Damned if you do, Damned if you don’t

Anyone who has been involved in public company executive pay knows that the PR and IR aspects matter. The press, like never before, is willing and able (in some cases, excited) to run negative stories about executive pay. These stories can dull or even neutralize positive messages the company wants to tell. E.g., pay issues turn the focus from the company’s hiring a great new manager and the company’s prospects for improved performance to the new manager’s pay package. These stories are also not lost on shareholders, including institutional shareholders. As a result, directors appropriately consider how pay decisions will be disclosed to and received by the press and the public. Keep in mind, though, that the capacity of the press and pay activists to criticize knows no limits.

Case in point: The NYT ran a story in the business section this weekend, which described the latest outrage in Wall Street pay. It wasn’t guaranteed bonuses, it wasn’t big cash payments, it wasn’t the lack of clawbacks or pay for performance links. No, it was stock. At the end of last year, Wall Street firms, for a variety of reasons, paid their employees with a far higher proportion of stock than normal. One would think that this was praise worthy. After all, most best practice guidelines suggest stock-based pay is superior to cash (it has a better pay-for-performance link, a built-in clawback and generally carries better retention provisions). The G-20, which is working on financial reform guidelines to be implemented by its member states (including the U.S.), proposed increased levels of stock pay. The TARP rules that govern the bailed out banks prohibit bonuses to be paid in any form other than stock. The Pay Czar has even required salaries to be paid partly in stock. So what’s the problem? Windfalls. As bank stocks have recovered, the executives who received stock last year have seen big paper gains. This is a problem, suggests the story, because the bank stocks were protected from falling further last year by the Federal government and their recent rise is at least partially attributable to the government as well. As one source put it, “[t]his had nothing to do with people’s performance.” Hence, the windfall characterization.

Regardless of what you think about the macroeconomics embedded in the article’s argument, I think it speaks to a general point that directors should keep in mind. Doing everything right does not insulate you from attack. There is always an angle for the press to follow. The best current example is the unavoidable balance between performance incentives and risk taking--increase pay for performance and you encourage risk taking; reduce incentives to take risks and you reduce pay for performance. Note that this issue is not limited to the financial sector. One gets the sense that, with the possible exception of deep across the board pay cuts, there is no compensation decision that the press cannot find a reasonable basis to attack. The good news is that the courts continue to recognize that reasonable minds can always differ over compensation decisions and, as a result, will generally not interfere. The press is a different matter.

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Comments

Understanding the problem

Posted By : James Harris
I think Mr. Hilfer's mixes up a couple of points which need to be treated separately. First, as my Mother used to say: "Never do anything you would be ashamed to read about on the front page of the NY Times." This advice has served me well over the years in business as well as life. Boards should assume that the nature of being a public company is such that all actions taken by the Board will be subject to public scrutiny to the extent such actions are required to be made public. If a company is regulated i.e. banks, insurnace companies, utilities and the like, one should assume all board actions will potentially be subject to public scrutiny. Here, I think Mr. Hilfers is on solid ground. Do the right thing and let the press write what they will. The second part of his thesis is more problematic. Pay for performance is going to be a hot topic in the business press and the halls of congress for some time to come. Whether pay is awarded in cash or stock, the issue of what was done to justify the amount still must be confronted. The point many people miss is that when millions of Americans cannot find jobs, those that are making millions is a sure cause for frustration. Is the pay deserved? Personally, it seems to me hard to justify paying millions to people who get their raw materials at zero cost and invest at a positive spread thanks to the US taxpayer. The argument that companies need to retain talent is valid. However, paying those people off the charts does not make sense when the taxpayer is ulitmately paying the bill.

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