Martin R. Rosenbaum is a partner in the Minneapolis law firm of Maslon Edelman Borman & Brand, LLP. His e-mail address is firstname.lastname@example.org
Business forum: CEO Smackdown II?
- Article by: MARTIN R. ROSENBAUM
- March 15, 2009 - 10:44 PM
In recent months, top executives of several large companies have endured public criticism for everything from flying to Washington in private jets to ask for government funds to taking excessive bonuses just before their companies fail. The interrogation of bank CEOs by a congressional panel in February (called the "CEO Smackdown" by dailybeast.com) had a scathing edge seldom seen since a decade ago, when tobacco CEOs were grilled by angry members of Congress.
Maybe that's not surprising, since bank executives are being blamed for the financial cancer devastating our economy. Expect more scrutiny to come.
Under the recent stimulus bill, the American Recovery and Reinvestment Act, Congress has imposed new restrictions on the compensation of financial services executives, carrying forward and enhancing similar provisions in last fall's bailout bill. Participating institutions must implement the following restrictions, with variations depending on the size of the company and how much aid it receives:
•Eliminate incentive arrangements that might encourage excessive risk-taking.
•Impose a "claw-back" requirement -- i.e., if compensation was paid based on inaccurate financial information, the executive has to repay the company.
•Limit or prohibit "golden parachute" payments.
•Limit bonuses, and require that some bonuses be paid in the form of restricted stock that doesn't fully vest until the government funding is paid back.
•Hold an annual, nonbinding shareholder vote to approve executive compensation (known as "say-on-pay").
It's no surprise that the new legislation significantly restricts executive pay. In both the bipartisan bailout package passed last fall and the recent stimulus bill, compensation limits seemed to be one of the few areas of common ground between Republicans and Democrats.
So, in the proxy statements being mailed out by the big companies in the next few weeks, can we expect to see evidence that the party's over? Will executive salaries have been curbed? Are lavish bonuses and golden parachutes things of the past? Will these restrictions have a long-term impact on compensation levels at these companies? And will Congress rain on the parade of other executives by adopting similar restrictions at a broad range of companies that are not receiving government help?
Certainly, there will be some examples of big decreases, such as the recent report that the compensation of Wells Fargo's CEO declined by 21 percent in 2008. However, shareholders of bailed-out banks expecting to see fewer zeroes at the end of the executive compensation figures in every proxy statement filed in the next few weeks will most likely be disappointed. But a lot of that has to do with timing.
The 2008 figures in the current batch of proxies will reflect decisions made by compensation committees in late 2007, before the effects of the legislative restrictions on salaries, bonuses or golden parachutes.
Even equity compensation (stock options and restricted stock) may not show the full impact of the stock market decline on the value of these awards. Under SEC disclosure rules, equity compensation figures are based on accounting impact, spread over the vesting period of each award. The 2008 amount will be inflated by the continued accounting impact of the executive's earlier awards.
The restrictions under the stimulus bill may not lead to long-term reductions in compensation at financial institutions. Boards of directors are always concerned about attracting and retaining the best executives, and once some of the political heat is off, companies are likely to keep spending more and more for the top talent.
However, the practice of paying bonuses in restricted stock may help prevent the scenario where a big cash payout to the executives is followed by a crash in the company's stock. If the company pays bonuses in restricted stock and the stock becomes worthless before the executive can cash out, the executive will be left in the same situation as the stockholders. This practice may provide a built-in incentive for executives to avoid the excessive risk-taking that seems to have contributed so greatly to the meltdown of the financial system.
The stimulus restrictions may soon become more prevalent at nonfinancial companies. Members of Congress have stated that they will consider broader adoption of similar limitations for public companies across all industries. Activist shareholders are putting pressure on boards of directors to implement policies such as the claw-back provisions in the stimulus bill, and the same activists are trying to get boards of directors to voluntarily adopt "say-on-pay" proposals. Also, compensation consultants are encouraging compensation committees to consider paying a greater share of bonuses in restricted stock.
One way or another, executives will continue to find themselves in the spotlight and can expect new limitations on their pay.
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