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Ten Ways to Restore Investor Confidence In Compensation

Ten Ways to Restore Investor Confidence In Compensation. By: Patti Stiger, Kayla Shadley, Sean Simon, and Josh Smith. Problem. Shareholders outraged by executive compensation. Securities and Exchange Commission established new proxy disclosure rules.

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Ten Ways to Restore Investor Confidence In Compensation

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  1. Ten Ways to RestoreInvestor ConfidenceIn Compensation By: Patti Stiger, Kayla Shadley, Sean Simon, and Josh Smith

  2. Problem • Shareholders outraged by executive compensation. • Securities and Exchange Commission established new proxy disclosure rules. • Overall the rules help investors know where their money is going. • Investors submitted 281 complaints through April 4, 2007, compared to just 173 for all of 2006.

  3. Top Ten Tips for Executive Hiring • Advice comes from activists, compensation experts and a handful of daring directors. • Ease Shareholder anger over executive pay packages.

  4. Tip #1 • Make sure the board's pay consultants don't also work for management. • Executives give themselves raises and benefits through hired consultants. • Morgan Stanley replaced Hewitt Associates. • Verizon Communications and Wal-Mart Stores face similar problems.

  5. Tip #2 • During outside CEO hunts, set limits on the projected compensation, hire a savvy negotiator and find a back-up candidate. • The Boards set a pay range before starting to search for new executives. • Gateway hired J. Edward Coleman when his package fell in the middle of the Boards range (1.95 Million Dollars.)

  6. Tip #3 • Skip severance for anyone with a sizable stock stake and deferred-compensation account. • Rich people do not need severance packages. • Home Depot’s CEO Frank Blake insisted on a more modest pay package than his predecessor. • Northern Trust CEO William A. Osborn terminated his employment-security agreement.

  7. Tip #4 • Retreat from "pay for failure" by making it easier to fire for cause. • Executives receive extravagant departure deals no matter how successful they were. • Walt Disney Co. can terminate CEO Robert Iger if he does not give testimony or cooperate in investigations. • Not a popular trend with CEOs.

  8. Tip #5 • Take a skeptical view of "peer group" comparisons. • Management frequently persuades board pay panels to pick competitors that will justify juicier deals. • Eli Lilly & Co. recently judged its pay packages against eight larger and more complicated companies including Johnson & Johnson.

  9. Tip #6 • Kill unjustifiable perquisites. • Companies have trimmed extras ranging from personal flights on the corporate jet to financial counseling. • Gannet Co. got rid of allowances for home security systems and club membership fees. • New proxy rules reduced the $50,000 disclosure limit to $10,000.

  10. Tip #7 • Link all long-term incentives to performance goals. • Executives pay is directly tied to their cash flow and stock performance. • General Electric Co. replaced CEO Jeffery R. Immelt’s options with performance share units.

  11. Tip #8 • Divulge precise measures that shape payouts for performance-based awards, and set hurdles high. • Investors should be able to figure out whether generous bonuses reflect good performance or poorly set targets, says Lucian Bebchuk, co-author of the book "Pay Without Performance.“ • Many businesses conceal performance goals for competitive reasons, even though it would be easier to set more stringent guidelines.

  12. Tip #9 • Conduct regular checkups about pay practices. • Boards are seeking second opinions about their pay plans and their advisers from rival consultancies. • Gateway might perform internal audits of option grants and similar long-term awards. • Conoco Phillips is considering rotating pay consultants every five years.

  13. Tip #10 • Give investors a voice about executive-pay packages, a right that exists in four countries. • "Say-on-pay" proponents hope investor censure -- or the threat of it -- will encourage directors to trim excessive awards and better link pay with performance. • In 2009 Aflac Inc. will allow investors to vote on pay.

  14. Final Thoughts • Securities and Exchange Commission are making new rules for the future. • Overall the executives and the Board will want to restore investor confidence any way possible.

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