WASHINGTON—Curbing executive compensation has been central to the Obama administration’s agenda in reining in the corporate excess that has come to define the global financial crisis.
But so far, little has been done to cut back on executive pay, and experts are debating the definition of “fair” pay and proper oversight in a free-market system.
“Directors should consider more robust, proactive changes that will newly ground compensation programs directly in each organization’s current business strategies, talent requirements, performance expectations and shareholder needs,” according to a compensation report by Pearl Meyer & Partners, a compensation consulting firm.
However, most executive recommendations suggest a claw-back policy, which allows the company to recoup some of what it has handed to an executive in actual pay, bonuses, and stock compensation if the executive fails to run a successful company.
Almost two-thirds of respondents, mainly directors and other higher-level managers, in a 2010 Pearl Meyer survey, suggested that executive pay should be capped, even if the company is doing well.
Furthermore, corporate boards are taking executive pay more seriously to stave off a stockholder revolt.
“Shareholders don’t mind paying CEOs when the company is performing well. But CEOs who make out like bandits when company performance is spiraling downward are upsetting to shareholders,” said Amy Borrus, deputy director at the Council of Institutional Investors, in an article on the Partners Green website.
Real World Executive Pay
“Surprisingly, the CEOs of companies with the best performance—expressed by total shareholder return year-over-year—did not necessarily receive the highest pay increases,” according to a recent report from consulting firm BDO.
In companies with a checkered performance, a revaluation of executive pay was considered, but never materialized. The grounds for continued high actual pay/bonuses couldn’t be determined, according to the survey takers, so everything remained at status quo in many corporate headquarters.
Executive pay scales are down from prior years, but BDO couldn’t find any relationship between pay and performance, as actual compensation was all over the place. Given that, it was difficult to establish a connection between pay and the firm’s performance.
“When comparing the bottom tier of the top performing companies with the top tier of the bottom performing companies across all 10 cities, the links between pay and performance became elusive,” found BDO during its research.
In New York, when shareholder wealth increased by more than 200 percent, executive pay increased by 10 percent, while in San Francisco, even when the shareholder wealth increased by more than 150 percent, executive pay decreased by 14 percent. Yet, when shareholder wealth increased by only 4 percent in San Francisco, the executive pay decreased by only 9 percent.
What is surprising is that in Washington D.C., when shareholder wealth increased by 85 percent, CEO pay increased by 37 percent and in Atlanta, a 74 percent shareholder return was rewarded with a 45 percent in CEO pay increase.
According to a recent Equilar Inc. study, bonuses and all other compensation besides actual pay had taken a hit among the Fortune 100 companies, declining between 2008 and 2009 by close to one-third, from a median value of around $340,000 to about $250,000. Any perks—such as use of company aircraft—decreased by close to 20 percent.
Experts suggest that although other compensation packages’ decreases did include a loss of perks, a major portion of compensation loss was due to decline in stock and option value, given the plunge in the 2009 stock market.
As many industry executives experienced a decline in the value of their compensation packages, 2009 pay packages for energy sector CEOs increased by 39 percent.
According to the Partners Green article, Chris Crawford, executive director at a Houston-based executive compensation consulting firm, said that executive pay in the energy sector will continue to rise, as experienced executives are hard to come by.
“When you look at the supply of available key technical and executive talent, it’s short and getting worse,” Crawford said. “The world financial crisis didn’t change that dynamic.”
Government Interjects
“Why is it that, when it comes to Wall Street compensation, enough is never enough?” asked more than 40 members of the U.S. House in a letter to six financial institutions, including the American International Group, Citigroup, the CIT group, M&T Bank, Regions Financial, and SunTrust Banks, in response to a report released on July 23 by Kenneth R. Feinberg, the special master for TARP executive compensation.
The letter continues, “Why is it that Wall Street remains tone deaf and blind to the struggles of working Americans? Why is it that Wall Street increases bonuses to executives while eliminating lending to small businesses?”
Rep. Peter F. Welch, D-Vt., the author of the letter, asked that all firms that have not repaid the taxpayers’ money, including interest, refrain from paying out any bonuses to the executives and claw back all “questionable bonuses.”
Feinberg named 17 banks that handed out “new stock grants, golden parachutes and other types of compensation” bonuses amounting to $1.6 billion, despite having been bailed out with taxpayers’ funds.
It is important to note that Feinberg was given authority to evaluate the compensation issue and make recommendations, but not the power to impose repayment of the bonuses or assess any fines.
In an appeal to the 17 firms, the Welch letter concluded, “It would be cynical in the extreme for you to thumb your nose at the American public by continuing excessive payouts while your company is in debt to the taxpayer. We expect you to take immediate action to address the issues we have raised in this letter and look forward to your timely response.”
But so far, little has been done to cut back on executive pay, and experts are debating the definition of “fair” pay and proper oversight in a free-market system.
“Directors should consider more robust, proactive changes that will newly ground compensation programs directly in each organization’s current business strategies, talent requirements, performance expectations and shareholder needs,” according to a compensation report by Pearl Meyer & Partners, a compensation consulting firm.
However, most executive recommendations suggest a claw-back policy, which allows the company to recoup some of what it has handed to an executive in actual pay, bonuses, and stock compensation if the executive fails to run a successful company.
Almost two-thirds of respondents, mainly directors and other higher-level managers, in a 2010 Pearl Meyer survey, suggested that executive pay should be capped, even if the company is doing well.
Furthermore, corporate boards are taking executive pay more seriously to stave off a stockholder revolt.
“Shareholders don’t mind paying CEOs when the company is performing well. But CEOs who make out like bandits when company performance is spiraling downward are upsetting to shareholders,” said Amy Borrus, deputy director at the Council of Institutional Investors, in an article on the Partners Green website.
Real World Executive Pay
“Surprisingly, the CEOs of companies with the best performance—expressed by total shareholder return year-over-year—did not necessarily receive the highest pay increases,” according to a recent report from consulting firm BDO.
In companies with a checkered performance, a revaluation of executive pay was considered, but never materialized. The grounds for continued high actual pay/bonuses couldn’t be determined, according to the survey takers, so everything remained at status quo in many corporate headquarters.
Executive pay scales are down from prior years, but BDO couldn’t find any relationship between pay and performance, as actual compensation was all over the place. Given that, it was difficult to establish a connection between pay and the firm’s performance.
“When comparing the bottom tier of the top performing companies with the top tier of the bottom performing companies across all 10 cities, the links between pay and performance became elusive,” found BDO during its research.
In New York, when shareholder wealth increased by more than 200 percent, executive pay increased by 10 percent, while in San Francisco, even when the shareholder wealth increased by more than 150 percent, executive pay decreased by 14 percent. Yet, when shareholder wealth increased by only 4 percent in San Francisco, the executive pay decreased by only 9 percent.
What is surprising is that in Washington D.C., when shareholder wealth increased by 85 percent, CEO pay increased by 37 percent and in Atlanta, a 74 percent shareholder return was rewarded with a 45 percent in CEO pay increase.
According to a recent Equilar Inc. study, bonuses and all other compensation besides actual pay had taken a hit among the Fortune 100 companies, declining between 2008 and 2009 by close to one-third, from a median value of around $340,000 to about $250,000. Any perks—such as use of company aircraft—decreased by close to 20 percent.
Experts suggest that although other compensation packages’ decreases did include a loss of perks, a major portion of compensation loss was due to decline in stock and option value, given the plunge in the 2009 stock market.
As many industry executives experienced a decline in the value of their compensation packages, 2009 pay packages for energy sector CEOs increased by 39 percent.
According to the Partners Green article, Chris Crawford, executive director at a Houston-based executive compensation consulting firm, said that executive pay in the energy sector will continue to rise, as experienced executives are hard to come by.
“When you look at the supply of available key technical and executive talent, it’s short and getting worse,” Crawford said. “The world financial crisis didn’t change that dynamic.”
Government Interjects
“Why is it that, when it comes to Wall Street compensation, enough is never enough?” asked more than 40 members of the U.S. House in a letter to six financial institutions, including the American International Group, Citigroup, the CIT group, M&T Bank, Regions Financial, and SunTrust Banks, in response to a report released on July 23 by Kenneth R. Feinberg, the special master for TARP executive compensation.
The letter continues, “Why is it that Wall Street remains tone deaf and blind to the struggles of working Americans? Why is it that Wall Street increases bonuses to executives while eliminating lending to small businesses?”
Rep. Peter F. Welch, D-Vt., the author of the letter, asked that all firms that have not repaid the taxpayers’ money, including interest, refrain from paying out any bonuses to the executives and claw back all “questionable bonuses.”
Feinberg named 17 banks that handed out “new stock grants, golden parachutes and other types of compensation” bonuses amounting to $1.6 billion, despite having been bailed out with taxpayers’ funds.
It is important to note that Feinberg was given authority to evaluate the compensation issue and make recommendations, but not the power to impose repayment of the bonuses or assess any fines.
In an appeal to the 17 firms, the Welch letter concluded, “It would be cynical in the extreme for you to thumb your nose at the American public by continuing excessive payouts while your company is in debt to the taxpayer. We expect you to take immediate action to address the issues we have raised in this letter and look forward to your timely response.”
