Posts belonging to Category executive compensation

Momentum continues to build in the European Union to give shareholders greater powers of oversight on executive-pay practices.

A release from New York-based Mercer announcing its latest perspective on the topic details some of what’s going on “across the pond”: In the United Kingdom, binding say-on-pay votes will be implemented starting in October; in Switzerland, a March referendum to introduce binding say-on-pay votes was just supported; and, with similar measures being discussed in France, German and Spain, the EU is planning to introduce legislation later this year to require all 27 EU countries to implement mandatory, binding say-on-pay votes. (The link takes you to Mercer’s “Perspectives” landing page; the April special issue, Executive Pay Regulation: The Potential Impacts of Proposed European Reforms, is at the top right.)

As the perspective notes, there’s a certain European “hardening of attitudes” going on:

The political impetus to regulate executive pay has accelerated in Europe. Recent regulatory developments that would give shareholders greater oversight of executive pay and cap bonuses in the financial services sector, reflect a hardening of attitudes among European politicians and the public. In an era of low or nonexistent economic growth, consumer price inflation, and falling average real wages, executive remuneration will continue to be a sensitive issue.

This is particularly true in the banking sector, where the continued payment of bonuses, in the face of taxpayer-funded bailouts and revelations such as the Libor fixing scandal in London, has sparked outrage. But with other countries and regions taking a less prescriptive approach, an unlevel playing field is emerging and may result in executives leaving the EU for less regulated markets.

These proposed regulations, which have, for the most part, been supported by shareholders, will nevertheless require them to be more active in their oversight of executive pay. One consequence of this greater investor workload may be to extend the influence of proxy advisory firms.

The piece goes on to note exactly what’s going on globally, including in the United States, where say-on-pay votes are still non-binding but have, nonetheless, “influenced executive pay practices [by eliminating] many problematic practices and [increasing] shareholder-engagement efforts.”

Indeed, in this blog post written by Senior Editor Andrew R. McIlvaine about a session at the recent WorldatWork Total Rewards 2013 conference, he goes into much more detail about some of the ways say-on-pay is impacting — pro and con — the business community.

One of the most notable quotes in his post comes from John England, managing partner of Philadelphia-based Pay Governance, who fears what the European binding-vote wave landing on U.S. shores might mean. (He is clearly not a fan.)

“When CEO pay escalates sharply against average worker pay, it will inflame things,” England says in the post. “I do believe we are just one or two scandals away from the prospect of a binding say-on-pay law … in this country.”

What are employers to do with this information? I ran that by two Mercer thought leaders. Here’s what they both had to say. First from Vicki Elliott, Mercer’s senior partner and global financial-services consulting leader:

Companies should not let tighter regulation in financial services and other sectors define their objectives for compensation and talent-management effectiveness. Be creative and don’t succumb to a one-size-fits-all. Companies will [also] need to rethink their employee value propositions and the power of non-pay methods — it can no longer be all about pay.

And from Gregg Passin, senior partner and executive rewards leader for North America:

As say-on-pay develops, it is very important to simplify and clearly communicate remuneration strategies and programs to shareholders. It is [also] likely that there will be more focus on building talent from within so processes for managing talent pipelines such as succession planning and career development will be critical.

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It’s a global trend that’s sweeping financial capitals all over the world, and it’s going to keep things quite interesting for HR leaders at public companies.

The “it” in question is say-on-pay, or the practice of letting shareholders vote on the renumeration awarded to executives of publicly traded companies in order to discourage or prevent corporate boards from granting excessive pay packages not linked to actual performance. Here in the U.S., a provision included as part of the Dodd-Frank Act of 2010 gives shareholders a non-binding vote on executive pay. Earlier this week at WorldatWork’s Total Rewards 2013 conference in Philadelphia, three executive-comp experts discussed its potential long-term effects.

“It’s going to lead to greater homogenization of pay,” said John England, managing partner of Pay Governance LLC. Say-on-pay “is causing some boards of directors to operate in a mode of ‘Let’s keep our heads down and stay under the radar screen.’ I’m not so sure that’s best for shareholders or companies in general.”

Companies in highly competitive sectors — such as technology and bioscience, for example — should be able to adapt their pay practices as they see fit in order to lure and retain the sought-after executive talent in those fields, he said.

Nevertheless, say-on-pay has also “been helpful in providing focus and strength to boards to clean up compensation practices that were not working,” said Steve Harris, managing director of Frederic W. Cook & Co. “I think boards are now at a point where they understand the implications of compensation decisions that may risk a backlash.”

Say-on-pay has also affected executive bonuses, said England. “I do believe it’s much more common now, thanks to say-on-pay, for bonuses to to be much more linked to performance,” he said. “In the past, executives received bonuses even when targets were missed, with the explanation that ‘Yeah, but the targets would’ve been hit had the market conditions not changed.’ Now, there’s no more ‘Yeah, but’ — when targets are missed, no bonus.”

The rise of say-on-pay has made communicating with shareholders a bigger imperative than ever, said England. “If you can influence your shareholders and tell them a story before they read the Institutional Shareholders Services report, that’s good. And it should not just be the HR and legal folks talking to shareholders — if you can get the board members talking with shareholders, that’s great.”

It can be very effective when a CEO meets with shareholders to “tell the company’s story,” said Harris. “Shareholder engagement needs to be done on an ongoing basis, not just when there’s a crisis,” he added. “Develop the relationship now and maintain it regularly; otherwise, you may not have these shareholders to turn to when you do have a crisis.”

Shareholders “love context,” said Blair Jones, managing partner of Semler Brossy Consulting Group. “They eat it right up. Develop a dialogue with your shareholders.”

The specter of a say-on-pay law that is actually binding — a number of European countries have taken, or are considering taking, this step — should keep boards and HR on their toes, said Harris. “I’m concerned about what is happening in Europe coming across the pond and infecting the U.S.,” he said. “Right now, I think Washington’s attention has shifted to jobs and growth, not executive pay. But we have to be careful. When CEO pay escalates sharply against average worker pay, it will inflame things.”

“I do believe we are just one or two scandals away from the prospect of a binding say-on-pay law … in this country,” said England.

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I witnessed two distinct ties to my City of Philadelphia just now while covering WorldatWork’s Total Rewards 2013 conference. Both occurred back-to-back, but it was the latter that convinced me it just might be worth sharing.

On leaving a session titled Tales from the Trenches: Managing Executive Performance Share Programs, I couldn’t help but notice the conference snack of choice — in fact, the sole snack for this session break — was an assortment of Tastycakes: krimpets, cupcakes, juniors, pies, etc.

For those conference-goers who appeared caught somewhere between bemused, confused and impressed, I proudly shared that the Tasty Baking Co., makers of the treats before them, hailed from this fine city (birthplace of both my sons, though I chose not to share that part with them). Anyway, nice touch, WorldatWork!!

Moments before, at the session mentioned above, moderator James C. Heim, managing director at Pearl Meyer & Partners, was serving as the go-between for Walter Cox, senior manager of executive compensation at Raytheon, and Carley Finkenthal, executive compensation leader at United Technologies Corp. The stories from both panelists on the decisions made and the lessons learned surrounding their performance-share and compensation programs was compelling and seeds for a story down the road — perhaps on our website, perhaps in HRE.

But it was Heim’s wrap-up witticisms that caught my ear and reminded me (and everyone else) what city we happened to be in. Using actual quotes from Philadelphia’s greatest claim to fame, Benjamin Franklin, Heim interpreted each one as if Franklin were alive and well and … well, moderating the panel himself. Here’s “Benjamin Franklin’s Roadmap for Success” as delivered by Heim and designed to make you a better executive-comp guru:

“When in doubt, don’t.” Do not implement a performance-share program if it is not administratively possible to do so.

“Be slow in choosing a friend, slower in changing.” Beware how far down you want to drive performance and be very careful in considering eligibility.

“Well done is better than well said.” Select performance metrics that are demonstrably correlated with long-term shareholder value creation. It’s better to have measures that drive value than measures that are easily explained.

“We must, indeed, all hang together or, most assuredly, we shall all hang separately.” Compare your proposal to industry prevalence data — is it different because it’s better or is it just different? And if it’s better, then don’t be afraid to follow your own lead.

“Being ignorant is not so much a shame as being unwilling to learn.” Model your proposed executive-compensation plan under a variety of scenarios — both proactive and reactive — to better understand the impact of your proposal across a variety of performance scenarios.

“How few there are who have courage enough to own their faults, or resolution enough to mend.” Revisit your plan periodically, and fix it when it needs fixing.

Remember, Heim said, “changing plans sends a powerful message” to the company and to the outside world that you’re on to something bigger and better, and carefully laying out new plans.

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It’s been well reported that CEO Ron Johnson is out at J.C. Penney Co., following the company’s dismal performance since he took over. (Since joining JCP, shares have plummeted more than 50 percent.)

So what does this mean for JCP’s chief talent officer, Dan Walker, who previously served as CTO at Apple during Johnson’s tenure there? Today’s Wall Street Journal is reporting sources as saying that “other Apple veterans at the top of Penney are likely to follow Mr. Johnson out the door.”

Among those “most vulnerable,” the article says, are COO Mike Kramer and Walker. (The Journal reports Kramer and Walker didn’t respond to requests for comment.)

The article also reports:

Many longtime Penney’s employees said they felt that new hires [from Apple] judged them or felt that they weren’t smart. Apple references were constant.”

In Johnson’s case, he’s not going to be leaving with the typical seven-figure package.  “Johnson opted not to enter into a termination pay agreement, according to the company’s latest proxy, which says the former CEO would be entitled only to any unpaid salary and $143,924 from a savings plan and the value of unused vacation,” according to the Journal.

Walker, however, would apparently do a bit better. Forbes reports that the CTO would see about $4 million were he to lose his job without cause.

Some of you may recall Walker topped our HR Elite list last year, with a total comp package of around $20 million.

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Executives from the Center on Executive Compensation of the HR Policy Association headed a session at WorldatWork’s Total Rewards 2012 conference on Tuesday to offer some insights into best ways to structure pay-for-performance strategies — and how to best tell their story to investors.

Nearly all companies this year received approval on their say-on-pay votes — about 89 percent — but seven have failed so far, said Timothy Bartl, president of the Center, but he noted: “No company that failed in 2011 has failed in 2012.” That indicates the companies learned from the experience and were able to not only tell their stories better but to have better stories to tell.

Common reasons for a lack of support, he said, were the comparison of CEO pay to a company’s performance, poor pay practices, significant changes in the structure of CEO pay and poor disclosure.

Most companies just don’t explain their compensation strategies very well, said Charles Tharp, CEO of the Center. “The question is why do we overcomplicate it?”

One issue that can be misunderstood — and needs to be better communicated — is the issue of  ”board discretion,” he said. Many investors see that as a way for companies to increase compensation, when, he says, it is more often used used to decrease it.

Bartl says it’s important to understand that the primary audience for executive-comp disclosures are the company’s largest institutional investors, proxy advisory firms (But Tharp notes, remember to design your comp strategies for your organization’s goals, not for the advisers, but “be sensitive to how they read these” and know their “hot spots.”), the media, regulators, competitors and employees.

The template for any effective pay summary, Bartl says, is to outline the company strategy, performance objectives and results, how pay varies with performance outcomes, actual pay vs. performance and changes going forward.

“Truly it’s two stories,” Tharp said. Companies need to validate they have a good executive comp strategy and they need to show what their plans are for the future. “It’s two pieces of the pie.”

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Following the $2 billion trading loss at JPMorgan Chase, the issue of clawbacks has “caught the public’s attention,” said Mike Melbinger, partner and global head of employee benefits and executive compensation, during a session at the WorldatWork conference.

And, he says, “When something catches fire like this, it’s almost always bad news.”

The current discussion of whether the lender will attempt to take back bonuses that were paid to executives may have a substantial impact because the U.S. Securities and Exchange Commission is still in the midst of writing regulations to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.

That law requires the implementation of clawback policies when bonuses or compensation paid to executive officers is based on “erroneous data,” Melbinger said. Previously, the law said companies “may” clawback such compensation; now it says they “must.”

“There is a history of … bad facts making bad law,” in this area, said Melbinger, noting that Dodd-Frank is “very short and open ended, so all of the real action will be in the rules.”

The issue requires organizations to revisit their pay-for-performance philosophy, said Daniel P. Moynihan, a principal at Hay Group who focuses on executive compensation. Companies should also consider providing documented statements of their clawback policies and key design attributes to employees.

Another issue, of course, is how to get that money back, he said. A $100,000 employee who got a $10,000 bonus may no longer even have that money anymore, so one potential solution is to have a policy that allows the company to recoup that money from future incentives.

Even more problematic, he said, will be trying to clawback bonuses from employees who no longer work at the company. Since clawbacks can go back three years, employers may want to have departing employees sign an acknowledgement that a clawback could be a possibility.

The fallout of the JPMorgan Chase case will be interesting, said Irv Becker, national practice leader on executive compensation at Hay Group.

Unlike some previous clawback dramas, this wasn’t an issue of a “rogue trader,” but was instead an investment strategy that ”wasn’t sufficiently safeguarded or implemented.”

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By now, I probably don’t need to tell you who Greg Smith is.

Yesterday, Smith resigned as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa in the most public of ways: through an op-ed piece in the New York Times!

Since then, the piece has created quite a stir, including leading off last night’s NBC Nightly News broadcast (and perhaps others).  As of early this morning, roughly 365 people posted comments to the op-ed piece on the NYT’s website and the news has been all over the business news channels, Twitter and the like.

This isn’t the first time a departing employee or executive has found an unusual way to tender his or her resignation. For example, I vaguely remember hearing about an incident where someone brought a cake to work colorfully decorated with their resignation letter on it.  But I wouldn’t be surprised if this wasn’t the first time someone used the op-ed section of a major national newspaper to bid his or her employer farewell. (Be sure to let me know if this isn’t the case.)

In his op-ed, Smith cites the “firm’s decline in moral fiber” as the reason for his departure, writing:

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids?  No humility?  I mean, come on.  Integrity?  It is eroding.  I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

Goldman Sachs (headquarters pictured above) responded to Smith’s assertions, saying that it didn’t reflect the way the company treated its clients.

So what’s the takeaway for HR leaders?

Merrie Spaeth, a Dallas-based communications’ expert, offers this assessment of Smith’s letter:

Normally, you’d say this is exactly the wrong, wrong, wrong way to go out the door. But this is like the woman who wrote the long letter to Ken Lay (Enron.) This is a very substantial, very senior, very well respected executive. He is actually sending a love letter to the firm, meaning—he loves GS and is willing to have a potentially very negative impact on his own position in the industry by calling them to account.

(Spaeth says she considers the op-ed piece credible because of what happened to “a good portion of the financial services/banking industry,” not because she personally knows Smith.)

I suspect the folks at GS may not see it the same way as Spaeth.

So returning to my earlier question of what this might means to HR leaders, Spaeth suggests the following:

I think the message for the senior HR executives is that you have to have functioning internal feedback and safety valves which hold executives accountable. (Think of Mark Hurd at HP and his behavior with the ‘escort.’ Think how many people had to know about that but no one stepped in and said, ‘Mark, pal, knock it off. No good will come of this.’  The GS example is potentially much more detrimental. Think of what just happened to Olympus, the Japanese company. They fired their CEO when he uncovered massive wrongdoing, and they thought they could get by.)

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In my last post, I shared a list of some of this year’s winners. Well, here’s my selections of people and organizations that didn’t fare as well in 2011. (Of course, there’s always next year.)

Unemployed workers, who were in some cases being denied work because they were unemployed.

Zynga—Before going public, the social game maker came under fire for demanding that certain employees who were given stock rights in the early days of the company surrender a portion of those shares or be fired. (Certainly, we could cite those “certain employees” as losers too.)

Public-sector unions, which continued to loose clout in states like Ohio, Georgia, South Carolina, North Carolina and Virginia.

Renault, which wrongly accused three executives of selling company secrets—and then terminated them. (Apologies and settlements promptly followed.)

Amazon, which became the subject of an Allentown Morning Call story about horrendous 110-degree working conditions at one of its Pennsylvania warehouse facilities. (Likely the same facility that ships many of the goods that show up on my porch.)

SHRM, which took a lot of heat in 2011 over allegations of a lack of transparency (primarily from a recently formed group named SHRM Members for Trasnparency). Granted, while political squabbling between these two groups contributed to the allegations,  the attention they got did undermine the credibility of SHRM’s leadership.

Herman Cain, whose run for the nation’s highest office swiftly came to an end following allegations of sexual harassment during his tenure as CEO of the National Restaurant Association (and allegations that we was having an affair).

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Not the greatest news for women leadership in business, if you go by recent reports from Catalyst, the New York-based organization dedicated to expanding women’s opportunities in the global marketplace.

According to the 2011 Catalyst Census: Fortune 500 Women Board Directors, Executive Officers and Top Earners and prior Catalyst censuses, women in corporate America have made no significant gains in the last year and are not further along the corporate ladder than they were six years ago. Youch.

Here are some of the more discouraging statistics, based on responses from 497 U.S.-based companies: Women held 16.1 percent of board seats in 2011, compared to 15.7 percent in 2010. (If we were rounding these, which we usually do, they’d be the same.) In both 2010 and 2011, less than one-fifth of companies had 25 percent or more women directors, while about one-tenth had no women serving on their boards.

There’s more. In both years, women of color still held only 3 percent of corporate board seats. And the number of women holding executive-officer positions actually went down, from 14.4 percent in 2010 to 14.1 percent in 2011.

The salary picture is no brighter for these women executive officers, either: In 2010, women held only 7.6 percent of executive-officer top-earner positions, a percentage that actually went down a tenth of a point in 2011, to 7.5 percent. That leaves men accounting for 92.5 percent of top earners in the year we’re about to usher out the door. Lastly, in both years, nearly one-fifth had 25 percent or more women executive officers, yet more than one-fourth had no women executive officers at all.

How can this be? Hard to say. Ilene H. Lang, president and CEO of Catalyst, says that — considering another Catalyst study demonstrates sustained gender diversity in the boardroom correlates with better corporate performance — “continued obstacles to progress make no sense.”

I know in my 11 years here, we’ve written many stories suggesting top-talent, high-performing women are rethinking the corporate-ladder top-leadership track because of its detriment to their very delicate work/life balance. But I would have thought corporate America would be further along than this by now in helping women solve those challenges — through greater flexibility, leadership development, telecommuting and teleworking options, coaching and mentoring, you name it … just sayin.

At least, on a positive note, a more expanded look by OnlineSchools.com shows more advancement. According to this recently launched “Women at Work” infographic by the Foster City, Calif.-based digital resource for online education, some 78 million women are projected to enter the workforce by 2018, with 10 percent of women over 25 holding an education beyond a bachelor’s degree in 2009, compared to only 1.7 percent in 1960.

OK, well, there’s that. I just hope those 78 million are being supported better by then.

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Some might call what Zynga recently did a feat of creativity, since it’s rarely if ever been done before. But I suspect more might feel chutzpa would be a better suited descriptor.

A front-page Wall Street Journal story, titled Zynga Leans on Some Workers to Surrender Pre-IPO Shares, details what’s unarguably an extremely bold move by top leaders at the company, which produces best-selling games like “FarmVille.”

In preparing to take Zynga public, the WSJ reported today, top executives began demanding that certain employees, who were doled out stocks rights in the early days, surrender some shares or be fired.

The company reportedly targeted those employees whose “job performance might not justify their large grants.”

The story went on to say:

Zynga’s demand for the return of shares could expose the company to employment litigation—and, were the practice to catch on and spread, would erode a central pillar of Silicon Valley culture, in which start-ups with limited cash and risk of failure dangle the possibility of stock riches in order to lure talent.”

Referring to a Google chef whose stock eventually was worth around $20 million, the story quotes someone as saying that Zynga executives “didn’t want a ‘Google chef’ situation.”

Earlier today, I asked Charlie Tharp, who leads the HR Policy Association’s Center on Executive Compensation, for his reaction.

“Stunned” was his response.

Tharp describes what occurred as the equivalent of a “compensation mulligan”—or, for the benefit of you non-golfers, do-over.

“In fairness, maybe some people didn’t perform or contribute as much as management thought they would when they gave them [the grants],” he says. “But by breaking the deal they made when they granted them the shares, [management] is setting a very bad precedent.”

“If they weren’t happy with their performance, they should have addressed that. If they weren’t happy with their contribution, they should have addressed that. But it seems to me like a way of not addressing the real issue and using this as an excuse [to take back shares].”

At the end of the day, Tharp says, “it doesn’t promote a culture of trust within the organization.”

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