A Roadmap for Executive Compensation
Tuesday, October 21, 8:00 AM
Reatha Clark King,
Director, Exxon Mobil Corporation and
Lenox Group, Inc.
James P. Melican
Chairman, PROXY Governance, Inc.
Founder & Editor, The Corporate
David N. Swinford
President & CEO, Pearl Meyer &
Digested from the panel discussion:
Reatha Clark King:
On Sunday, we asked and found out that 75% of us at this conference
think it is very likely there will be new regulations in targeted
areas of governance. And I think compensation is targeted. And further
inspiration came last night from John Whitehead-how grieved he is to see
excessive greed surrounding executive compensation. We took some excellent
food for thought from the Board-Shareholder Communications session, which
talked about say-on-pay. Now, in this session, we are looking for a roadmap
to executive compensation.
It's obvious to everyone in the world that when talking about
executive compensation, we're on a chipping and changing landscape. It's
impossible to predict how this is going to come out. In all probability, we
will see legislation.
If you look at last October through the end of
September-the value of people's equities is down 24%, even before this
month. People are angry; they want something to be done. A challenge
directors face is that they need to be looking now at what they are going to
be doing this year. If the performance criteria the board is using to
determine compensation is built on shareholder return, you know the CEO will
say "This decline was world-wide and does not reflect this company." The
board will be faced with what to do: Stay with the formula? Try to iron it
What has been more shocking to me than the failures of Wall Street,
is the subsequent failure of Wall Street to demonstrate any leadership role.
If you corporate directors do not take a leadership role, you are in for a
world of pain-no matter who gets elected.
Two weeks ago, I testified before Congress before
Waxman's committee, and I'd like to go over what I said (aside from "I told
you so"). I said, if you're paying people on the volume of
transactions rather than quality , you're in for a lot of trouble.
I'm going to introduce you to a new term I coined:
Forensic Corporate Governance. That's what we're going to be doing to figure
out what when wrong.
Somebody once said, "True change comes about when
something which has been perceived as unfortunate is now perceived as an
injustice." That's where we are now. I think say-on-pay is inevitable.
You'll see a lot of "no" votes for compensation committee members. Clawbacks
will be universal. Again: Act now, you don't want to have this forced on
What I'd like to do is talk about what compensation committee
members in this room might want to think about for this year-which will be
the most heavily viewed (and reviewed) set of compensation decisions people
in this room have ever made. The new administration-no matter which
party-will be anxious to solve problems of their constituents.
I believe the first rule is that you have to adhere to
your plan. You have disclosed your plans and explained them to your
shareholders, and you've disclosed the plans in a way that attempts to
convinced shareholders that this plan adheres to the business strategy.
You have to follow your own rules. If this year's
bonus will determine whether an executive stays with the company-you are in
a very unfortunate situation. We need to give people reasons to build
careers with our organizations-reasons going beyond pay. If you're giving
people substantially more options or shares because share prices are down,
you are going to be accused of being not very sympathetic to shareholders.
I believe we'll see a lot of focus (as you design
plans for 2009 and beyond) on multiple measurement systems. We're focused on
short-term goals right now because management consistently tells us they
can't set good 3-year goals. Not all of us are fortunate enough to have
long-term looking, career building management teams.
We need to extend the time frames of most of our
incentive plans. I think that extending the time frame of performance will
help you explain to investors why this represents a good long-term
investment in management, and your ability to look at long-term risk
management. Most decisions we make have long-term tails-and our incentive
programs need to measure those tails.
Audience Question: 94% of
people in the audience felt CEO compensation was high. Since compensation is
set by the compensation committee, this seems not like a CEO problem, but a
I believe the answer to CEO pay is majority vote. If shareholders
can replace directors that do a bad job, directors will do a better job. In
my testimony on Lehman Brothers and AIG, I included the names of every
member of the board as my "Hall of Shame."
You put a plan in place last February, and the world has changed.
Performance objectives that seem reasonable probably won't be attained. You
will have executives saying "What are you going to do for me?" You have to
say, "The world changed for investors, too." This is not the time for
giveaways. I think we all agree-this may be your last opportunity to do it.
Next year you may be under legislation.
Audience Question: How
much is too much? What do you expect to see happen with compensation trends
in the new environment?
Base salaries will be very conservative-but not awful. Annual incentives are
going to be down-I believe companies will respond by giving bigger
opportunities next year, or setting softer goals.
How much is too much? People don't criticize executive
pay when the company is performing well, and when pay moves in the same
direction as shareholder returns. People are becoming less tolerant when
they see people walking away with a consolation prize. Committees need to
focus on change in control and severance clauses-because that's where you
will be sued, and that's where you will be personally embarrassed when
things go wrong.
Audience Question: Next
week I have a board meeting, and executive compensation is the number one
topic. Our consultant will recommend that we baseline salaries consistent
with our industry. Do you think this is a good idea?
You have to decide on your compensation philosophy. You're
philosophy may be to pay below the industry, it may be to pay above. You
have to be able to explain to your investors what's really going on. If you
think you've got the right argument, you stick to your guns.
Audience Question: Present
outrage isn't just due to pay for performance. Present outrage is also due
to the inequality gap-don't you think the salary gap needs to close?
I am all for Bill Gates and Steve Jobs or Walt Disney coming up
with a great idea and making a bazillion dollars. But the injustice and
barbarity of the current system is ruining our credibility in the world.
Audience Question: Can you
comment on the role of the outside compensation consultant?
No matter what the consultant comes in with-what data he or she
has-the board needs to say, "Here's what we're interested in, and we're
relying on you to provide that."
They are important service providers with important information,
but as I said before, boards can't outsource their judgment.
Audience Question: What do
you think about director pay being tied to performance?
I think directors should be paid in shares. I think they should be
required to hold their shares until they retire. I don't think directors
should be paid for short-term performance; I want our compensation committee
to be real, real straight.