Amid the Din over Exec Pay, Companies Hold the Line

More are making the disclosures the SEC mandated last year, but few are significantly altering their compensation policies.

Kate Plourd
- CFO.com | US

http://www.cfo.com/article.cfm/11958664/1/c_11957745?f=home_todayinfinance

August 20, 2008

After all the hoopla over executive compensation in the past couple
years, how much has changed? Has the increased disclosure in proxy
statements that the Securities and Exchange Commission mandated last
year influenced corporate strategies?

Judging by interviews with compensation experts, there has not been
a dramatic shift, in response to either the SEC rules or unrest within
the investor community and the public at large about
executive-compensation levels. For the most part, emerging trends have
more to do with providing the now-required detail in the Compensation
Discussion and Analysis section of proxy statements than with how much
executives are paid.

"In the pay levels themselves, there wasn't a lot of big news. It
was really about the focus on the CD&A," says Jannice Koors,
managing director at Pearl Meyer & Partners.

In 2007, the year the new rules took effect, many companies did not
comply, with the SEC having stated that it would not pursue enforcement
actions right away. But the commission signaled its intention to get
tough last October, when it published a review of the first year of its revised compensation rules and mailed 350 letters to companies it deemed to have made insufficient disclosure in their 2007 proxies.

The tactic appears to have been fairly successful. A majority of
companies are now in compliance, according to Mark Borges, a principal
with compensation consulting firm Compensi.

A significant number of companies have opened up about the way they
set incentive-plan performance targets, notes Alexander Cwirko-Godycki,
research manager at Equilar Inc. His analysis of 2008 CD&A
statements from Fortune 100 companies shows that 66 percent disclosed
incentive-plan performance targets, up from 56 percent in 2007.

"We've gone from a situation where a lot of companies were on the
fence to one where a clear majority of companies are disclosing these
targets," he says. "It's a massive improvement, and we expect it to
continue."

Cwirko-Godycki notes that CEO and CFO total pay, including bonuses,
incentive awards, and stock-option awards, was actually up 1.3 percent
and 5.4 percent, respectively — despite the worsening economy hindering
efforts to meet performance incentives. Long-term compensation plans
are still paying well, but short-term ones have taken a hit this year.

Executive performance bonuses in the housing and financial services
took the hardest hit, but others are likely to follow, according to
Borges.

"The effects always trail what's happening in the economy," says
Borges. "I would expect, based on what we've experienced this year,
that we're going to see a lot more programs where total compensation is
flat or down."

There was a particular increase in disclosure regarding severance
packages. Under the new SEC regulations, companies must disclose how
they would pay executives and their families upon an executive's death
or if the company was sold, closed, or taken over. And that requirement
may have been the trigger for changes to the plans themselves.

"We've seen more changes to severance and change-of-control
agreements and more amendments to the plans," says Cwirko-Godycki.
"Although the changes weren't dramatic, there was a lot of tweaking to
the plans in situations where companies realized that they had some
provisions that no one else had. But most didn't make big cuts."

As for changes to compensation itself, maybe the most significant
one involves perquisites. Borges says a large number of companies have
scaled back on perks or in some cases even eliminated them.

And, while the new SEC regulations are all about increased
disclosure, in the case of perks many companies this year actually
reported less detail, according to Borges.

Before 2007, companies were required to disclose total perquisite
expenditures of $50,000 or more per executive. The SEC last year
reduced that threshold to $10,000, which increased companies'
administrative burden of tracking the expenses. The commission did not,
however, provide guidance as to whether expenses must be itemized
(corporate jets, club memberships, personal financial planners, etc.).

In the first year of the new rules, some companies cautiously
included such detail, while others merely disclosed the total perk
allowance for executives, which had been common prior practice. This
year, though, after the SEC did not react to companies that omitted the
itemization, the number of companies opting for the non-detailed
disclosure roughly doubled among a group of 50 Fortune 500 companies
that Borges has been studying.

Meanwhile, it's not just the new SEC requirements that are playing
on companies' minds. Perhaps just as likely to steer change is
widespread scrutiny from public officials, investors, and the media.

"With the scrutiny of CD&A by the media and institutional
investors, and a general outcry around 'what are shareholders paying
for,' compensation committees are revisiting the basics with a little
more energy," says Myrna Hellerman, senior vice president of Sibson
Consulting. "They're asking: what is it that we really believe about
paying our people? Who are we going to compare ourselves against? Where
are we going to position ourselves in the market? How are we going to
use equity? How much is enough? And how much wealth should executives
accumulate?"

For example, Watson Wyatt Worldwide reported on Wednesday that in
an analysis of 75 large public companies, 87 percent now have stock
ownership guidelines and requirements for executives, up from 75
percent in 2007.

Additionally, 38 percent have a claw-back policy that enables
companies to recoup investment compensation if the financial measures
underlying the incentive plans are restated. That compares with 23
percent a year ago.