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Indianapolis Star, October 6, 2008 column



Lofty exec pay may be facing closer scrutiny


It's easy to simply get angry when you look at compensation packages for some of the executives who led the companies involved in the financial crisis.

Richard Fuld, chief executive of bankrupt Lehman Brothers Holdings, collected pay valued at almost $465 million from 1993 through 2007, according to career compensation data from California-based research firm Equilar. That includes pay worth about $45.4 million last year. (For the record, according to Bloomberg News, Fuld in a memo told Lehman workers he feels "horrible" about their pain.)

Stanley O'Neal, Merrill Lynch's former CEO, took home compensation with an estimated value of $145.2 million from 1997 to 2007, according to Equilar.

Kerry Killinger, who last month lost his job as CEO of the failing Washington Mutual, took home pay valued at $98 million, Equilar said.

Why go on? You're probably already steamed.

But in the wake of this serious financial mess, shareholders should take a close look at the structure and consequences of executive-pay packages. Perhaps there should be some aggressive shareholder activism this coming proxy season.

"There should be no doubt that executive compensation lies at the root of the current financial crisis," Paul Hodgson, a senior research associate with research firm The Corporate Library, wrote last week.

"There is a direct link between the behaviors that led to this financial collapse and the short-term compensation programs so common in financial services companies that rewarded short-term gains and short-term stock price increases with extremely generous pay levels."

Nell Minow, co-founder of The Corporate Library, is scheduled to testify today before the House Oversight and Government Reform Committee on the causes and effects of Lehman's bankruptcy.

Top executives receive pay from multiple money buckets these days, with much of it coming from cash bonuses and incentive payments, as well as grants of stock options and restricted shares.

The Corporate Library's report mentions two potential changes -- beyond what is included in the federal bailout package -- that could dramatically change the way companies are overseen and the way executives are paid:

1. Giving shareholders of a company an annual vote to approve executive pay, a movement sometimes referred to as "Say on Pay."

2. Allowing shareholders to offer up their own candidates for seats on a company's board, as opposed to shareholders simply voting on the board candidates offered to them by the company.

Not everyone agrees with that approach.

"I am not a fan of the notion of shareholders getting involved in the company at that level," Diane Denis, professor and Duke Realty Chair in Finance at Purdue University's Krannert School of Management. Most shareholders, she said, lack the understanding of individual companies to make those sorts of decisions.

She said the leaders of financial firms were taking risks that in many cases they didn't fully understand.

It's just that shareholders are grappling with just how to bring needed accountability to the executive suite.

By the way, shareholder "Say on Pay" proposals for an advisory vote on executive pay were voted down this year by investors at companies including Wachovia and Merrill Lynch. Those investors don't have much of a say on anything now.

Copyright 2008




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