Heading Toward Proxy Season - 18 Jan 2009

Facing increased scrutiny in an uncertain economy, companies need to
look closely at their executive compensation, pay-for-performance, and
overall pay design as they prepare this year's proxy statements. HR
should play a key role.

By Louis Greenstein

RiskMetric Group unofficially rang in the 2009 proxy season with its U.S. Corporate Governance Policy Update.

Considering the
current economy and the new disclosure rules in effect these past few
years, it should come as no surprise that this year's update includes
voting recommendations on key issues such as poor pay practices,
executive compensation and inappropriate perks.

HR executives at
public as well as privately held companies may want to consider the
recommendations as their organizations grapple with -- and in some
cases adjust -- compensation plans and pay-for-performance measures.

RMG (formerly
Institutional Shareholder Services), the New York-based provider of
risk management and corporate governance services, has adopted a
"relative" approach to determining a "pay for performance disconnect."

The disconnect is now
defined as an increase in a CEO's total compensation, while the
company's one-year and three-year total shareholder returns are in the
bottom half of its industry group.

Patrick McGurn,
special counsel to RMG's ISS Governance Services Unit, says that poor
performance used to be tied to a company's own negative returns rather
than to returns at other companies.

"We've switched to a
relative measure so we can see which companies either create value or
stop the erosion of value," says McGurn. "If we didn't change it, most
companies would be poor performers under the old definition."

RMG also revised its
definition of "poor performance," which it now measures as one-year and
three-year total shareholder returns in the bottom half of a company's
industry.

"In this environment,
keep an eye on performance relative to your peers," McGurn advises.
Investors, he says, want to see performance measured on a relative
basis.

While a lot of companies benchmark their peers, few include performance in the mix, he says.

"In the past, even if
your company had negative numbers, most companies had positive returns.
Now almost everyone has negative returns. So the question becomes how
are you performing relative to your peers?"

Don Lindner,
executive compensation practice leader for WorldatWork, a Scottsdale,
Ariz.-based professional HR association, says it's critical for an
organization to have a compensation philosophy that supports its
business strategy.

"What is the
compensation philosophy? How will they align pay and performance? What
drives the business? What does success look like? And how can we define
a comp plan that attracts, retains and motivates executives? Those are
the fundamentals," he says.

Once that is
established, Lindner says, an organization can arrive at a sound plan
design. To help HR executives advise their companies on executive comp
and other pay issues, WorldatWork created a free
questionnaire
.

Since the proxy
disclosure rules went into effect, many companies have eliminated some
of what RMG characterizes as poor pay practices, such as certain
executive perks.

Results from RMG's
2008-09 Policy Survey suggest that institutional investors are
concerned about poor pay practices including inappropriate perks.

About three-quarters
(74 percent) of institutional clients indicated in the survey that they
would favor withholding votes for incumbent comp committee members
based on excessive perks.

Nearly all (96
percent) said that automobile allowances in excess of $100,000 per year
should be considered "excessive." About the same amount (94 percent)
indicated that personal use of corporate aircraft, exceeding a
threshold, should be considered "excessive."

Edmond FitzGerald, a
partner in the executive compensation practice group at the New
York-based law firm of Davis Polk & Wardwell, says HR should
construct incentives that

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