from Third Quarter 2009
Corporate Board Member
by Julie Connelly
An uncertain economy is clouding strategic planning, but boards must still grapple with some pretty specific numbers—the ones they’ll have to put together to come up with compensation packages for their CEOs and other top executives. Comp experts have two pieces of advice for those who are looking at the numbers for 2010:
- Don’t allow yourself to be stampeded by popular opinion. It’s important that you resist any temptation to be punitive just because you sense that shareholders are out for blood.
- Don’t believe that your CEO will quit if you cut his package. There aren’t that many places for him to go, and besides, CEOs read the papers and if they have any smarts at all they know that pay cuts are where it’s at.
Overall, you just need to be fair-minded and firm. “What I tell everybody is, take a deep breath and relax and try not to make changes in a crisis environment,” says William E. Mayer, 70, lead director of the Midwestern newspaper chain Lee Enterprises and founder of Park Avenue Equity Partners. “You want to be fair to management. If I don’t have any idea of what’s going to happen in 2010, how can I hold management accountable?” Adds Ann Rhoades, 64, president of PeopleInk, a human-relations consulting company in Albuquerque, New Mexico, and chair of the compensation committee at JetBlue Airways: “We had a great year because our people were working very hard, and then the recession came. And now we’re going
to penalize them?”
Still, in the current environment there is what shareholder activist Tim Smith of Walden Asset Management describes as “a perfect storm—the hot spotlight of public attention, government regulation, and shareholder pressure to focus on executive pay.” In May, Senator Charles Schumer, the New York Democrat and member of the Banking, Housing, and Urban Affairs Committee, introduced his Shareholder Bill of Rights Act of 2009, a piece of legislation, co-sponsored with Senator Maria Cantwell (D-Washington State), that ties together many of the recent strands of shareholder activism and discontent. The bill’s provisions for proxy access and majority voting—not to mention rules more directly related to executive compensation, such as say on pay—would enable share owners to sweep out entire boards that are deemed to be rewarding failure and replace all the directors with stewards more to their liking.
These forces are pressing boards to rethink what and how CEOs are paid. By the end of 2008, median CEO pay at S&P 500 companies had fallen 6.8%, to $8.4 million, according to Equilar, a Redwood Shores, California, outfit that analyzes executive compensation. A 20.6% drop in the median annual bonus caused most of that downdraft. Frederic W. Cook & Co., a New York City compensation consulting firm, reckons that base salary growth will be negligible this year, annual incentive plans will pay out way below target, and long-term incentive values will drop by 10% to 20%. Myrna Hellerman, a Chicago-based compensation expert at New York’s Sibson Consulting, says that the chair of a compensation committee recently told her, “Well, we just went and took away everything. It was easier that way. It’s what the shareholders expected, and our executives were resigned to the impact of our actions. Now we need to figure out what we’ll bring back and what is gone forever.”
Continued...