The Shareholder ForumTM


"Say on Pay" Proposals

Forum Home Page

"Say on Pay" Home Page

Program Reference


New York Times, April 18, 2009 article


The New York Times




April 18, 2009

Companies Reset Goals for Bonuses

When executives have a tough time meeting their performance goals, a growing number of companies are moving the goalposts for them.

Instead of paying bonuses to top executives when revenue or profits rise — less and less likely in this dark economy — companies have disclosed plans to offer awards based on other measures of success. A bonus may be more attainable if based, say, on preserving cash flow.

Xerox has dropped revenue growth as a factor in determining bonuses for its executives, the company disclosed recently in regulatory filings. The company will rely instead mostly on cash flow and secondarily on earnings per share.

“In this unstable economy it is critical that we focus on cash generation and earnings,” said Carl Langsenkamp, a Xerox spokesman, in an e-mail message. “So as the economy shifts, there are times that we reset priorities.”

Under the old system, which included revenue growth, Xerox’s chief executive, Anne M. Mulcahy, got a bonus of $990,000 for 2008, less than half of the $2.2 million she received a year earlier. Other top executives saw similar reductions in their bonus awards, according to Xerox’s proxy.

But changes like these raise concerns among institutional investors who worry that companies may be looking for ways to pay bonuses regardless of performance.

“What makes a lot of investors anxious is, not only is it changing, but it could allow for gaming of these incentive programs,” said Michael McCauley, corporate governance officer at the Florida State Board of Administration, the investment manager for the state’s pension plan. “You just kind of have to do some analysis of why that change was made,” and whether it is an incentive that benefits investors, he continued. “Is the actual change a good one?”

Companies generally point to the economic downturn and argue that this year, missing the kind of performance targets used in the past does not result from poor management. It would be unfair to withhold pay from executives, in this view, because they may be doing a good job while circumstances beyond their control sabotage their efforts.

The Barnes Group, a manufacturing and logistics company, said in its latest filings that its bonuses would take into account the working capital of the company and each of its segments, alongside earnings per share.

“It was kind of just a way to focus the organization,” said Brian D. Koppy, director of investor relations and communications at Barnes. “If you focus on cash in a down environment, that is better for the sustainability of the business in the long run.”

If the idea had been to make it easier for executives to earn bonuses, Mr. Koppy added, the company could simply have lowered its earnings target.

Determining how many companies are adjusting the terms of their executive bonus plans is not easy. Sometimes the changes are disclosed in proxies, but not always. A systematic comparison of disclosures in proxies is time-consuming; bonus terms are not always reduced to easily searched charts or tables.

“The disclosures we’re highlighting were very far and few between in past years,” said Alexander Cwirko-Godycki, research manager at Equilar, which identified several modified bonus plans for The Times. “It’s safe to say that this crisis environment, whatever you want to call it, is forcing companies to try to make these changes.”

Perhaps most controversially, some companies adjusted performance goals on the fly in 2008, generally making it easier to earn bonuses. In October, the board of Comsys IT Partners, an information technology consulting company, approved cutting the earnings target that the company had to meet in the last six months of 2008 for its executives to get a bonus.

The compensation committee at Comsys justified the reduction by bluntly stating that the original 2008 goal “was unattainable” for earnings before interest, taxes, depreciation and amortization. The company also reduced the size of bonuses that top executives could receive. Filings show that Larry L. Enterline, the company’s chief executive, received a bonus of $187,500 for his performance in 2008, down from $562,500 a year earlier. Similar declines were reported for other top executives.

Investor relations officials at Comsys did not return calls seeking comment.

Consultants who specialize in executive pay say that changes to bonus programs are not necessarily against the interests of shareholders, who benefit from keeping and motivating talented managers. Allowing a company to reset performance goals during the year, providing more opportunities to react to the changing economy, may make sense.

“There’s a feeling that judgment should be used,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “That’s what we’re seeing.”

One way to ensure that hard-working executives get the bonuses they deserve is to include a relative measure of performance that compares results with those of competitors. That helps mitigate the effects of a declining economy, since all the companies in a particular business would face similar pressures, said Mr. McCauley of the Florida State Board of Administration.

Using more factors to set bonuses also helps, he said, because rarely does one measure of performance capture everything.

“What investors really want to see is that they’re stretch goals — they’re not necessarily easily attainable,” Mr. McCauley said.

Reasonable people may differ on what best reveals the quality of an executive’s work, but putting too much emphasis on investors’ returns poses its own risks. Shareholders may not always be best served by strategies to increase earnings at any cost. Remember the pressure to inflate numbers at Enron, way, way back in 2001.

Changing business conditions may alter everything from the executive skills needed to the bonus measurements, remarked Brian T. Foley, managing director of Brian Foley & Company, a compensation consulting firm in White Plains, in an e-mail message. “But the underlying pay-for-actual-performance dynamic still must be clear, significant and readily defensible.”



A version of this article appeared in print on April 18, 2009, on page B1 of the New York edition.


Copyright 2009 The New York Times Company




This Forum program is open, free of charge, to anyone concerned with investor interests relating to shareholder advisory voting on executive compensation, referred to by activists as "Say on Pay." As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was supported by Sibson Consulting to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of performance leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.