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June 17, 2007
Hear Ye, Hear Ye: Corralling Executive Pay
EXAMINING insider stock transactions has always
helped investors gauge managers’ confidence in their own company’s
prospects. Shareholders who hear an executive boast of a grand strategic
plan while dumping piles of his own stock have a right to be dubious.
Actions speak louder than words, after all.
Now, a group of investors is arguing that an
analysis of a company’s pay practices can provide similar insights into
managerial confidence, and they have established a shareholder forum to
demonstrate how such an assessment might be made. The forum, set up last
week, will use
Verizon Communications as a test case.
While investors often become upset about executive
pay, they rarely use compensation practices to guide buy or sell decisions
on stocks. And yet, because pay is supposed to be closely linked to a
company’s future performance, analyzing its structure should, in theory,
reveal a good bit about executives’ confidence in their business plans.
“No analyst or investor is going to understand the
market conditions associated with achieving objectives as well as a
manager does,” said Gary Lutin, an investment banker at Lutin & Company,
who is chairman of the shareholder forum. “So the key is to find out
whether the manager is betting his pay on reaching those objectives.”
For example, if a chief executive stands to
receive 80 percent of a bonus by achieving just 20 percent of the
objectives, investors may think twice about betting their retirements on
Trouble is, investors usually get only sketchy
information about the performance goals that managers must meet to earn
their incentive pay. Even after parsing this year’s more detailed pay
disclosures, it is hard to tell when compensation practices indicate that
corporations will pay managers for succeeding rather than for merely
showing up. That’s because performance goals are maddeningly vague;
benchmarks such as growth in earnings per share, revenue or cash flow are
common, but the rate of growth required to receive a bonus is not often
Companies are loath to share too many details
about performance pegs because, they say, that might give away corporate
secrets to competitors.
But it doesn’t have to be this way. So argues Mr.
Lutin and the Association of BellTel Retirees Inc., a group of 110,000
former Verizon employees that is another organizer of the shareholder
forum. The Belltel Retirees own shares in Verizon and have an interest in
its long-term success. The group has prodded Verizon to link executive pay
more closely to financial performance and has submitted a variety of other
The forum wants to give investors the tools they
need — without compromising proprietary corporate information — to
understand the parameters executives have established for measuring
The group chose Verizon because its stock has
traded at a discount to its competitors’ — a discount based at least in
part on perceived risks about its huge and costly bet on FiOS, an
all-fiber network it is building to wire consumers’ homes. FiOS delivers
digital television and high-speed Internet services, and Verizon’s chief
executive, Ivan G. Seidenberg, hopes to persuade consumers to adopt FiOS
and ditch their cable companies.
Another reason the group picked Verizon is that
investors have criticized Mr. Seidenberg for the hefty compensation he
secured in years when his company’s stockholders fared poorly. Verizon is
also one of a handful of companies where a majority of shareholders
supported a say-on-pay proposal that would give its investors a voice on
pay practices each year. That proposal passed at Verizon with 50.1 percent
of the vote.
But it is the company’s big bet on FiOS that makes
it a perfect test case for the forum. Mr. Seidenberg has asked
shareholders to bet on the FiOS strategy; the question is, is his pay
package tightly tethered to FiOS’s success as well, or is Mr. Seidenberg
avoiding that particular gamble?
“They’re making huge capital outlays and it’s not
something that can be completed overnight,” said C. William Jones, the
president of the BellTel Retirees and a former strategic development and
planning executive at Verizon. “They’ve got a good strategy and they are
working toward it. But I believe that if we had a forum where there was a
freer exchange of information, it would make the investment community less
The forum will be free of charge and open to all
Verizon shareholders, both institutional and individual. Other investment
professionals can also participate, such as money managers and members of
the New York Society of Security Analysts. (Information about the forum is
on the Web at
Robert A. Varettoni, a Verizon spokesman, said
that the company was evaluating the invitation to communicate with
shareholders in the forum, but that it would wait until the Securities and
Exchange Commission has issued guidance about online exchanges before it
“The S.E.C. has explored many aspects of
shareholder communications, including online discussions,” Mr. Varettoni
said. “The S.E.C. has indicated that it will issue proposed rules on this
topic in the coming months, addressing some of the questions raised,
including selective disclosure of nonpublic information and a company’s
liability for content posted in a forum by third parties.”
But Mr. Lutin said that forum programs he had run
in the past had no unusual online aspects and had simply followed
old-fashioned meeting processes for which S.E.C. rules are well
For his part, Mr. Lutin hopes that the Verizon
forum will show investors how to get specifics on pay to help them to make
informed investment decisions. This test could lead to examinations of
other companies’ pay practices.
“If you start seeing the people who buy and sell
stocks asking these questions, no executive will be caught touting some
business plan and then be caught having to say that his bonus is not based
on it,” Mr. Lutin said.
Perhaps directors will also pay more attention to
ensuring that compensation is more closely tied to strategies executives
are promoting. Every day, managers ask their boards — as well as their
shareholders — to have confidence in their long-term business strategies.
But if managers are not betting a large portion of their pay on the
success of those strategies, why should investors or directors go along?