4 questions for the experts

By David Milstead, Rocky Mountain News (Contact)

Originally published 05:41 p.m., June 6, 2008
Updated 11:04 p.m., June 6, 2008

The Rocky Mountain News conducted phone and e-mail interviews with compensation consultants and governance analysts about some of the hot topics in executive pay.

The respondents:

* Charles Elson, chairman of the John L. Weinberg Center for Corporate Governance, University of Delaware.

* David Insler, senior vice president, Los Angeles office, and Myrna Hellerman, senior vice president and regional leader, Chicago office of Sibson Consulting.

* Shirley Westcott, managing director of policy, Proxy Governance.

* Peter M. Miterko, executive vice president, Denver Managment Advisors.

* Paul Hodgson, senior research associate for executive and director compensation, The Corporate Library.

* Pearl Meyer, senior managing director of Steven Hall & Partners.

Many companies are putting performance criteria on elements of their compensation packages. But is the bar set sufficiently high that executive pay could actually decline in coming years, or will pay levels continue to rise no matter what happens?

* David Insler: Those of us that partner with boards and management toward the interests of all stakeholders believe that the performance conditions will result in better alignment between performance and pay. Setting the bar "sufficiently high" won't necessarily have the effect of reducing executive pay. However, it may help refocus performance beyond the short-term demands of the markets and, in turn, cause some slowing of pay as companies rebuild their performance around creating real value for the long term. Short-term profit goals and explosive market growth up until recently contributed to executive pay acceleration.

Compensation committees spend plenty of time comparing their executives' compensation with pay at peer companies. How much do they discuss what they're paying the executives compared with pay for the average worker at their own companies?

* Shirley Westcott: I doubt that they're doing comparisons against average worker pay. Especially at multinationals, the figures wouldn't be meaningful since average worker pay reflects local market norms. A better comparator (which shareholders are taking interest in) is the pay of the CEO relative to the other named executives.

* Peter Miterko: More and more companies are worried about, and are considering, internal equity. Over time I think that worry will extend down through the ranks.

* Charles Elson: Compensation levels are known throughout the organization. Any good board will examine the relationship within the organization, with the conclusions that levels out of whack will affect morale, which will in turn affect productivity.

Why do companies typically peg compensation to the 50th percentile or higher? As it's been noted, not everyone can be above average, but when everyone tries to be, compensation levels are driven up. Would a company really face negative shareholder reaction if it said it planned to pay its executives below-average salaries?

* Paul Hodgson: It would face negative executive reaction. Shareholders would be overjoyed if a company said it was going to pay below-average salaries and divert the savings into bonus opportunity that would only be paid out if shareholder value were increased.

* Pearl Meyer: The poor performers are being paid less, and the good performers are being paid more than before. When you put it together, you get averages that don't mean much.

What pay practices that were once common are now considered less than best-practice?

* Westcott: Profligate use of stock options; time-vested restricted stock; golden parachutes that have been extended to ordinary terminations (resulting in the proverbial "pay-for-failure"); employment contracts that auto-renew; tax gross-up payments, where companies pay the tax on an executive's parachute-level severance packages; perks like corporate jets, country club memberships, spousal travel, etc.

* Miterko: Subjective bonuses and time (vs. performance) vested restricted stock are going the way of the dinosaur.

* Myrna Hellerman: Reloads, big perquisite packages, discretionary bonuses, pure time-vesting with no performance consideration, expense reimbursement that is not clearly business necessity and lack of transparency in the process would be considered less than best-practice.