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| Best Practices: On the Board: |
Checking Excess
Michelle Leder
09/01/2005
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In the past, it was common for a corporate board’s compensation committee to
be stacked with close friends and even relatives of the
management—people who
typically met once a year and were highly
unlikely to challenge how much the
company paid its executives, says
Robert Kamerschen, who chairs the compensation
committees for Radio
Shack and R.H. Donnelly and sits on the board of directors
at three
other companies.
 Today, regulators’ scrutiny and investors’
indignation over excessive compensation are forcing corporate boards to
mend
their ways. Labor unions, public pension funds, hedge funds and
individual
investors are riding a rising tide of outrage against excess
executive
compensation and perquisites, one that threatens to wash
unprepared board
members into ignominy.
Individual managers on
the receiving end are also at
risk. This past April, Tyson Foods agreed
to pay a $1.5 million fine for failing
to disclose numerous perks
(including Oriental rugs and a Costa Rican villa)
doled out to former
chairman and CEO Donald Tyson. For his role in the fiasco,
Tyson paid a
$700,000 fine.
A survey by compensation consulting firm Pearl
Meyer & Partners found that CEO compensation at large U.S.
companies
increased 13 percent in 2004, to an average of $10 million.
The survey
considered total compensation, which typically includes base
salary, various
bonuses and the value of stock options and restricted
stock.
“We’ve gotten
ourselves into this position of what most
observers would say is the overpaying
of CEOs and other top
executives,” says veteran investor advocate John
Biggs, who sits
on the boards of Boeing and JP Morgan Chase and is the
former chairman
of pension fund TIAA-CREF.
The situation, Biggs says, dates
back
to the 1980s when stock options became a popular mode of compensation. “It
was a windfall gain to all the executives in the country.” Indeed, a
survey by
the AFL-CIO found that the average CEO now makes 300 times
more than the average
employee, up from 42 times more in the early
1980s.
Boards of large
companies, primarily those in the Fortune
500, are becoming more sensitive to
the issue of excessive pay. Dan
Ryterband, managing director for Frederic W.
Cook & Co., a New
York–based compensation consulting firm, says many of his
clients now
ask him how to avoid winding up in BusinessWeek as a poster-child
for
excessive compensation and out-of-control perks. Ryterband’s advice—for
those companies paying his hourly fee of $500 to $1,000—is to craft
compensation
plans that consider performance objectives such as profits
and stock
price.
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