 2008 regulatory filing, SandRidge disclosed that the company paid director Daniel W. Jordan more than $23 million from 2004 to 2007 to buy leases, oil and natural gas wells and other related transactions. SandRidge also said that from 2004 to 2007, Jordan contributed more than $12.6 million to the company's drilling projects.
The company said in 2008 each of the transactions “was determined to be in the best interest by the disinterested members of our board of directors.”
“We believe the terms of these transactions were similar to those that could have been obtained from an unrelated third party,” the 2008 filing stated.
Ed McGaughey, managing director of executive compensation consultant Pearl Meyer and Partners, could not address SandRidge specifically, but said public disclosure can help companies meet regulatory requirements.
If a business relationship is disclosed, it is up to shareholders to decide whether they agree that the relationships are immaterial, McGaughey said.
Guay could not address SandRidge specifically, but he said disclosure of potential conflicts often is the most important factor in whether those conflicts are considered material.
“If it is disclosed, presumably the SEC is aware of it,” he said. “The auditor has signed off on it and the chief executive officer has signed off on it.”