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CEO Pay Looking Up

New study by D CEO magazine and Paradox Compensation reports on executive compensation trends among middle-market public companies in Dallas-Fort Worth.
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Executive Compensation: Immediate Concerns to Companies

This time of the year, public companies are working on two key activities involving executive compensation: Preparing the 2009 proxy statement, which includes summarizing 2009 compensation for key executives; and setting target compensation opportunities and performance metrics for 2010.

As you know, 2009 was not a good year in the press for executive compensation. For example, in October, Business Week issued a special report and included an article by Paul Hodgson of The Corporate Library in which he strongly criticized the relatively small decline in CEO pay as reported in 2008 proxies (-2%) in comparison to the 2008 fall-off in the S&P 500 (-37%). Public outrage about executive compensation is at an all-time high, Congress is working on regulation that will extend beyond TARP companies, and the SEC recently released new rules on compensation reporting in proxies.

However, in an environment of economic re-building, companies need to make it a priority to motivate key executives facing personal compensation concerns, such as dramatically underwater options, zero salary increases in the past year, and reduced bonuses.

Here are two general guidelines:

First. tell your story clearly!
With shareholder concerns and "say on pay" still on the horizon, what should companies be doing in regard to reporting 2009 compensation? Be specific about alignment between executive compensation and shareholder value. If bonuses were paid based on 2009 performance, describe how amounts were linked to achievement of performance. For example, many companies will pay half the target bonus value if 80 percent of financial goals are met, and no bonus if less than 80 percent achievement occurs. If 2009 payouts have not yet been determined, avoid payments based on discretion if targets were not met. In this case, it would be better to give a performance-based restricted stock grant (or similar equity instrument) in order to link the executive’s compensation opportunities with future results. A more comprehensive assessment of risks inherent in compensation programs may be required, especially if one or more parts of the company have unique compensation arrangements. Small companies (less than $5 million in assets) will need to review new SEC rules carefully because some apply while some do not.

Second, take extra care with 2010 compensation program decisions.
Many compensation decisions are tied to market practice, but data can easily be manipulated through peer company selection and how jobs are matched. Hire an independent compensation consultant to help interpret market trends and clearly explain to this expert that finding bigger numbers is not the end goal. With downsizing and bankruptcies, don’t be surprised if market data show a reduction in pay. Many companies are struggling with how to set performance targets in an uncertain environment. Work with your financial executive to set targets, and provide a full explanation to the board that indicates payouts and risks under various scenarios. All senior executives should have a healthy proportion of compensation opportunities tied to overall company performance. This reduces the risk of maximizing value in a part of the business to the detriment of the whole. Avoid option replacement, the practice of "making up" underwater options. (This usually has poor shareholder optics and underwater options can be dealt with through other means, such as re-visiting 2010 and future grant practices.)

These suggestions are strictly a starting point. The key message is more transparent linkage to short- and long-term business results throughout the compensation planning and reporting process. Bottom line: if necessary, you should be able to explain your practices to a newspaper reporter or shareholder advocacy group.

For further thoughts on the impact of new SEC rules, visit Core24inc.com. Posted by Marsha Cameron, Paradox Compensation Advisors, 1/21/2010