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For the study referenced in the article below, see

Note:  James F. Reda, whose firm conducted the study reported below, served on the panel of the Forum program that initiated the 2006 "Advisory Voting Project" and developed consensus principles for executive compensation.  He also led that program's "Analytical Alternatives" workshop to address the information requirements for both corporate and investor decisions about executive compensation, and has supported subsequent Forum programs with guidance on the analysis of compensation's relationship to corporate performance objectives.


New York Times, August 16, 2009 column


August 16, 2009

Fair Game

The Quick Buck Just Got Quicker

WITH outsized and corrupting corporate pay packages under scrutiny, you might think that companies would be rushing to tamp down their compensation plans. Making sure that pay actually rewards long-term performance, for example, seems a fairly obvious way to allay shareholder fears that managers are lining their pockets rather than safeguarding their companies.

But a study of changes made in pay practices by 191 of the nation’s largest companies this year shows that where pay is concerned, enlightenment remains a long way off. In other words, meet the new pay, same as the old.

The study was conducted by James F. Reda & Associates, an independent compensation consultant in New York, and it looked at proxy filings issued by almost 200 companies in the first half of 2009. The firm analyzed changes these companies made to their pay plans that take effect this year.

The biggest shock? Instead of seeing a greater reliance on long-term incentive programs, the Reda report found that changes in these companies’ plans made short-term incentive pay a bigger part of the compensation pie. Let me say that again: The plans — despite the calamities that short-term profiteering has visited on our economy — made short-term incentives a bigger component of compensation.

Last Friday, troubled financial companies relying on the taxpayers’ dime had to deliver details of their top executives’ compensation packages to Kenneth Feinberg, the government’s so-called pay czar. It will be interesting to see whether Mr. Feinberg finds the same short-term incentive skew in those pay packages that Mr. Reda did in his study.

“If you were going to encourage long-term thinking and behavior, you would reduce short-term pay, but companies have in fact reduced the long-term programs,” Mr. Reda said. “This is counter to the direction suggested by the United States Treasury, academics and other expert advisers regarding ways to mitigate risk.”

Another troubling finding in the Reda study was an increased use of restricted stock awards that are not performance-based. The awards simply vest over time.

Finally, the study found no significant decline in the use of so-called tax gross-up deals, a shareholder-unfriendly arrangement under which companies foot the bill on taxes that executives owe on their munificent pay packages.

Changes to pay practices were common this year: about 70 percent of the analyzed companies disclosed making some shift, Mr. Reda said. Almost 60 percent of the analyzed companies made what he considered to be major changes to their pay plans. But the nature of those changes surprised him.

“I was expecting that a lot of companies would be changing the payouts from cash to stock and then restricting the stock for three to five years,” he said. “Or paying out half of the bonus in cash and half in stock that must be held for three years. Those would be helpful changes, but I didn’t see any of that.”

Several pay policy changes showed some sensitivity to shareholder concerns about excessive compensation. For example, 43 percent of the companies making changes to their pay said they had eliminated merit increases, while 15 percent said they had reduced retirement benefits or eliminated tax gross-up payments on perquisites like insurance policies or use of jets. Some 13 percent said they froze or reduced base salaries and 4 percent reduced the benefits that would accrue to a chief executive if the company he or she oversaw changed hands.

Here is another plus: Some companies tightened up performance measures that must be met before incentive pay is dispensed. For example, 10 companies that changed their short-term incentive pay structures added profit or cash-flow requirements to performance pay hurdles. And in long-term performance programs, several companies added capital efficiency measures to their benchmarks. These included return on equity and return on invested capital.

BUT the overall message from the study, Mr. Reda said, is that in executive payland, real change comes exceedingly slowly. And pay for performance remains more mantra than practice.

Mr. Reda said he suspected that the increased reliance on short-term incentive pay that he found was a result of the precipitous declines in many of these companies’ share prices. Indeed, he found that the greater the drop in a company’s stock price, the more likely that its pay program was changed.

There were a variety of changes made to incentive pay that wound up skewing companies’ total packages toward short-term performance. First were the adjustments made to long-term incentive grants, like decreasing the value of awards or dispensing the same number of shares regardless of a decline in their value.

Among short-term incentive programs, some companies moved to discretionary plans, widened payout ranges or lowered performance hurdles.

The end result was a greater reliance over all on short-term incentive pay. And that invites riskier behavior among executives, Mr. Reda said.

With more than 20 years of executive pay analysis under his belt, Mr. Reda can offer a historical perspective on how the mix of compensation has changed over the years. In his view, leverage in compensation — where incentive pay far outweighs salary — has ballooned. And the opportunity for executives to tap into that leverage has vastly increased the risk in pay plans.

“Corporate America needs to deflate their compensation packages because with higher leverage comes higher risk,” Mr. Reda said.

Comparing today’s common practices with those of his early days in the business is revealing, he said.

“When I first got in this business in 1987, a typical C.E.O. would have a short-term incentive opportunity of 60 percent of salary, and for the long-term, a good one would get two times salary,” Mr. Reda said. “If you do the math, the salary was equal to about 30 percent of the total compensation package. Today, it’s about 10 percent. So over the last 20 years or so the leverage of these compensation packages has increased dramatically.”

Compare these figures with those paid out in 2008. The typical short-term incentive pay for a chief executive was 200 percent of salary, while long-term incentives accounted for eight times salary.

“In both cases the incentive pay more than tripled,” Mr. Reda said. “Have people changed that much in 20 years that you need to throw these huge outsized incentive bonuses at them to get them to work?”

Come hell, high water, financial crisis or stock market collapse, the executive pay grab goes on. Clearly, if shareholders thought the economic downturn would result in more sensible pay packages, they’ve got another think coming.



A version of this article appeared in print on August 16, 2009, on page BU1 of the New York edition.



Copyright 2009 The New York Times Company




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