The Brave New World of Executive Compensation Plans
Enough is enough. That’s the message shareholders have sent to boards of directors — causing a downward shift in executive compensation.
“Slowly but surely the screws are tightening down on boards of directors of public companies to stand up for what’s right for the stockholders,” said Paul Dorf, managing director of Compensation Resources.
Exorbitant salaries are inappropriate, he said. “We’re seeing a definite shift in compensation — given the downward trend from last year and this year.”
Although the Sarbanes-Oxley Act of 2002 is six years old, he said, “we’re seeing the culmination of it now. It’s finally coming to a head.”
Since transparency has been mandated, it’s difficult to prove a portion of compensation is so confidential that it cannot be disclosed. This, of course, causes all aspects of executive compensation to be scrutinized.
“Giving stock away has come to a screeching halt,” Dorf said. “Stock used to be given out in 1,000- or 100,000-share increments — now they set a monetary limit on it, say, the value of $60,000 worth of shares.”
And the Securities and Exchange Commission returns “compensation discussion and analysis” reports to companies — insisting they be rewritten in “plain English,” Dorf said.
Some compensation elements were embarrassing, he said, when they came to light — from divorce settlements, to gross-ups to Wall Street Journal subscriptions.
And often executives retire and are re-hired as consultants for an “exorbitant rate.”
But now, boards of directors are much more wary, especially if a company is doing poorly and the executives are still highly compensated.
Dorf said there are five major aspects of executive compensation — base salary, annual incentive plans (10 years ago the target was 25 percent of base salary, now its 100 percent), long-term incentives for equity, supplemental benefits and prequisites, and an employment or change-of-control agreement, often referred to as a “golden parachute.” “The key is to make sure you motivate executives to accomplish the tasks you want them to do, without shareholders thinking the compensation is out of line with the marketplace,” he said.
Disclosure, transparency and fewer stock options are not the only trends in compensation.
“Even before the slow economy, companies started focusing on issues of morale,” said Toni Fleming, business development manager at Manpower Professional’s local office. “They’re evolving toward performance-based pay for executives. Base salary (has become) only a percentage of fair-market value.”
Instead of high base salaries, executives have the opportunity for significant performance-based bonuses. Healthy companies, Fleming said, assign a metric to their strategic objectives, in order to measure success or a percentage of success of their executives.
Six Sigma training certification is popular with companies, she said, as well as scorecarding or dashboard reporting, to annually measure individual performance and thus overall performance of a company. If specific metrics are reached, then executives receive bonuses above and beyond their base salary.
The two main reasons for the trend in performance-based compensation are better morale at all levels and the protection of the company, Fleming said.
In an inflationary economy, strategic objectives are more difficult to achieve, and if they’re not reached, then the company is not held accountable for paying high salaries to executives who are not performing well.
“Healthy organizations get creative with executive compensation — and if executives reach performance objectives,” Fleming said, “they can earn well over 100 percent of fair market value.”
Enough is enough. That’s the message shareholders have sent to boards of directors — causing a downward shift in executive compensation.
“Slowly but surely the screws are tightening down on boards of directors of public companies to stand up for what’s right for the stockholders,” said Paul Dorf, managing director of Compensation Resources.
Exorbitant salaries are inappropriate, he said. “We’re seeing a definite shift in compensation — given the downward trend from last year and this year.”
Although the Sarbanes-Oxley Act of 2002 is six years old, he said, “we’re seeing the culmination of it now. It’s finally coming to a head.”
Since transparency has been mandated, it’s difficult to prove a portion of compensation is so confidential that it cannot be disclosed. This, of course, causes all aspects of executive compensation to be scrutinized.
“Giving stock away has come to a screeching halt,” Dorf said. “Stock used to be given out in 1,000- or 100,000-share increments — now they set a monetary limit on it, say, the value of $60,000 worth of shares.”
And the Securities and Exchange Commission returns “compensation discussion and analysis” reports to companies — insisting they be rewritten in “plain English,” Dorf said.
Some compensation elements were embarrassing, he said, when they came to light — from divorce settlements, to gross-ups to Wall Street Journal subscriptions.
And often executives retire and are re-hired as consultants for an “exorbitant rate.”
But now, boards of directors are much more wary, especially if a company is doing poorly and the executives are still highly compensated.
Dorf said there are five major aspects of executive compensation — base salary, annual incentive plans (10 years ago the target was 25 percent of base salary, now its 100 percent), long-term incentives for equity, supplemental benefits and prequisites, and an employment or change-of-control agreement, often referred to as a “golden parachute.” “The key is to make sure you motivate executives to accomplish the tasks you want them to do, without shareholders thinking the compensation is out of line with the marketplace,” he said.
Disclosure, transparency and fewer stock options are not the only trends in compensation.
“Even before the slow economy, companies started focusing on issues of morale,” said Toni Fleming, business development manager at Manpower Professional’s local office. “They’re evolving toward performance-based pay for executives. Base salary (has become) only a percentage of fair-market value.”
Instead of high base salaries, executives have the opportunity for significant performance-based bonuses. Healthy companies, Fleming said, assign a metric to their strategic objectives, in order to measure success or a percentage of success of their executives.
Six Sigma training certification is popular with companies, she said, as well as scorecarding or dashboard reporting, to annually measure individual performance and thus overall performance of a company. If specific metrics are reached, then executives receive bonuses above and beyond their base salary.
The two main reasons for the trend in performance-based compensation are better morale at all levels and the protection of the company, Fleming said.
In an inflationary economy, strategic objectives are more difficult to achieve, and if they’re not reached, then the company is not held accountable for paying high salaries to executives who are not performing well.
“Healthy organizations get creative with executive compensation — and if executives reach performance objectives,” Fleming said, “they can earn well over 100 percent of fair market value.”
