Sound, Fury-and Reasoned Response

In these unprecedented times, legislators in the U.S. (and elsewhere) are taking aim at corporate governance of executive compensation and at an array of specific pay practices, from base salary increases to incentive awards to severance and even to corporate jets.

April 14 2009 by Diane Doubleday


In these unprecedented times, legislators in the U.S. (and elsewhere) are taking aim at corporate governance of executive compensation and at an array of specific pay practices, from base salary increases to incentive awards to severance and even to corporate jets.

Already, a salary cap of $500,000 for top executives at companies that receive the largest amounts of federal bailout money has been imposed by the U.S. Treasury department. In the offing are say-on-pay requirements, an expansion of the clawback provisions that were first enacted with Sarbanes-Oxley, elimination of ordinary severance pay, prohibitions on salary increases and incentives, and increased taxation of executive pay through such vehicles as further limiting the million-dollar deduction for performance- based compensation.

The unintended consequences of prior Congressional efforts to limit executive pay include million-dollar salaries, excessive use of stock options, change-in-control benefits equal to at least 3X pay, tax gross-ups to cover golden parachute excise taxes, and so on. But the environment today is different and, therefore, the unintended consequences of regulation are more severe. American businesses compete on a global basis and our recovery will influence the world’s. Limiting the ability of organizations to attract and retain top executive talent will threaten our global competitiveness.

We are already risking this in sectors receiving government funds tied to pay constraints. Without incentives, ordinary severance and salary increases, the best talent will move. And the ability of these companies to recruit new senior talent is severely hampered.

So what would be a reasoned response to the legitimate concerns shareholders and other stakeholders have about executive pay?

Like it or not, Congress is likely to require publicly traded companies to provide shareholders with an advisory vote on executive pay in time for the 2010 proxy season. This is certainly not a panacea; the U.K. has say on pay and shareholders there are equally upset about the financial crisis, large bonuses and poor performance. In anticipation of say on pay next year, companies should be thoughtful about actions they take this year (many of which will be disclosed and voted on next year), such as:

  • Long-term incentive grant values should be reduced from 2008 levels. With share prices down 30–40 percent, most companies cannot afford grants at values equal to last year’s. Companies will have to use judgment here; the data lag the market.
  • Severance benefits should be revisited. Examples of pay for failure have made this a top issue for shareholders. Companies should review their plans and align them with current notions of reasonable and affordable severance.
  • Incentive plans should be carefully reviewed. Concern about rewards for inappropriate risk, the volatile economic environment and changing business models and strategies are all reasons to do an comprehensive audit of incentive plans, whether short-, mid- or long-term.
  • Use common sense. This is generally not the time to give senior executives pay increases, when performance didn’t meet goals, to change the hurdles for outstanding performance shares or to make executives whole for the decline in their holdings because of the market collapse. If you are tempted, consider not just the “optics” of such actions today, but the votes next year.
    Diane Doubleday (diane.doubleday@ mercer.com) is a worldwide partner in Mercer’s human capital business and editor of Pay for Results.