Enough is enough. That's the message shareholders have sent to boards
of directors -- causing a downward shift in executive compensation.
"Slowly but surely the screws are tightening down on boards of
directors of public companies to stand up for what's right for the
stockholders," said Paul Dorf, managing director of Compensation
Resources.
Exorbitant salaries are inappropriate, he said. "We're seeing a
definite shift in compensation -- given the downward trend from last
year and this year."
Although the Sarbanes-Oxley Act of 2002 is six years old, he
said, "we're seeing the culmination of it now. It's finally coming to a
head."
Since transparency has been mandated, it's difficult to prove a
portion of compensation is so confidential that it cannot be disclosed.
This, of course, causes all aspects of executive compensation to be
scrutinized.
"Giving stock away has come to a screeching halt," Dorf said.
"Stock used to be given out in 1,000- or 100,000-share increments --
now they set a monetary limit on it, say, the value of $60,000 worth of
shares."
And the Securities and Exchange Commission returns
"compensation discussion and analysis" reports to companies --
insisting they be rewritten in "plain English," Dorf said.
Some compensation elements were embarrassing, he said, when
they came to light -- from divorce settlements, to gross-ups to Wall
Street Journal subscriptions.
And often executives retire and are re-hired as consultants for an "exorbitant rate."
But now, boards of directors are much more wary, especially if
a company is doing poorly and the executives are still highly
compensated.
Dorf said there are five major aspects of executive
compensation -- base salary, annual incentive plans (10 years ago the
target was 25 percent of base salary, now its 100 percent), long-term
incentives for equity, supplemental benefits and prerequisites, and an
employment or change-of-control agreement, often referred to as a
"golden parachute." "The key is to make sure you motivate executives to
accomplish the tasks you want them to do, without shareholders thinking
the compensation is out of line with the marketplace," he said.
Disclosure, transparency and fewer stock options are not the only trends in compensation.
"Even before the slow economy, companies started focusing on
issues of morale," said Toni Fleming, business development manager at
Manpower Professional's [Colorado office. "They're evolving toward
performance-based pay for executives. Base salary (has become) only a
percentage of fair-market value."
Instead of high base salaries, executives have the opportunity
for significant performance-based bonuses. Healthy companies, Fleming
said, assign a metric to their strategic objectives, in order to
measure success or a percentage of success of their executives.
Six Sigma training certification is popular with companies, she
said, as well as scorecarding or dashboard reporting, to annually
measure individual performance and thus overall performance of a
company. If specific metrics are reached, then executives receive
bonuses above and beyond their base salary.
The two main reasons for the trend in performance-based
compensation are better morale at all levels and the protection of the
company, Fleming said.
In an inflationary economy, strategic objectives are more
difficult to achieve, and if they're not reached, then the company is
not held accountable for paying high salaries to executives who are not
performing well.
"Healthy organizations get creative with executive compensation
-- and if executives reach performance objectives," Fleming said, "they
can earn well over 100 percent of fair market value."
© 2008 The Colorado Springs Business Journal. All rights reserved.
© 2008 Enterprise Security Today. All rights reserved.
|
