Let's All Help Control Runaway CEO Pay. Well, Maybe Not the Shareholders
from November/December 2007
Does your company have a "pay for performance" compensation contract with the CEO?
Many companies do. But it's not a panacea. And forget about shareholder input.
Yes, we have one, and I believe it’s working for us because it’s a balanced-scorecard approach. No single factor means success. We rely on a whole range of factors, so the compensation is not all focused on just one number.
Eric James Burton, 60
Dean of the College of Business,
Middle Tennessee State University, Murfreesboro, Tennessee
Piedmont Natural Gas
Yes. We just instituted it by shareholder vote. We engaged an outside consultant and put a pay-for-performance system in place for all of senior management. We’re optimistic that it is going to motivate the executive team and result in increased performance. It also responds to the new cry from shareholders.
Joseph F. Coradino, 56
President, PREIT Services LLC, Philadelphia
AC Moore Arts & Crafts Inc.
Yes, we do, and I think it’s worked very well. Compensation for the CEO and the senior executive group that reports to him is based on achievement of both financial goals and subjective goals, such as strategic planning for expansion. We measure the performance of the CEO and the senior executives against the internal goals that are set and against a peer group of six or seven other companies. If the CEO and key executives blow the top off the internal goals but the rest of our peer group does even better, they’re not going to get their full incentive, which I think is a good balance. On the other hand, if they don’t meet all their internal goals but beat their peers, they can make more money than they would have just based on the internal goals.
Herbert Wender, 70
Former Chairman and CEO, Radian Guaranty Inc., Philadelphia
Radian Group
We have pay-for-performance systems, not contracts. They apply to a number of people in senior management. On balance it’s been pretty useful, but I’d still rank compensation as one of the most challenging issues facing our boards; the need to find incentive arrangements that are both equitable and truly “incentivized” is challenging. We typically use several measures, including shareholder return, annual goals, and individual objectives.
Robert C. Larson, 73
Chairman, Lazard Real Estate Partners LLC, New York City
Intercontinental Hotels Group PLC, UDR Inc.
Measuring performance can be tricky, because performance objectives must reflect what the capabilities of the entire organization are and must not be tailored to specific parts of the organization. If the purchasing department’s performance is based on lowest-cost supplies, for example, production quality may suffer.
Harold S. Haller, 69
Director of the Statistical Consulting Center, Case Western Reserve University, Cleveland
U-Store-It Trust
Do you think shareholders should have a say in how much a CEO is paid? In general, how much shareholder power is too much?
You get a lot of proxy statements with shareholder proposals. They have a right to do it, but it’s like the tyranny of the minority, because a person with only a couple of hundred shares out of millions of shares can propose a shareholder proposal, as long as he follows procedure. I think we have enough procedures in place to protect the small guy, but the big guy always gets the ear of management just based on the number of shares he owns. So I guess it’s a good thing that the small guy has a right to voice his opinion. It gives him power.
Kelly L. Chan, 60
Vice President, Phoenix Bakery Inc.,
Los Angeles
Cathay General Bancorp
I don’t believe shareholders should participate in management of the company. They elect the board, and strategic direction is provided through the board—that’s it. And no, I don’t think they should say how much CEOs are paid.
Eric S. Rangen, 50
Senior Vice President and Chief Accounting Officer, UnitedHealth Group, Minnetonka, Minnesota
FlexSteel Industries
I don’t think the average shareholder can construct a compensation plan. You have to have a board you trust. If you don’t trust it, replace it. Boards of directors are elected shareholder representatives. You can legislate through proxy.
Daniel J. Altobello, 66
Former Chairman and CEO, Caterair International, Bethesda, Maryland
DiamondRock Hospitality Co., Friedman Billings Ramsey Group, JER Investors Trust Inc., Mesa Air Group, World Air Holdings Inc.
I do not fear shareholder involvement and have no problem with giving shareholders a mechanism to express an advisory opinion on executive compensation. I don’t support letting shareholders determine what the pay should be, as this would be unwieldy and dysfunctional. However, advisory-opinion votes provide good feedback to boards and also force boards and management to better explain and justify levels of compensation.
James R. Jones, 68
Co-chairman and CEO, Manatt Jones Global Strategies, Washington, D.C.
Anheuser-Busch, Kansas City Southern, Keyspan Corp.
