The Handbook of Board Governance, 2nd Edition

27Lawyers' Advice to Directors on Overseeing Executive Pay

Howard Levitt

Senior Partner, Levitt LLP

Allyson Lee

Associate, Levitt LLP

Introduction

Executives, directors, and officers work hard, and that should be recognized.

But before you or any member of a board take any steps to set up compensation, take a second and imagine the possible headlines. Or maybe don't imagine, just Google—it's easy to find outrage about the gall of executives who vote to give themselves a particularly good deal:

“Hydro One Board Members Approved $25k Raises for Themselves”¹

“Metro Vancouver Directors Vote Themselves a Golden Handshake”²

“Lloyds Faces Shareholder Revolt as Ceo's Pay Is 95 Times That of Average Worker”³

“Fiduciary Officers Owe Duty to the Company, Not Their Wallets”⁴

And this doesn't cover all the potential legal consequences: long, drawn-out lawsuits; termination; orders for repayment of any and all sums deemed “inappropriate,” including bonuses, stock options, dividends, salaries, and termination packages; monetary penalties for breaches of fiduciary duties; court orders tying up funds; and perhaps an eventual decision that a court found you to have violated your duties and placed your own interests over those of the company—something no individual would want as their reputation.

Negotiating deals might be an everyday occurrence, but when executive compensation is on the table, even the most experienced executives and board members should pause and only proceed with care and ...