Good Article on Executive Pay

[legion]

Disclosure Won't Tame C.E.O. Pay
NEW YORK (The New York Times)--This Tuesday, the Securities and Exchange Commission plans to unveil its first overhaul of executive compensation disclosure rules in 14 years. The new rules, which were leaked to the news media this week, are intended to give investors a fuller picture of the staggering amounts of money going to America's chief executives and other top corporate officers.
Under the proposal, companies will have to disclose much more than just information about outsize salaries and bonuses. An estimated dollar value will be placed on obscene grants of stock options. The details of bloated retirement packages will be made public. And companies will have to list all the absurd perquisites that have accrued to chief executives in recent years -- including the latest twist, the practice of having companies pay the boss's taxes. Nor will companies be able to bury this stuff in the proxy statement, as they've long done; it will all have to be put in one place, where it can be easily seen and understood.

All in all, it's going to be a pretty sickening sight.

It is fitting that this is the first initiative of the new S.E.C. chairman, Christopher Cox; better disclosure, in all sorts of areas, is likely to be his hallmark. ''Disclosure of material information has been one of the priorities of the S.E.C. for 70 years,'' Mr. Cox told me a few days ago. ''It's a priority I inherited.''

In the case of compensation, it was Mr. Cox's view that such disclosure had become ''less accurate and less useful'' in recent years -- and who can doubt it? Think back to 2002, when the world learned about Jack Welch's retirement perks -- including Red Sox tickets, a Manhattan apartment for life, country club memberships and free use of a corporate jet -- not from the General Electric proxy statement, but from his angry wife's divorce papers. After taking down some $1 billion in the two decades he ran G.E., it appeared that he had negotiated a retirement plan that would cause him to never have to take cash out of pocket to pay for anything.

Better disclosure rules are all fine and well, but we already know plenty about executive pay. We know that it is out of control, socially corrosive and divorced from any real rationale (did Michael Dell really need stock options to ''incent'' him?). Nor is it economically insignificant. According to Lucian A. Bebchuk, an executive compensation expert at Harvard, from 2000 to 2003, the total compensation of the five best-paid officers of all publicly held companies amounted to 10 percent of corporate earnings.

But when I asked Mr. Cox whether he thought the new disclosure rules would help rein in executive pay, he punted. ''It is not the role of the S.E.C. to determine the level of compensation,'' he replied. ''It is the role of directors and shareholders.'' And hence the problem: when the S.E.C.'s new rules are instituted, some months down the road, it won't be just you and me who are getting a fuller picture of executive compensation -- so will the nation's chief executives. And history suggests that whenever they discover a fellow C.E.O. is getting something they don't have, they make a grab for it. In other words, as laudable as more disclosure is, there is a real possibility that it will make a bad situation worse.

Take, for instance, 1993, the year Congress passed a law eliminating the tax deduction for any executive salary that exceeded $1 million. What happened? First, the new law accelerated the trend of giving C.E.O.'s hefty stock option grants. Second, it made $1 million the new salary floor. ''In the hall of fame of unintended consequences,'' said Nell Minow of the Corporate Library, a corporate governance monitoring group, ''that has to rank right near the top.''

Or take the last time the S.E.C. pushed through executive pay disclosure rules. ''I was a consultant to Richard Breeden when the S.E.C. did its disclosure rules in the early 1990's,'' recalled Graef Crystal, the grand old man of executive compensation critics, referring to the S.E.C. chairman at the time. ''I absolutely thought it would cause comp to go down because the disclosures would be so embarrassing. But it turned out that when somebody is hauling in $200 million, he's not embarrassable.''

Mr. Crystal, who ran the Towers Perrin compensation consulting practice before becoming a critic (''atoning for my sins,'' he likes to call it), points out that the information currently disclosed in proxies has been a huge force in driving compensation upward. Compensation consultants use it to compile surveys of C.E.O. perks and pay, allowing for easy comparison. Such surveys, which most boards rely on to set their own C.E.O.'s pay, are one of the most invidious tools in the comp racket. And with the Internet, compensation information is available the instant the proxy is filed with the government. ''The consultant will call within 30 seconds saying, 'Michael Eisner just got a huge grant. We have to do more for you,' '' Mr. Crystal said.

So what do we do about what I've come to think is the single most intractable problem in corporate America? How do we put a lid on executive greed?

There are many people in the field who think the essential problem is that pay is disconnected to performance, and that is certainly true. ''If a C.E.O. gets a million stock options and the stock goes up a buck, that's not what I'd call pay for performance,'' Ms. Minow said. Mr. Crystal says that most so-called pay for performance plans are really ''pay for pulse'' plans.

But I think the problem is deeper than that. Even C.E.O.'s who do perform well are often paid too much. There is a huge disconnect between the amount executives are paid and society's expectation of what is reasonable to pay someone to manage a big company. Nobody begrudges Bill Gates his wealth; he became the richest man in the country because he founded a hugely successful company. But lots of people begrudge, say, James M. Kilts, who ran Gillette for just four years -- and then pocketed $175 million when he sold the company to Procter & Gamble, because the sale put in play the options he was handed during his short tenure. There is simply no excuse for showering Mr. Kilts (who is on the board of The New York Times Company) with that kind of wealth.

There are plenty of ideas out there for getting C.E.O. pay more in line with investors' expectations, though none of them strike me as the perfect solution. Representative Barney Frank, Democrat of Massachusetts, has filed a bill that would allow shareholders to vote on ''change of control'' compensation schemes -- like the one that enriched Mr. Kilts -- and would also force executives to return compensation if the company subsequently had to restate its earnings. But Mr. Frank told me that he is leery of trying to legislate the appropriate level of executive pay. ''It is the shareholders' money,'' he said. ''If they want to pay for Jack Welch's newspaper, they have that right.''

Ms. Minow thought that giving shareholders the means to put additional heat on boards would help. ''There is no such thing as an independent director if C.E.O.'s are picking them,'' she said. As a result, she added, ''I am very committed to the most significant shareholder initiative right now: majority vote.'' If shareholders could oust directors with a simple majority vote, she believes, they would start voting against compensation committee members ''who approve these absurd packages.''

Leo J. Hindery Jr., the former C.E.O. of a number of telecommunications companies, attacks executive compensation practices in his new book, ''It Takes a C.E.O.'' He has an idea that came from his time running the YES Network for George Steinbrenner and Major League Baseball decided to crack down on sky-high team payrolls. ''When the Yankees exceed the salary cap,'' he said, ''Steinbrenner has to pay a luxury tax. Writing a check gets his attention.'' Mr. Hindery believes that there should be a ratio between what the C.E.O. makes and what the average worker in the company makes -- say, 25 to 1. (It is currently over 400 to 1.) If the chief executive's pay exceeded the ratio, the company would have to pay a luxury tax, just as Mr. Steinbrenner does.

Indeed, one prominent compensation consultant has begun advocating for what he calls ''internal pay equity.'' That is Frederic W. Cook, who has been in the field for nearly four decades. ''I am proposing it,'' he told me, ''as an alternative to this 100 percent reliance on surveys. There has to be some other way. Surveys are flawed.''

Mr. Cook put this idea into practice in 1990, when he was advising DuPont. Its C.E.O. at the time, Edward Woolard, decided to set his pay at 1.5 times the pay of his senior managers. He did so, he said in a recent speech, because he thought it was ''equitable.''

He didn't care that his peers were making much more; indeed, he felt they were giving corporate chieftains a bad name. Of course, if all C.E.O.'s were as public-minded as Mr. Woolard, we wouldn't have the problem.

[wilke3169]

Very good article. Hate to see it slide off of page one after only 28 views.

[dtw]

There should be a LAW!!! Wont' someone please think of the children! We've got stop this from EVER HAPPENING AGAIN.

[legion]

I thought the article captured the dilemna quite clearly:

Executive pay is clearly out of hand. However, all of the laws and rules enacted to date have had the unintended consequence of causing essentially and executive pay pi$$ing contest. On the other hand, setting specific limits would be anti-capitalism.

[stevepaa]

No, what we have now is not capitalism as most presume it to work. It is piracy at the highest levels of corporate America. And all the pirates okay the pay for the other pirates. Rarely anything they do is commensurate with their pay or payout when they leave.

[legion]

Wow. Steve and I agree on something.

My favorite example is Michael Ovitz. He was president of Disney for 14 months. He did a horrible job. He got $120 million.

I maintain that I could do just as bad of a job as Ovitz did in 14 months. Where's my $120 million?

BTW, I was saying that setting limits on executive pay would not be capitalism. I never pretended that how executive pay is set today is capitalism.

[Superman]

You guys must be mistaken. Wasting money, cheating, graft, fetherbedding.....that's gubmint. If it's private industry you're talking about, well, that's where we find efficiency and value and integrity. You can trust CEO's. It is your local public servant who is the Devil.

[BlueSkyJaunte]

Originally posted by Superman
You guys must be mistaken. Wasting money, cheating, graft, fetherbedding.....that's gubmint. If it's private industry you're talking about, well, that's where we find efficiency and value and integrity. You can trust CEO's. It is your local public servant who is the Devil.

No. You can't trust any of them. It's not that power corrupts; it's that power attracts the corruptible. Don't trust any one who seeks power.

[Superman]

True enough. One of the HUGE problems with our political system is that the skills needed to be a good statesman are the antithesis of the skills needed to be a good politician. The skills to get elected are very different from the skills to make good public policy.

Don't trust anyone who seeks that kind of power.

[legion]

SEC's Proposed Disclosure Rules Get a First Public Airing Today
NEW YORK (The Wall Street Journal)--When the Securities and Exchange Commission meets today to vote on proposing a massive revamp on how companies disclose executive pay, business and investor advocates will be zeroed in on picking out fresh details of the proposal.
The anticipated changes -- including disclosure of a total compensation figure, detailed analysis of how pay is determined and new tables requiring better disclosure of retirement plans and director pay -- already are being hailed as the biggest overhaul to executive-pay disclosure in 14 years.

But pay consultants, lawyers and investor advocates say the extent to which compensation secrets are brought out of the shadows will depend in large measure on how aggressively the SEC, under new Chairman Christopher Cox, pushes for disclosure on a handful of issues that have been little discussed so far.

The full proposal -- and the fine print -- won't come out for some days. Yet today's meeting will be the SEC's first public airing of the changes, and investor and business advocates hope to fill in some blanks when staff members answer questions by the five commissioners.

"Any details we'll get will come out of the discussion and presentation of the proposal itself," said Mark Borges, a principal at Mercer Human Resource Consulting in Washington.

Business groups say they don't oppose more disclosure in principle, and the agency's commissioners are expected to vote to send the rules out for public comment. The potential lobbying battle, though, will be over the final wording of the proposed rule, and experts say a handful of issues stand out as potential flash points.

PAY FOR PERFORMANCE: Investor advocates say the current compensation-committee report in annual proxy filings gives mostly boiler-plate information about how pay for top officers is determined. Companies disclose, for instance, that they are rewarding a chief executive officer for attaining an internal goal, have hired a pay consultant and have compared their CEO with peer groups.

The SEC staff is proposing a beefed-up discussion-and-analysis section. Investor advocates are hoping the SEC will demand that boards disclose exactly what performance measure is being rewarded. Is it growth in earnings per share or growth in some other financial metric? Companies have argued that disclosing that information could hurt them competitively.

Shareholders also want to know details of the hiring arrangement of any pay consultant. The latter is important, they say, because it shows if the consultant's interests are aligned with those of the board or those of the CEO.

"If the compensation committee hires the compensation consultant, they have more of a direct control over the whole process," said Mark Reilly, a partner with 3C-Compensation Consulting Consortium in Chicago. But if management hires the consultant and uses the firm for other work, there is concern the consultant will be beholden to the executives. "If you can set your own pay, it's probably going to be pretty high," he said.

Experts also wonder whether the SEC will require companies to provide an inventory of all outstanding stock options for each top executive, with grant dates and strike prices, plus a list of exactly which options were exercised during the past year. David Yermack, associate professor at New York University's Stern School of Business, said it is difficult now to keep track of past awards because of bare-bones options tables.

FUTURE COMPENSATION: An emerging hot-button issue among investors is how boards allow executives to sock away huge amounts of money but disclose little of it.

Deferred-compensation arrangements function like souped-up 401(k) plans for executives. On the surface, they are little more than savings plans giving tax advantages for deferring pay, but critics say they allow companies to secretly bolster executive pay through features like guaranteed high interest rates, generous matching contributions and the like.

SEC rules only require companies to disclose interest credited to an executive's account above a "market" rate set by the Internal Revenue Service, currently 5.76%. If accounts are credited with hypothetical returns based on market-index or company-share performance, the amount may not need to be disclosed. Since these "accounts" typically have no cash in them -- they are IOUs from employer to executive -- the company is on the hook for the interest or hypothetical returns.

Under the SEC's proposal, companies would have to disclose all the interest they pay, not just the above-market portion. In addition, the proposal would require proxies to include a table detailing top executives' deferred-compensation benefits. The table would show the amount each executive deferred, how much was withdrawn and how much interest was credited to their accounts during the year, SEC officials say.

One important detail that is so far unknown: whether companies would have to disclose deferred-compensation details for the five highest-paid executives or also an aggregate figure for all executives receiving the benefit.

RETIREMENT BENEFITS: Executives also benefit from supersize pension plans, often called supplemental executive retirement plans, or SERPs. Like traditional pension plans, these pay out lump-sum or annual checks in retirement, usually calculated as a multiple of pay and years of service.

While traditional pensions are effectively capped by tax law, SERPs have no limits. Some calculate payouts using an executive's highest years of pay, instead of the last years as traditional pensions use. Executives often are credited with more years of service than they have with a company, further inflating their retirement payday.

While proxy filings currently include tables that let an investor approximate the pension take-home for a company's top executives, the disclosure isn't always clear.

By contrast, the SEC proposal would require companies to calculate the actual pension each named executive would be entitled to and list it in an easy-to-read table, SEC officials say.

HIDDEN REWARDS: Corporate-governance experts are waiting to see whether companies will need to supply a dollar value on dividends paid on restricted stock -- shares given to an executive but which can't be sold until certain restrictions are met, usually the elapsing of a specific time period. Currently, a company is required to say whether it paid dividends but not report the value of the dividends. Dividends on restricted stock can add up to real money, and investor groups argue they should be disclosed as compensation.

Similarly, companies currently disclose perquisites if the aggregate value is above $50,000. The SEC proposal lowers the threshold to $10,000. One question is if the SEC will demand more detail on perks. Some companies voluntarily list perks given to executives in a table, but it isn't required.

"The SEC needs to be careful to give companies as little wiggle room as possible," said Paul Hodgson, a senior researcher at The Corporate Library, a Portland, Maine, governance firm. "Without being overly prescriptive, they still need to be very clear about exactly what needs to be disclosed."