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| Best Practices: On the Board: |
Checking Excess
Michelle Leder
09/01/2005
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“There
are ways to set compensation well without directors spending
their
entire lives doing it,” Ryterband says, adding that the typical director
on a compensation committee should set aside 150 hours a year for each
board
that he sits on. “In the past, a lot of compensation committee
members viewed
their responsibilities as a part-time job. But now they
are seeing it as a real
job with the potential for real
embarrassment.”
TOP VIEW
The days when boards automatically
approved executive compensation packages are
well past.
Abusive and
overly generous policies have sparked bad press, investor
resentment
and prosecutorial interest. A growing number of
boards are exposing
compensation to greater scrutiny. But the
shift has proven difficult
for many,
particularly smaller
companies. | Flying Blind
But addressing this
dilemma is hardly as simple as ordering a
20 percent pay cut, even for
the compensation committee members who,
theoretically at least, control
the purse strings. While a handful of struggling
companies, including
Continental Airlines, have cut top executive pay, most
compensation
consultants say that trend is unlikely to catch on at
others.
Among the new methods compensation committees are
utilizing are
restricted stock grants, which typically set dates—and
sometimes even
performance restrictions—on when shares can be sold.
Unlike stock options, which
typically allow executives to buy the stock
at a deep discount, restricted stock
is an outright grant. Another
reason for their growing popularity is that
beginning next year,
federal regulations will require companies to begin
expensing stock
options or accounting for them more comprehensively than most
have done
in the past. “There’s a real de-emphasis on entitlement programs and
stock-based compensation,” Ryterband says, but both he and Biggs warn
that
restricted shares can be problematic, particularly if they are not
tied to
performance guidelines, such as an increase in profits or
cost-cutting
moves.
While experts such as Ryterband,
Biggs and Kamerschen see growing
awareness among Fortune 1000 companies
of how their compensation arrangements
might draw unwanted attention,
the vast majority of the more than 13,000
publicly traded companies are
relatively ignorant of the dangers. More
worrisome, perhaps, is that
even when these smaller public firms go astray, they
are far less
likely to face blistering shareholder meetings or broadsides from
the
business press, two of the most glaring motivators for adhering to
performance-based compensation plans.
When Kamerschen walks into
the board
rooms of Radio Shack and R.H. Donnelly, he bases his
decisions on CEO evaluation
processes that are much more formalized
than in the past. Compensation committee
members use a template of
specific goals for income and profit increases, then
grade the CEO on
how well he achieves each goal. Poor grades can result in lower
compensation, with much of this information disclosed in the annual
proxy
statements mailed to investors. Directors often get into heated
discussions.
“Committees get comfort out of consensus. But if there is
total consensus, you
never get a true understanding that what you’re
doing is right,” Kamerschen
says. “If a director has something on his
or her mind and doesn’t speak up, it’s
a real problem.”
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