Executive pay: Be careful what you wish for

One can sense change in the air as sentiments on CEO and executive compensation becomes an even bigger front-and-center issue during proxy season this year.  Global economic uncertainty certainly has not helped perceptions of some high-profile pay packages.  Pay for performance?  “What performance?” many are asking these days, especially pension funds and other groups where average-wage workers predominate.

In the US, the Dodd-Frank Act required boards to provide greater transparency, and by giving shareholders a nonbinding say-on-pay vote, offered boards a more precise touchstone as to what shareholders are thinking.  Prior to this year, smaller companies (with a public float of less than $75 million) were exempt from adhering to separate shareholder advisory votes.  With this gone, smaller companies will now come under scrutiny, adding to the concerns of those directors.  Simple, direct, plain language on how executives and directors are compensated will also increase scrutiny because, after all, disclosure is exposure.

Like the US, the EU is also addressing issues of accountability vs performance bonus payouts.  Just last week, the European Parliament and EU States reached an initial agreement that would restrict bank executive bonuses to a “fixed” salary with flexible pay (a.k.a. bonus) fixed to no more than twice their fixed salary — and only with shareholder approval.  The rationale behind this proposal is to increase the financial ‘cushion’ for institutions and to discourage the high-risk behaviors of the past.  Regional and global economies have had their challenges, and individual household financial pressures have increased over the years.  Watching how companies are paying their leaders, especially in the financial community, has caused unrest among many labor and investment groups.  We’ve seen increasing resistance to the remuneration of our financial and business leaders, giving EU leaders new strength in approving new rulings to restrict banker bonuses at twice their base salary.

As a number of large companies had moved their corporate headquarters to Switzerland to gain better tax advantages, such moves may turn out to have been in vain.   As of March 1, 2013, the Swiss endorsed a new a plan (Minder Initiative) with even greater restrictions on how both executives and directors are compensated. This includes binding shareholders’ says on compensation, bans on bonus awards for executives signing on to or leaving a company, and annual re-elections for all directors.  Violators will face stiff penalties: three years in prison, and  fines of up to the equivalent of six years’ salary.  The proposed plan (also dubbed the “rip off initiative” by the media), would entitle shareholders to block salaries, ban golden parachutes, and require more transparency on loans and pensions granted to both executives and directors alike.  Such regulation would impact on all publicly listed companies based in Switzerland, and would be expected to be implemented by 2014 – 2015.  The UK has also been working to increase transparency for shareholders while putting some restraints on how performance bonuses are doled out.

The above only scratches the surface of the issues on executive compensation. There are positive ways to build compensation plans and incentives for good performance. Ideally, good performance should not need to be encouraged solely by financial incentives. From where we stand, the efforts of different governing bodies in responding to investor and shareholder concerns seems well intended if they succeed in shedding more light on the business behaviors of executives and directors, and encourage good governance. We can always hope that the good folks spearheading these initiatives are not doing this for the pay alone, but are working towards what they are convinced is right.

We’ll have more to say on this over time, so stay tuned.

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