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Financial Times, September 20, 2009 article


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Business coalition urges pay overhaul

By Francesco Guerrera in New York

Published: September 20 2009 22:40 | Last updated: September 20 2009 22:40


A coalition of US companies, investors and directors will on Monday propose a radical overhaul of executive pay, calling for the elimination of practices including severance payments, tax refunds and the personal use of corporate jets.

The group, formed by the Conference Board, a business organisation, will criticise corporate America for not reforming its compensation structures before the crisis, blaming that failure for causing a “loss of trust” in US companies.

The report by the coalition, which is backed by companies including technology groups Cisco, AT&T and Hewlett-Packard, and large investors such as the California State Teachers’ Retirement System, underlines the corporate sector’s desire to quell public anger over excessive compensation and stave off government action on the issue.

“It is a lot better for corporations to get compensation right . . . than to have a governmental solution, because that inevitably tends toward the one-size-fits-all,” said Robert Denham, a close adviser to Warren Buffett, who co-chaired the Conference Board group.

The economic crisis has widened the gap between executives’ pay and the salaries of average Americans, prompting a wave of resentment towards business leaders. The US Federal Reserve, other regulators and politicians are threatening to crack down on bankers’ pay and many companies and investors fear similarly strict rules could be imposed on the rest of the US corporate world.

The group’s report says companies should avoid promising executives large severance payouts when the company is sold and generous retirement plans that are not available to other employees.

The coalition also takes aim at companies that refund executives’ income and excise taxes and pay for their personal use of aircraft, club memberships and other perks.

The coalition does say that companies can adopt some of these practices in special circumstances – a clause that could spark criticism the proposals do not go far enough. However, the report warns that companies would have to justify such decisions to shareholders.

Rajiv Gupta, the former chief executive of the chemical group Rohm and Haas who co-chaired the Conference Board panel, said the measures were crucial to restoring public trust in US companies.

“The trust has been lost in the last few years and does need to be rebuilt, and it is up to management and boards to do so. Regulation alone cannot do that,” he told the Financial Times.

The report calls for companies to introduce provisions to “claw back” pay from executives who are found guilty of misconduct.

It also urges boards to disclose fees paid to compensation consultants - a thorny issue that prompted Hewitt Associates, a large pay consultant that worked on the report, to issue a dissenting opinion.

Jim Reda, the founder of James F Reda & Associates, another compensation consultant, said the proposals would help boards to shape executive pay. “Normally, if a board gets between a CEO and his money, it is not going to be very popular, “ he said. “The goal of these principles is making executive compensation fair to both executives and shareholders.”

The coalition was also backed by international business figures including Sir David Walker, head of the UK government’s corporate governance review and Sir Mark Moody-Stuart, the chairman of the mining group Anglo-American.

Additional reporting by Michael MacKenzie in New York


© Copyright The Financial Times Ltd 2009.




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