Charles Modlin and Michael Dunn Published in Directors & Boards
"Executive Compensation Risk Management: Strategies For An Evolving Regulatory Landscape"

Charles Modlin and Michael Dunn's article, "Executive Compensation Risk Management: Strategies For An Evolving Regulatory Landscape," was published in the September 22, 2009 issue of Directors & Boards. In their article, the authors discuss executive compensation risk management and what companies should consider when developing corporate compliance programs. The authors note, "Although the audit committee is responsible for risk management policies and procedures under most compliance programs (and NYSE listing standards require the audit committee to have such authority), management retains broad discretion and authority to assess and manage exposure to business risks, including as it relates to incentive compensation for non-executive employees." 

According to the authors, as Congress, the Treasury Department and the SEC act to stimulate the economy and address unprecedented turmoil in capital markets, executive compensation practices that are deemed to have encouraged excessive or inappropriate risk have been at the center of public debate. They note, "Federal regulators and law makers have responded by adopting or proposing a series of measures that target the assessment of compensation policies and packages as a significant component of financial risk management." They outline five broad-based compensation principles that companies should consider to align compensation practices with the interests of shareholders. In addition, they suggest that committees “align compensation practices with sound risk management by conducting and publishing risk assessments of pay packages to ensure that they do not encourage imprudent risk taking."

Charlie and Michael conclude, “As companies work to evaluate and revise their compensation risk strategies, it is important to remember that there is no one-size-fits-all solution. They add, "Every company faces unique challenges based on its industry and specific operations that will require it to analyze its compensation risks in different ways. However, through an effective framework with clearly defined policies, procedures and roles for specified participants, a company will be well-equipped to effectively adopt and maintain risk management strategies that reflect today's best practices."