Valley Firms Propose Limits On Executive Pay

I had to rub my eyes when someone passed along a link to this story on Tuesday:

Has the world gone made? Was this a hoax?

Just listen to this madness from the Post story:

“A coalition of blue-chip companies on Monday endorsed the idea of voluntarily overhauling executive compensation practices in an effort to restore public confidence in corporate America and to get out ahead of potentially more burdensome rules that could emerge from Washington.

Pay practices such as huge severance payments, personal use of corporate jets and incentives not tied to long-term performance should vanish unless a specific justification exists, according to a task force convened by the business organization the Conference Board.”

Now this is either a radical change of heart, or a phony attempt to head off attempts by the federal government to impose more harsh guidelines. Let’s take a closer look: According the Post story:

“Early supporters of the overhaul initiative include AT&T, Hewlett-Packard, Tyco and Cisco, as well as investors such as the California State Teachers’ Retirement System.”

Now, CALSTRS I can see. But HP? Cisco?

The report was issued by the Conference Board, a pro-business organization. The full report is here. According to the report:

“The Conference Board convened the Task Force on Executive Compensation in March 2009 to address the loss of public trust in the processes for oversight of executive compensation.”

Loss of trust? No! Say it ain’t so!

Here’s the problem, according to the task force:

“In retrospect, executive compensation governance and disclosure reforms implemented earlier in the decade may have changed “too little, too late” and the current public demand for change has effectively eliminated the option for executive pay practices to gradually evolve, as boards explore and test
alternatives over time. Regardless of whether the recent executive pay issues are concentrated in the financial services industry, the task force believes that public corporations and directors are at a crossroads with respect to executive compensation. In order to restore trust in the ability of boards
of directors to oversee executive compensation, immediate and credible action must be taken.”

Too little, too late. Agreed. But how to fix it? Ah, therein lies the rub. And task force is clear that this won’t be fixed by a bunch of pesky rules:

“The task force recognizes that a ‘rules-based’ approach cannot provide the essential flexibility required to accommodate the disparate industries, strategies, business models, and stages of development represented in the more than 12,000 U.S. public companies.”

Instead of rules, there are principles:

  1. A significant portion of pay should be incentivecompensation, with payouts demonstrably tied to performance and paid only when performance
    can be reasonably assessed.
  2. Total compensation should be attractive to executives, affordable for the company, proportional to the executive’s contribution, and fair to shareholders and employees, while providing payouts that are clearly aligned with actual performance.
  3. Companies should avoid controversial pay practices, unless special justification is present.
  4. Compensation committees should be independent, experienced,
    and knowledgeable about the company’s business.
  5. Compensation programs should be transparent, understandable, and effectively
    communicated to shareholders.

The third one is really the most interesting here because it specifically suggests eliminating a number of the more outrageous pay practices:

  • Multi-year employment agreements providing for generous severance payments
  • Overly generous golden parachute payments or benefits
  • Gross-ups for tax consequences of parachute payments or perquisites
  • Golden coffins
  • Perquisites or executive benefits that are not generally available to other managers
  • Stock option repricings or restructurings that are not value neutral, nor approved by shareholders

Now, when reporters or shareholders are complaining about these things, we can point to their business allies and say, “Hey, we’re not crazy here.”

The problem with the other four principles is essentially the same. If I were to suggest these to most boards, they’d probably reply that they already follow these guidelines. Most proxies, when detailing executive pay, assert that the pay or the benefits are necessary to align the manager’s interests with shareholders, and they are tied to performance. Often, companies have a system for measuring performance, but will junk it from time to time when they believe circumstances call for it.

And most companies probably feel burdened by the SEC’s rules that called for more straightforward reporting of compensation. That didn’t solve the problem of transparency.

So yes, there need to be rules. And more importantly, there needs to be penalties. The voluntary solution won’t quite cut it.

But let me at least applaud the task force for acknowledging the problem and the need to fix it. They say that’s the first step, right? But in this case, it’s only a first step.


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  • AP

    Hi Chris,

    I respectfully disagree that there need to be laws around executive compensation. These matters should be left up to the boards of directors and the shareholders.

    However, I would like to see rules requiring more independent directors, rather than the chummy relationships between board and management that we see today that perhaps lead to the offensive practices like pay for NON-performance, outrageous termination compensation and retirement benefits, etc.

    Also, the laws should make it easier for shareholders to instigate change via shareholder proposals. Today, it is much too easy for companies to bury shareholder proposals.