To help preserve the business judgment rule defense and make it more difficult for a plaintiff to prove that a director breached his or her fiduciary duties, Compensation Committee members should use tally sheets (a.k.a., “placemats”) when making compensatory decisions and attach such tally sheets to the Committee’s resolutions or minutes. As background, the “business judgement rule” is a prospective defense that every Compensation Committee should strive to retain. If the business judgment rule defense is applied, then the decisions of a director will be presumed to have been informed, made in good faith, and accomplished with the belief that such decisions were in the best interests of the company.
Tally sheets can be offered as evidence that the Compensation Committee made an informed decision (even if the wrong decision). What is a tally sheet? It is a one or two page document that lists each component of an executive’s compensation throughout a range of alternative scenarios (e.g., termination without Cause, termination with Cause, termination without Good Reason, a change in control transaction, etc.). The compensatory amounts to tally include income, projected values of equity awards under various performance and termination scenarios, realized stock option and stock gains (last 5 or so years), and total wealth accumulation.