Monday, August 21, 2006

2 Books on Corporate Governance, and Executive Compensation & Benefits

By John L. Colley, Jr., Jacqueline L. Doyle, George W. Logan and Wallace Stettinius

By Peter Wallace and John Zinkin
(John Wiley & Sons)

I know that executive compensation and benefits is outside the radar of most HR managers. I know also that every HR manager is pretty curious how much and what else the top honchos are getting. They only have a clue by the number of and car model they drive, the huge and well-appointed house they live and vacation in, the places they visit, where they spend their vacations among others. These are some telltale signs of how high the bosses are in the organization totem pole, the trust that are visited on them by the powers that be and their contribution and importance to the organization or to the power brokers.

Colley and his coauthors write, “One of the more visible tasks a board of directors must deal with is determining the compensation of the chief executive officer and senior managers (including top HR executives). The compensation must be structured to avoid paying premiums for average or poor performance. The task is not simple; the board wants to attract the right people, find the right alignment of their performance and shareholders’ interest in both the short and long term and use the most tax-efficient methods.

“Important factors considered are:
 The value of the CEO to the company. This is, by far, the most important consideration, yet difficult to quantify.
 The company’s capacity to compensate the CEO, reflecting its size and profitability.
 Absolute performance of the company over some time period based on indicators reflecting universal financial standards.
 Relative performance of the company compared to industry comparable companies.
 Achievement of nonfinancial goal, particularly strategic ones.
 External parity with other comparable companies’ CEO compensation packages and prevailing trends in the marketplace.
 Internal priority. Boards should consider the relationship between the compensation of the CEO and the rest of the management team. Frequently, the CEO is paid twice as much as the next senior officer.

“Boards desire to pay CEOs and management teams for good performance. This concept might be simple, but its implementation is complicated. Different business situations, for example start-ups, growth businesses, tough industry conditions, and turnarounds, create very different compensation challenges. Performance in each instance must be determined with the situation in mind.

“A CEO compensation package generally consists of the following:
 Base salary—a guaranteed, fixed cash amount. In some companies with outstanding performance, the base salary is as low as 10 to 15 percent of total compensation. (No wonder, they pay very small income tax) There are even a few cases where CEOs receive no base salary, only at-risk compensation. On the other hand, in companies with weak performance results, a base salary frequently will account for 50 to 100 percent of the total compensation.
 Short-term incentives—bonuses paid for outstanding performance including achieving corporate strategy and goals and other performance measures such as profits and earning per share, revenue growth, ROI, cash flow and strategic measures such as market share. They can be paid in cash and/or company stock.
 Long-term incentives—most difficult to design properly but are the principal means by which the sought-after alignment between the interests of managers and shareholders is accomplished. This includes stock options, restricted shares, required stock purchases, stock appreciation rights and cash awards. Ironically, these incentives are also the instruments through which most of the flagrant abuses in compensation have taken place.”

After you have stopped drooling, do the math. But there’s more.

“Executives normally receive the standard fringe benefits of paid holidays, vacation, life insurance, and long-term disability and health care coverage, although sometimes at more generous levels than lower-level employees. And there are a whole set of benefits and perks that tend to be reserved for higher level executives. They include supplemental executive retirement plans, voluntary deferred compensation plans, membership in clubs, car allowances, and use of corporate or leased aircraft and many others. Some perks can be justified to a point, but in some cases are carried to excess.”

Don’t fret when you notice that your boss spends more time in the golf course than in the office. Remember the saying “it is lonely at the top;” and consider the demands and stresses of their job.

One last, executives are continue to be paid and enjoy perks long after their termination depending on their contract. Remember HP CEO Carly Fiorina, deposed last winter for failing to deliver enough benefits from the company's acquisition of Compaq Computer Corp., received a whopping with a $42 million package of which $21.4 million was severance pay and is now writing a book about her career.

The spate of pay scandals in the US and many parts of the world highlight how difficult it can be for the Board Compensation Committee to fully function and be effective. Authors Wallace and Zinkin write that other than determining the amount and composition of the CEO’s package (providing they do not suffer from mutual back scratching, leading to inflated packages), the committee can serve a useful purpose in:

 Determining whether other managers are paid in line with the company’s policies as already agreed by the Board.
 Understanding the options for and their effect on Director and managerial compensation.
 Establishing the principles and limitations upon the remuneration of the other most senior executives.
 Operating on behalf of the Board any long-term performance-related pay-plan, as it affects the Executive Directors and any other managers who are affected by it.
 Determining on behalf of the Board matters of policy over which the company has authority relating to the establishment of, or operation of, the company’s pension scheme of which the Executive Directors and senior managers are members, if the company has one.
 Nominating on behalf of the Board any trustees of the pension scheme, if one exists.

Two important questions to ask to determine quality of executive compensation are: “Is executive pay tied to strategic goals? and How well is it gauged to the creation of shareholder value?”


By Robert M. Tomasko

By Charles H. Green

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