Compensation Committee Mistakes when Hiring CEOs

There are three major mistakes made by compensation committees in hiring a new CEO: failure to set a compensation range before commencing the search, failure to have the backup candidates needed to avoid having to give in to unreasonable demands, and failure to require a warranty and representation of the background information on which the committee relies in the employment agreement.

By setting a compensation range before commencing the CEO search, the compensation committee provides a guidepost for what it considers reasonable. A compensation committee which fixes on a single candidate with no back-ups makes itself vulnerable to oversized compensation demands.

The author lists several high-profile example of resume fraud at the CEO level, and underscores the problem this can create for the company. As a solution, he advocates requiring a specific warranty and representation to make it clear that the company is able to rely on resume information in entering into the contract. Requiring the warranty and representation forces the candidate to think again about whether he or she has exaggerated the resume. This can make for a more reliable vetting process and, equally important, a specific warranty and representation which turns out to be materially false may permit the company to disclaim its obligations under the employment contract, including severance, on the grounds that the company was fraudulently induced to enter into the agreement. It may even subject the CEO to a damage claim.