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Reining in Executive Compensation

Human Resource Executive online, June 15, 2009

While the administration is keeping a hands-off approach, thus far, to imposing salary ceilings on all companies, there continues to be increased focus on more transparency for executive compensation. New rules expected to be released by the SEC in July will mandate additional proxy-statement disclosures, including "say on pay" and information about potential conflicts of interest by comp consultants.

By Stephen Barlas

The Obama administration's restrictions on executive compensation announced last week created a lot of smoke but there wasn't much fire in evidence.

Certainly few people will get burned, given that the most potentially onerous restrictions affect only seven large companies and any additional companies who take Troubled Asset Relief Program funds in the future.

Moreover, while new federal pay czar Kenneth Feinberg has the authority to set executive pay for those TARP fund recipients, where he sets those levels is anyone's guess.

Nonetheless, at a briefing on June 12, Timothy Bartl, vice president and general counsel at the Center On Executive Compensation, an offshoot of the Washington-based HR Policy Association, said he is concerned that any salary ceilings imposed on TARP companies might find their way into much more widespread mandates on all public companies -- either via congressional legislation or administrative action by the Securities and Exchange Commission, which is scheduled to publish a new rule on executive compensation disclosure in July.

"The discussion to apply TARP-type caps more broadly will occur, but I think there will be an awful lot of reluctance on the part of those who might see such a step as undermining the recovery," Bartl said.

He welcomed the SEC intention to revise its exec-comp rules, which have come under fire from both corporations and institutional investors, and he predicted the SEC "will look at a lot more than people think when they announce their plans in July."

Those plans, according to hearings on June 11 at the House Financial Services Committee, include mandating additional disclosures with regard to how a company, and its board in particular, manages risk; how salaries are set for other executives below the levels now prescribed; and new disclosure requirements regarding compensation consultant conflicts of interest, according to the testimony of Brian Breheny, deputy director of the division of corporate finance at the SEC.

The main focus of the Center on Executive Compensation regarding any SEC rulemaking is to convince the agency to revamp the summary pay tables in the compensation disclosure and analysis section of the proxy statement.

Those tables have been criticized for obscuring the actual annual pay for top corporate executives, in part because the calculation for each "named" executive mixes pay earned in the prior year or current year and the estimated accounting expense of equity-based incentives granted in the current year.

"No one takes the total compensation figure for an executive to be the total number," said Charles Tharp, executive vice president for policy at the Center.

Tharp's organization has developed a substitute table that describes actual annual pay and how it was determined; and explains how that pay, in each of a number of categories such as salary, annual incentive, long-term incentive payout, etc.; was linked to corporate performance.

Tharp said that a more understandable executive-compensation disclosure is far more preferable to the SEC mandating that companies conduct an annual advisory -- but nonbinding -- vote among shareholders on executive pay.

Treasury Secretary Timothy Geithner, however, endorsed "say on pay" last week, and observers believe the SEC will undoubtedly start working on it, probably as part of its July exec-comp rulemaking package.

Tharp said the British experience with "say on pay" has shown that compensation levels remained unaffected, although retirement benefits and golden parachutes have been reined in to some extent.

Both Tharp and Bartl advocated a "board-centric" approach to compensation reform, as opposed to a federal-mandated approach.

The SEC's Breheny did not give any specifics during the June 11 hearing on the commission's "board-centric" approach to reining in compensation consultants -- who were criticized in congressional hearings a few years ago for doing business with corporate executives whose salaries they were opining on to that company's board of directors.

Tharp said those kinds of conflicts have been rooted out for the most part over the past few years via various company policies.