Executive pay comes under renewed scrutiny

MAY 25-31, 2007 VOL. 28, NO. 05
Executive pay comes under renewed scrutiny
What a life to be the CEO of a public
company — the private jets, exclusive golf
clubs and hefty compensation packages.
In recent months, the public has shown an
almost voyeuristic obsession with executive pay. With its new disclosure rules on
executive compensation, the Securities and
Exchange Commission let everyone know
that it has been watching as well.
Last August, the SEC gave us the most
significant rule changes in over a decade
to set the way public companies have to
describe executive pay in their proxy statements. Those new rules do not dictate the
amount or range of acceptable pay, but
make sure the public knows all elements of
the pay package, such as salary, stock options, retirement payments and yes, even
golf club memberships.
We cannot lose sight of the
fact that this is a complex
business issue and there is
no single approach that
works for every company.
The key changes include: (i) expanding
the basic compensation table to include an
executive’s total compensation, (ii) adding
two new tables with information on stock
option and restricted stock grants, (iii) adding a new table on retirement and deferred
compensation benefits, and (iv) requiring
the committee that sets executive pay to
explain the compensation objectives and
describe what the committee is trying to
reward. The rules also require further detail on those executive perks that seem to
receive so much attention.
With all of this
it’s not surprising
that many commentators believe these
new disclosures may
force companies to
trim the size of CEO
pay. But members of
Congress and shareholder activists are
not waiting on the
sidelines to find out.
The House of Rep▼
resentatives recently
passed legislation that would require public companies to let shareholders have an
annual nonbinding vote on executive compensation. A companion bill was introduced
in the Senate by Sen. Barack Obama, DIllinois. Similar advisory “say-on-pay”
proposals were introduced by shareholders
at over 50 companies, with Blockbuster
just becoming the first company to pass
the proposal.
Are public company executives really
overpaid in the Pacific Northwest? This kind
of question is not a new one. The retirement
package given to Jack Welch following his
departure from General Electric and the
widely publicized allegations of “looting”
of Adelphia and Tyco by executives at those
companies come to mind. Today, it is difficult to open a newspaper without seeing an
article about perceived excess in executive
compensation. And with an ever increasing
number of executives under investigation
for backdating of stock options, the SEC’s
timing for comprehensive disclosure of pay
practices looks pretty good.
However, we cannot lose sight of the fact
that this is a complex business issue and
there is no single approach that works for
every company. A comparable pay package
at two similarly sized companies may be
wholly appropriate at one of them and difficult to justify at the other. It just depends
on the situation.
For instance, there may be a very good
reason to retain and provide incentives to
a management team that is performing at
a high level, even though their efforts have
not yet resulted in measurable benefits to
the company’s shareholders. At another
company, it may be difficult to justify ever
increasing levels of executive pay when the
real business driver is a favorable market
condition rather than a significant contribution by management.
All of these issues make it tough on
compensation committees whose decisions
are now out in the open and closely scrutinized. And with continued emphasis in the
financial markets on short term results, and
the ongoing regulatory burdens that public
companies face, this may actually be one of
the more difficult times to be a high level
executive with a commensurately “high”
level of compensation.
So as all of us look for a more thorough
view of what’s included in those executive
pay packages, we should try to understand
why they were established and how they
serve those objectives. We should be on the
lookout for compensation policies that suggest a strategic vision and align executive
pay with the interest of shareholders. They
might include policies that are based on
superior pay for superior performance, and
on principles of internal pay equity. Most of
all, we should do our compensation watching with both a critical and discerning eye.
MICHAEL MORGAN is a shareholder
at Lane Powell PC law firm and focuses his
practice in the areas of business, corporate
finance and securities. Reach him at 206223-7013 or morganm@lanepowell.com.
Reprinted for web use with permission from the Puget Sound Business Journal. ©2007, all rights reserved. Reprinted by Scoop ReprintSource 1-800-767-3263