Repeat after me: The Obama administration will not cap executive compensation and will not tell companies how to pay their senior managers.
That is, it won’t unless your company got financial help through one of the federal government’s alphabet-soup bailout programs. Those who took multibillions of dollars will have to answer a federal “compensation czar.”
And in general, isn’t that how it should be?
If you smashed up a perfectly good company and got public money to patch it up, it should be costly and uncomfortable for you to regain the right to take it back onto the open highway of the free market.
But if you’re a company that’s been whipsawed by the recession, the last thing you need is for the government to limit what you can pay your CEO, CFO or other C-level exec.
So give Treasury Secretary Timothy Geithner credit for his plain talk yesterday: “We are not capping pay. We are not setting forth precise prescriptions for how companies should set compensation, which can often be counterproductive.” (See story on D3.)
That doesn’t mean corporate America has danced away from changes in how executives are paid. Or that everyone is thrilled with all of the compensation-related provisions outlined by Geithner yesterday.
While applauding the administration for not mandating pay caps, one Philadelphia attorney who works with a lot of compensation committees panned a renewed push for nonbinding “say on pay” votes by shareholders.
John Martini, the head of Reed Smith L.L.P.’s Tax, Benefits and Wealth Planning practice group, said that most shareholders are “not equipped to make good decisions” on pay. Politicians may be pressing to import this practice from the United Kingdom, but Martini said he doesn’t see a groundswell of support from shareholders.
Irv Becker, national practice leader for the executive compensation practice of Philadelphia’s Hay Group, applauded the federal encouragement of performance-based pay. More companies are doing just that, he said.
One local example he cited was Campbell Soup Co., which pays its top people with 100 percent “performance-vested” plans. Seventy percent of their incentive compensation is paid in restricted stock based on total shareholder return. The rest is paid in restricted stock based on earnings-per-share targets.
Comcast Corp. and Cigna Corp. pay their top managers using about 50 percent performance-vested plans. The other half of their incentive pay comes from stock options, Becker said.
In general, Becker welcomed Treasury’s focus on compensation principles rather than outright rules, which can spawn unintended consequences.
Still, some gray areas will need to be addressed. Compensation committees will now have to factor “risk assessment” into how they pay executives, which they largely have not done, Becker said. Congress has been critical of incentives that seem to have encouraged reckless behavior.
And matching compensation to a “time horizon of performance” will be very challenging for complex organizations in which different business units represent different degrees of risk, he said.
If the Sarbanes-Oxley Act of 2002 mandated the audit committees of boards of directors to assert their independence, that’s what new legislation the Obama administration intends to do for compensation committees.
Anything that prods board members to be more independent is to be applauded, said John A. Pearce II, management professor at the Villanova School of Business. He called the performance of the boards of the biggest bailout banks “shameless.” They “showed no awareness to the dangers to which their busineses were exposed,” he said.