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Is Aligning Executive Pay with Stock Performance A Good Thing?

According to a recent article in the Wall Street Journal, “CEO pay during 2011 was more firmly correlated to how well companies fared in the stock market, a change from 2010, when pay and performance were not directly related.”

New York Stock Exchange

The New York Stock Exchange, the world’s largest stock exchange by market capitalization (Photo credit: wikipedia.com)

 
Indeed, the 2010 Dodd-Frank financial-reform law, which gave shareholders an advisory vote on executive-pay plans, caused many companies to alter how, and how much, they pay CEOs.  One would think this is good news to investors, who have long clamored for the interests of senior management to be aligned with shareholders.
 
However, Lynn A. Stout, a Cornell Law School professor and author of “The Shareholder Value Myth,” believes this has inadvertently empowered hedge funds that push for short term solutions. She notes that the average holding period of stock was eight years in 1960; today, it is four months.  Ms. Stout argues that the directive to “Maximize Shareholder Value” has led to an epidemic of accounting fraud, short term thinking by management and myopic trading strategies by investors.
 
Because of the pressure exerted by hedge funds to push stock prices higher, which often comes at the expense of the organization’s long term value, Ms. Stout advocates limiting the role of investors so that executives and boards of directors are freed up to think about customers and employees, allowing them to invest in the company’s future and act socially responsible.
 
Ms. Stout and corporate governance advocates appear to have diametrically opposed beliefs on how corporations are best managed.  Perhaps a blending of the two views is appropriate: empower shareholders to safeguard their investments by actively preventing manager conflicts of interest and self-dealing, and lock investors into their investments so they do not push for short-term strategies.

 

PondelWilkinson, investor@pondel.com
 
 

Is Executive Compensation a New Marketing Ploy by Law Firms?

While the days of being “Lerached” are thankfully long gone, a new potentially litigious trend in the public company world seems to be emerging.

CEO Pay

 
This time the subject is executive compensation.  And unlike
those days prior to the infamous class-action lawyer William Lerach getting “Lerached”
himself, this time more than one law firm may be joining the fray.
 
I’m not one for being an alarmist, so don’t start worrying yet.  But one never knows, and perhaps PW Insight will be breaking this story first.  Just be aware that after two years of Say-on-Pay being part of the proxy lexicon, it seems that suddenly a number of law firms are launching “investigations” into potential breaches of fiduciary duties by boards of directors, seeking executive compensation approval.
 
Funny thing is that while the law firms are writing directly to these companies, they also are issuing press releases over the national wire services.  So far that we can tell, no company has publicly responded to the allegations.  And they shouldn’t.
 
All of the press releases we have reviewed thus far appear to use the same copycat language. They also have embedded links for interested shareholders to contact these law firms with words like “protect your investments, free of charge,” not to mention “Attorney Advertising” posted on the bottom of each release. Kind of a sick way of soliciting business, don’t you think?
 
While the 2013 proxy season is still far away, and perhaps nothing will come of this, public companies nevertheless must pay attention.
 
According to a recently published paper by law firm Paul Hastings titled, “Staying in Front of Shareholder Litigation Challenges to Executive Compensation,” nearly 80 companies failed to receive majority support on executive compensation since the Say-on-Pay rule was enacted.  The paper concluded that executive comp issues are “poised to escalate” and advised that companies should consider strengthening reliance upon the advice of independent, outside consultants by adapting “new corporate best practices” and engaging separate, independent compensation consultants for both the compensation committee and the board.
 
Everyone’s trying to be innovative in making a buck these days. Hopefully, however, we will not see the return of Lerach-style tactics as part of the marketing process.

 

Roger Pondel, rpondel@pondel.com
 
 

What They’re Still Sayin’ about Payin’

Say on Pay

Photo credit: Flickr, Tind

With proxy season nearly upon us, a couple of thoughts may be in order about Say on Pay, one year after
we first blogged about these new guidelines going into effect.
 
On the positive side, last year nearly all companies had their executive pay plans approved by at least a majority of their shareholders, according to a recent research report from IR Insight in a survey of 181 companies.  Moreover, the vast majority of the companies received a “yes” vote from 70 percent or more of their shareholders on their executive pay plans.
 
With only two companies surveyed receiving a majority of “no” votes, Say on Pay is nevertheless not lessening in importance.
 
“Egregious pay packages are by and large a thing of the past,” according to Robin Ferracone, a consultant with Farient Advisors, an independent executive compensation firm.  Ferracone believes that investors were “forgiving” last year.  She said institutional investors are set to grade companies’ pay plans “a lot harder” in 2012, although if companies’ performances and the markets improve, investors may not question executive pay much at all.
 
Narrowly approved pay plans may not be out of the woods.  Modest changes to the investor base could put these companies in jeopardy of receiving enough “no” votes to reject the pay plan.  Executive compensation experts advise corporate secretaries and investor relations officers to contact top holders at these companies to learn about investor concerns, and either explain the purpose of the questionable provisions, or modify the plan.
 
Going forward, the expectation is investors will more closely scrutinize how executive pay is
determined.  They want to see companies disclose how they have appropriately aligned performance with pay.  Ferracone believes this means more use of objective criteria, benchmarking and third-party diagnostic tools.
 
Finally, the SEC has delayed until the second half of 2012 the final rules on a number of pay disclosures under the Dodd-Frank Act.  Ira Kay, managing director at Pay Governance, a firm that provides independent executive compensation advice to boards, says the “pay versus performance” disclosure rules are difficult to craft, and the SEC may get ideas from companies tackling the issue on their own.  We’ll soon see.

 

PondelWilkinson, investor@pondel.com