5 Surprises in your CEO's Pay Package
CEO pay packages are getting a lot more transparent, what with recent and pending SEC disclosure rules.
The use of a single-page “tally sheet” approach for compiling all the value an exec stands to gain spells out how big the comp totals can be – often to the surprise of the very directors who approved the pay plans. What are the most common CEO pay “surprises” facing boards?:
· How do reasonable annual stock grants add us to stock tsunami? Health care firm United Health Group has boomed under CEO William McGuire, and the boards rewards him with a hefty annual options package. In April, the Wall Street Journal noted that such incremental option grants, combined with stock appreciation, give McGuire a potential payoff of $1.6 billion. CalPERS and ISS are now threatening withhold-vote actions against United Health directors. Equity grants “become a continuous pattern, and accumulate layer by layer” says Mike Hoes, who pens the Execcomp.com blog. Boards can take control by looking at the CEO’s accumulated equity before adding new grants – and asking how much more incentive is really needed.
· Item-by-item myopia, “Comp committees just focus on this element, or on that element, and then things like SERPs, but don’t consider the total value” notes Paul Dorf. Different elements of the pay package have differing renewal or update timelines, so it’s too easy to view each in isolation, and miss out on totals. A tally sheet approach not only forces the board to add all the values in one place, but helps synchronize their review.
· Look closely at the tax impact of the pay package – and the impact of your tax responses. Gross-ups for top exec tax obligations are now built in at a majority of Fortune 100 corporations, and their use is spreading downward. “Gross-ups on taxes are something no one ever puts a dollar sign to, but they can add millions” observes Dorf. Look to see what triggers any gross-ups granted your CEO, what their worst-case impact could be, and the tax or other implications for the company.
· Perks and benefits are often the goodies that look worst on a tally sheet, but, once again, the comp committee has only itself to blame. Big corps have most of the horror stories here, but even mid-cap firms uncover “hey wait a minute” perk excesses. To regain control, review the actual amounts awarded for things like travel, membership, autos, support services, etc. Are the line items reasonable and needed, or just a nice round number?
· Severance and retirement packages are one of the biggest comp shockers, often due to lack of board scenario planning. If the company is acquired and the CEO retires will his or her parachute compound itself? Do all those options you granted suddenly vest? Would a resulting jump in the stock price inflate the figures? Insist on numbers for differing scenarios, especially a “worst case.”
Final note: Pay packages are one area where the full board shouldn’t be afraid to challenge the results of the comp committee – don’t just assume they considered everything.
