NOTHING will ever touch PAY, BONUSES and OPTIONS for the top people!
Bet on it!
----------------------
Executive Pay:
"After years of watching the top echelons of corporate management take
home billions, shareholders want to know: Will inflated pay packages
get slashed?"
By David S. Hilzenrath
Washington Post Staff Writer
Sunday, December 21, 2008; F01
Angelo R. Mozilo, whose Countrywide Financial came to symbolize the
failings of the mortgage industry, took home more than half a billion
dollars from 1998 to 2007, including $121.7 million from cashing in
options last year alone. Charles O. Prince, who led Citigroup to the
brink of disaster, was awarded a retirement deal worth $28 million.
Now, in a show of purported restraint, top Wall Street executives are
going without bonuses.
What are we to make of all this?
If you're angry that so many executives got paid so much for screwing
up so spectacularly, you might take solace in the fact that shares
they still hold have lost value, too. But if you think executive pay
is finally succumbing to the force of gravity -- if you'd like to
believe that an epic destruction of investor wealth will fundamentally
and permanently change the way chief executives are paid, or that you,
dear shareholder, have the power to join forces with others just like
you and create a more rational order -- don't bet on it. The nation's
financial crisis could change the rules of executive pay, but if
history is any guide, you'll have a lot more to complain about in the
years ahead.
Through nearly two decades of tinkering, each new twist in executive
pay has proved flawed. Incentives meant to reward good management have
done just the opposite, and efforts to reform the system have in some
respects made matters worse. From the bursting of the dot-com bubble
to the collapse of companies like Enron and WorldCom, from the rampant
backdating of stock options to the current meltdown of the global
financial system, the so-called pay-for-performance movement has led
to colossal windfalls, reckless risk-taking and fraud.
At a time when the government is using taxpayer funds to rescue
financial titans -- when ordinary Americans are watching their
retirement savings evaporate -- announcing that top executives will
forgo bonuses has obvious public-relations benefits. But unless a
bonus was warranted, it's a hollow gesture. And it does nothing to
alter certain underlying realities.
For the most part, executive pay is set by executives. Executives
dominate corporate boards, and corporate boards are self-perpetuating.
As a practical matter, shareholders have little say in the selection
of directors, and once directors are in the compensation boat, they
have little incentive to rock it.
If you're a director and you go along with generous chief executive
pay, "you get to sit on more boards," said Fabrizio Ferri, an
assistant professor at Harvard Business School who studies executive
compensation.
According to one school of thought, the scale of executive pay, if not
the particular form, is unlikely to change substantially unless the
balance of boardroom power changes.
There are several ways the crisis could shake things up.
First, short of a revolution in the way corporations are governed,
there are efforts afoot to make it harder for executives to profit
from mismanagement while investors are left holding the bag.
Some shareholder activists are calling on boards to hold incentive pay
hostage to a company's long-term fortunes, and investor anger could
put pressure on directors to comply. The American Federation of State,
County and Municipal Employees plans to ask shareholders to vote next
year on resolutions urging boards to take two steps: stretch out the
payment of annual bonuses over multiple years and hold on to a
significant portion of equity awards until the executive has been gone
from the company for two years.
The resolutions are purely advisory.
Second, through its bailout programs, the government can set
conditions for companies that accept federal funds. For example, the
government is requiring participating firms to eliminate incentives
for executives to take "unnecessary and excessive risks that threaten
the value of the financial institution." It's unclear how companies
will apply such a nebulous standard. In the spirit of both the AFSCME
proposal and the Treasury mandate, the investment firm Morgan Stanley
recently said it will make a portion of annual bonuses subject to
recapture by the company.
Third, either Congress or the Securities and Exchange Commission could
make it easier for big shareholders to put their own candidates for
board seats on the corporate ballot. In theory, that could make
directors much more accountable. For it to work, shareholders,
especially institutions like pension and mutual funds, would have to
take a more active role than many have had the stomach to play in the
past.
The plan could backfire. If executives are forced to confront
shareholders with real power, would they be any less motivated to
deliver short-term results, or the illusion of short-term results --
even if those compromise the company's interests over the long run?
* * *
Outrage about executive pay is far from a new phenomenon.
Back in 1990, two professors warned that something very bad was taking
place in America's boardrooms: Executives were being paid too little.
"On average, corporate America pays its most important leaders like
bureaucrats. Is it any wonder then that so many CEOs act like
bureaucrats rather than the value-maximizing entrepreneurs companies
need to enhance their standing in world markets?" professors Michael
C. Jensen and Kevin J. Murphy wrote in the Harvard Business Review.
Executives, not surprisingly, embraced the idea. In a way, so did
their toughest critics. At the time, some shareholders were up in arms
about million-dollar executive salaries. They demanded that pay be
based on performance, and they bought into the notion that chief
executives should be able to make more money as long as they earned
it.
President Bill Clinton and Congress got into the act in 1993,
dictating that companies could no longer take tax deductions for
executive pay packages of more than $1 million -- unless the pay was
performance-based.
What followed was a massive proliferation of stock options, making it
possible for executives and workers alike to attain fortunes that were
previously unimaginable. Options give the holder the right to buy
shares of stock at a fixed price -- ordinarily, the price at which the
shares are trading when the options are granted. If the market price
of the stock climbs, the holder can exercise the options and sell the
shares at a profit.
If the executive is awarded options to buy 500,000 shares at $10 each
and the stock price climbs to $100 -- well, you do the math.
Corporate boards claimed that they were aligning the interests of
executives with those of shareholders. They were wrong.
Options can reward any increase in the share price. That became
painfully clear in the bull market of the 1990s when executives
benefited from rising share prices even if their stocks lagged behind
competitors or market averages.
Then came an epidemic of accounting scandals, which showed that
options gave executives powerful incentives to cook the books and kite
their stocks. More recently, many companies were found to have
secretly manipulated the terms of options. By backdating the awards --
in other words, falsely claiming that the options were granted when
the stock price was especially low -- companies lowered the
performance hurdle and made the options much more valuable.
As an alternative to options, or in addition to options, many boards
shower executives with stock that vests over a period of years. But
those awards are widely mocked as "pay for pulse" because they have
value even if the stock price falls. Some boards layer on additional
requirements -- for example, the executives can't collect the stock
unless the company's profit or share price hits certain targets. If
the targets aren't easy to hit, they can introduce more incentives to
cheat.
Meanwhile, boards have a history of openly changing the rules to
benefit the boss. When performance targets proved too hard to meet
last year, a bunch of companies dispensed with their criteria and
awarded bonuses anyway, according to a report this month by the
Corporate Library.
Government efforts to reform executive pay have had mixed results.
When the government limited the tax-deductibility of executive
salaries, many boards stuck shareholders with the added taxes instead
of capping the salaries. When the government mandated clearer
disclosure of executive pay, it gave shareholders fresh ammunition to
complain -- but it also gave executives more information about their
peers, which gave them new leverage in pay negotiations, Joseph E.
Bachelder III, a lawyer for top executives, wrote in the New York Law
Journal last year.
In 1992, after the SEC adopted some of the most significant reforms,
one leading compensation critic suggested that the actions could put
him out of business. "I may be like the Maytag repairman, with nothing
to do, sitting here waiting for somebody to be overpaid," Graef
Crystal joked. Sixteen years later, Crystal is still fulminating.
At last check, the chief executives of companies in the Standard &
Poor's 500-stock index received pay packages valued at an average of
$10.5 million, which was 344 times the pay of the typical American
worker, according to a study by the Institute For Policy Studies and
United for a Fair Economy, which says that "concentrated wealth and
power undermine the economy."
Murphy, a co-author of the 1990 Harvard Business Review article,
predicted that executive pay will resume its upward climb.
"I think we have a history that shows that uproars over executive
compensation at most create short-run changes in pay. And then what
usually happens is the government enacts some knee-jerk reactions that
at the end of the day end up increasing executive pay," he said.
Chief executives "prefer to play a heads-I-win, tails-you-lose game
with shareholders, and so far they've been successful," said Jensen,
the other author of the 1990 article. "It's changing, but compensation
committees [of corporate boards] still tend to be under the control of
the CEO," he said.
Though it may be counterintuitive, the current crisis could plant the
seeds for a new bumper crop of executive riches.
As compensation committees ponder their next round of pay decisions,
one of the questions they are trying to answer, board advisers said,
is how to factor in the decline in stock prices when determining how
many shares to award executives. They could give out the same number
of shares as in past years, delivering much less value. Or they could
give out many more shares to make up for the reduced value of each
individual share, setting executives up for huge gains if stock prices
recover.
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/20/AR2008...000096.
----- [ moreover ] -----
"Passing the Buck"
By Michelle Singletary
Sunday, December 21, 2008; F01
When the chief executives of General Motors and Ford announced that
they would take just $1 a year in salary if Congress bailed their
companies out, I rolled my eyes. Not for a moment did that gesture
make me feel better about the possibility of the automakers receiving
welfare.
Who in their right mind thinks a chief executive earning a $1 a year
is actually making a sacrifice?
Nobody.
Last year, the chief executives of at least 32 companies took the
symbolic salary of $1 a year, according to Equilar, an executive
compensation research firm.
We regular wage earners know darn well these guys will get stock
options, benefits and perks that far exceed what most of us will earn
in our lifetimes.
From 2006 to 2007, the median value of total stock holdings and
accumulated retirement benefits for Fortune 500 chief executives
increased 6.1 percent to $56.7 million from $53.4 million, Equilar
found. These amounts include pension benefits, deferred compensation,
outstanding stock option awards, unvested stock awards and shares
owned outright.
Executive compensation has again become a hot-button issue as company
after company tanks, taking the economy down with them. On the gut
level, it just feels morally wrong for executives to earn millions
while shareholders and employees suffer so badly.
Ideally, executive compensation should be set by the marketplace and
not by the government. Pay for performance is what we all expect. The
harder you work or the more value you bring to your company, the more
you deserve to be compensated.
That's the ideal way to pay people. But we know that chief executives,
at least those running major corporations, are different. There's so
much more at stake when they fail to do their jobs properly. Just look
at the American auto industry. The executives who ran Chrysler, Ford
and GM off the road are compensated handsomely while begging for a
bailout. Even if their companies go broke, the bigwigs will get
millions in compensation despite their mistakes.
But there's some good that could be had from the current crisis in
corporate America. When someone is pleading for a handout, you can get
something in exchange for rescuing them. It would be idiotic if
Congress didn't take advantage of this crisis and find a way to better
control the way executives are compensated.
If we now have an economy in which we cannot allow certain industries
or companies to fail, then we need better governance over executive
compensation. We need to place checks and balances so top executives
aren't allowed to run firms into the ground while enjoying outrageous
pay packages no matter how their companies perform.
Perhaps one way is to focus more on the boards that approve executive
pay. Let's hold accountable the people responsible for granting the
monstrous stock options, bonuses, golden parachutes and benefits.
Last year, companies in the S&P 500 index spent on average more than
$2 million on board compensation, according to preliminary findings of
a director pay survey by the Corporate Library, an independent
research firm. The median total compensation for individual directors
of S&P 500 companies was just less than $200,000.
Despite the economic downturn and a year-long recession, the pay for
directors has gone up. The median increase in total board compensation
was nearly 11 percent. The median increase in compensation for
individual directors was almost 12 percent. This is the third year of
double-digit increases for directors and boards.
Is it no wonder that executive pay is so high? The people determining
how much executives will get are lapping up the money, too.
A board of directors ought to be examining executive compensation in
the name of good governance. The buck has to stop with the directors
because, let's be honest, they will never give up the responsibility
to approve executive pay to stockholders and probably shouldn't.
I favor the trend of companies and boards taking pay cuts and
eliminating bonuses when corporate performance stumbles. For example,
Western Digital is reducing the salaries of its chief executive and
top executives 15 to 33 percent. The company also said in its filings
with the Securities and Exchange Commission that it was reducing
nonemployee director retainers and committee fees by 15 percent for
2009.
"The rate at which companies are reducing executive salaries is
certainly accelerating, and in many cases, executives are acting ahead
of their boards by voluntarily taking pay cuts," said Alexander Cwirko-
Godycki, research manager at Equilar.
But that's the problem: We can't always rely on this volunteer effort.
There has to be accountability, and it's got to start with the
compensation committees of these large companies. They have to have an
overarching value system that recognizes that their decisions have
rippling effects on our entire economy. And if they cannot get it
right, we need to make them.
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/20/AR2008...000094.
--------------------
· On the air: Michelle Singletary discusses personal finance Tuesdays
on NPR's "Day to Day" program and at
http://www.npr.org.
· By mail: Readers can write to her at The Washington Post, 1150 15th
St. NW, Washington, D.C. 20071.
· By e-mail: singletarym RemoveThis @washpost.com.
Comments and questions are welcome, but because of the volume of mail,
personal responses are not always possible. Please note that comments
or questions may be used in a future column, with the writer's name,
unless a specific request to do otherwise is indicated.
---------------------
Then, there's "AFLAC!"
http://www.thirdwayblog.com/images/400/Aflac%20Duck.jpg
-----
"Shareholders Seek More Say on Pay"
By Heather Landy
Special to The Washington Post
Sunday, December 21, 2008; F01
So you're a shareholder in a company you believe pays its top
executives far too much. What can you do about it?
Well, not much -- for now.
But the deepening financial crisis -- and the growing outrage over
executive pay packages and the arrival of a new White House
administration -- are breathing new life into the "say on pay"
movement, which aims to give shareholders a stronger voice on
corporate compensation.
Companies adopting say-on-pay policies agree to hold annual
shareholder votes on executive compensation packages. The votes would
not be enforceable -- boards would still have the ultimate
responsibility for setting pay -- but advocates of the policy say it
gives shareholders an important venue for voicing their opinions.
Say on pay has been gathering momentum slowly. In the 2008 proxy
season, shareholders filed more than 75 say-on-pay resolutions,
averaging 42 percent support and winning majority votes at 10
companies, according to RiskMetrics, which researches corporate
governance trends. That was up from a 41.7 percent average support
level the previous year, when say-on-pay resolutions passed at eight
companies.
Activist funds suspect they'll find broader support going into the
2009 proxy season, when say-on-pay resolutions are expected to be
filed with more companies, and in some cases re-filed with companies
where the measures failed in previous years.
Skeptics question the effectiveness of say on pay when it comes to
restraining runaway compensation. Like many of the matters
shareholders take up at annual meetings, say-on-pay votes are
nonbinding, meaning boards can simply take shareholders' sentiments
under advisement without carrying out reforms.
And opponents of say on pay argue that it undermines the authority of
boards and could steer talented executives into private companies
where their compensation would be subject to less scrutiny.
But now that the deepening financial crisis has turned executive pay
into a potent rallying cry, corporate governance experts are
predicting a growth of support for say-on-pay initiatives.
"Clearly there's something crazy going on with executive compensation.
Is it going to be fixed by say on pay? My sense is that just the mere
discussion of it has already had some impact," said Jay Lorsch, a
professor at Harvard Business School and chairman of its Global
Corporate Governance Initiative. "People in boardrooms are realizing
that the growing criticism of the business community is a thing to be
concerned about, and that to get back into the public's good graces,
they've got to do something."
The pressure to reform pay also is playing out on Capitol Hill, where
debate over the government's role in the issue has been a key part of
the discussion over the bailout of the financial industry and the
federal loans sought by automakers. The public furor over pay
practices could clear the way for legislation requiring say-on-pay
votes at public companies, governance experts said.
It's a remarkable turn of events for say-on-pay proponents.
The fledgling movement was nearly written off six months ago, as
legislative efforts to force companies to implement say-on-pay
policies stalled in the Senate and failed to win several closely
watched shareholder votes. But the Illinois Democrat who introduced
the Senate bill, Barack Obama, is now headed to the White House. And
Rep. Barney Frank (D-Mass.), who helped get a say-on-pay bill passed
in the House in 2007, plans to reintroduce the issue in the next
Congressional session.
Meanwhile, many of the say-on-pay shareholder resolutions that came up
short at annual meetings in 2008 appear likely to resurface in 2009.
New York City Comptroller's Office spokesman Michael Loughran said the
city's employee retirement system, which oversees about $95 billion of
pension money, resubmitted a say-on-pay proposal to Home Depot after
garnering 42.1 percent of the vote at the company's last annual
meeting.
"Given the widespread negative impacts of corporate greed, it is
indisputable that excessive executive compensation must be reigned
in," Loughran said. "Shareholders must be afforded a fundamental right
to cast an advisory vote on the executive compensation proposals of
public companies."
Critics of corporate compensation practices point to frequent
disconnects between pay and performance. The Corporate Library, a
governance research firm, found that only six of last year's 30
highest paid chief executives had a better five-year track record than
their peers when it came to delivering shareholder returns.
The recent carnage in the stock market may help level the playing
field, as many executives who rely on stock option grants for the bulk
of their compensation find themselves unable to exercise their awards
at a profit. Even before this year's slump, executives at one in three
companies were holding out-of-the-money stock options in 2007,
according to consulting firm Watson Wyatt. But the market's decline
may work to the advantage of say-on-pay advocates. Efforts to fix what
some would call a broken compensation system resonate with shell-
shocked investors.
Boston Common Asset Management, a fund at the vanguard of the say-on-
pay issue, failed to find enough support from fellow investors this
year for its proposals to adopt say on pay at IBM and Waddell & Reed
Financial, where only 43.3 percent and 49.5 percent of the respective
votes were cast in favor of implementing the policy. But Boston Common
has refiled say-on-pay resolutions with both companies for their 2009
annual meetings.
"With the new administration coming in and the economy in the state
it's in, this is an issue that's not going away," said Dawn Wolfe, a
researcher at Boston Common. Other major proponents of say-on-pay
policies include the California Public Employees' Retirement System
and the American Federation of State, County and Municipal Employees.
Say-on-pay laws allowing foradvisory votes by shareholders have been
on the books for several years in countries including Britain and
Australia. But it is still a relatively young concept in the United
States.
In May, shareholders in Aflac, the first American public company to
agree to an advisory vote on pay, cast their ballots. Only 2.5 percent
voted against the compensation granted to the insurance company's top
executives -- not that Daniel P. Amos, Aflac's longtime chief
executive, was worried.
Say on pay "gives shareholders an opportunity to express how they
feel," Amos said. "I think in life people want to be heard, and I
think what has happened in recent years is there's a feeling out there
that they are not being heard. Well, our shareholders are being heard.
And if they had voted no on our pay, then we would have changed going
forward because it would have sent us a signal that we need to
evaluate what we're doing."
Pharmaceutical giant GlaxoSmithKline, which in 2003 became the first
big British company to have its pay plan rejected by shareholders,
replaced the head of its compensation committee that year and hired a
consulting company to review its policies and listen to investors'
concerns. Soon after, the $28 million severance promised to the chief
executive if he were to lose his job was reduced to $5.6 million. The
next year, the company's pay plans were approved by a vote of 82
percent.
There's no guarantee that U.S. companies that adopt say on pay would
be as responsive. While nonbinding votes frequently spark boardroom
discussions, they don't always lead to reform. But it's that type of
ambiguity that makes weighing in on say on pay a relatively easy call
for Congress, said Steve Balsam, a professor at the Fox School of
Business at Temple University in Philadelphia. "It's a way for
politicians to do something, or say they're doing something, about
executive compensation without actually mandating anything," Balsam
said. "It just sounds good."
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/20/AR2008...000090.
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