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22 Oct. 2009 | Comments (0)

Now that the shock of Special Pay Master Kenneth Feinberg’s decision (Reuters, Oct. 22) to cut the pay of 175 executives at companies receiving the most government aid is starting to wear off, the real fun will begin. It’s looking more like Feinberg’s announcement Thursday (Treasury Secretary Timothy Geithner’s comments) is just the first salvo in a fight between shareholders and public company boards. Actually, another salvo was just thrown by the Federal Reserve today when it issued its long awaited proposal to oversee bank incentive compensation policies. (read the press release) And the battle cry will be, “Say on Pay!” At least that is what the researchers at The Corporate Library (TCL) and the compensation consultants over at Pearl Meyer & Partners believe. In the same week that Feinberg’s decision was leaked to the press, TCL released a “10-Point Test” for shareholders to use when they are allowed to vote on a non-binding resolution on their company’s executive compensation packages.

Say on Pay Survey

During the recently completed National Association of Corporate Directors (NACD) annual Corporate Governance Conference, Pearl Meyer released the results of an online survey (read the press release) on company preparedness for Say on Pay. The survey of 231 participants found that more than two-thirds said their company hasn’t taken any steps to prepare for such a vote and only 35 percent plan to do so in the next six months. Just look at what they are saying over at Pearl Meyer.“Although many believe such a requirement will not take effect until the 2011 proxy season, decisions being made now regarding 2010 compensation practices could potentially be the subject of Say on Pay votes in 2011,” said Mike Enos, the company’s managing director.

A 10-Point Test

In his “10-Point Test,” Paul Hodgson, senior research associate at TCL, wrote, “More importantly, investors, straining at the leash to have a say on pay, feel that a chance for reform is within their grasp. And not just activist investors. All investment firms are likely soon to have a say on pay, whether they like it or not…” Some might think it a bit premature to start planning for life with Say on Pay since the Corporate and Financial Institution Compensation Fairness Act of 2009, which would require an annual shareholder advisory vote on executive compensation, is not even law yet. As of Oct. 22, that bill had been approved by the U.S. House and still faces a Senate vote. But maybe the Obama Administration is starting to move into high gear on the financial regulatory reform. Case in point: Feinberg’s executive pay cut decision. Broc Romanek’s blog has one of the best descriptions of Feinberg’s actions. Click here to read.

Principles, principles, principles

I find it interesting that while investors and some companies are gearing up for Say on Pay and the possibility that executive compensation packages will be cut, some are actually trying to get ahead of the reform wave by being proactive. Credit Suisse (Wealth Bulletin, Oct. 21) did just that on Oct. 21 when the Swiss bank adopted the G-20 compensation model that was announced back on Sept. 25. Basically, the bank will focus on higher base pay and more deferred variable compensation tied to the long-term performance of the bank. The bank has also included clawback provisions for bonuses in the new model. With Credit Suisse’s action, I thought it was a good opportunity to write a list of top executive compensation principles. So below is a table comparing the G-20 principles to that of The Conference Board Task Force on Executive Compensation. And right here are the principles released by the Securities Industry and Financial Markets Association (SIFMA):
  • Firms should establish compensation policies consistent with effective risk management
  • Compensation should be linked to sustainable performance
  • Risk management professionals should be appropriately independent
  • Firms should communicate their compensation practices to shareholders.

Executive Compensation Principles

G-20 Summit Financial Stability Board Principles for Sound Compensation Practices (Released Sept. 25, 2009) 1.) Financial institutions should have an independent board remuneration (compensation) committee that oversees compensation policies. 2.) Compensation should be aligned with long-term value creation by avoiding multi-year guaranteed bonuses and requiring a significant part of variable compensation be deferred, tied to performance and subject to clawback. They should also take into account current and potential risks. 3.) Financial institutions ensure that compensation of senior executives and others who have a material impact on risk exposure align with performance and risk. 4.) Financial institutions disclose compensation policies and structures to guarantee transparency. 5.) Variable compensation be limited as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital base.

The Conference Board Task Force on Executive Compensation (Released Sept. 21, 2009) 1.)  Compensation plans should establish a clear link between pay, strategy and performance. 2.)  Provide compensation that is fair, affordable and clearly aligned with actual performance. 3.)  Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance – such as excessive golden parachutes, overly generous severance arrangements, gross-ups of parachute payments or perquisites, and golden coffins – unless specific justification exists. 4.)  Demonstrate credible board oversight of executive compensation. 5.)  Foster transparency with respect to compensation practices and appropriate dialogue between boards and shareholders.

  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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