Pay Pressure Boils Over

Nothing is off the table this year in revamping executive compensation programs.

For many years the typical severance for a CEO has been three times annual salary, with CFOs and others one level down getting two years’ or at least one year’s pay. But there generally has not been a performance-based component to that equation.

Now, with so many companies performing poorly, there is great sentiment against huge severance for their departing executives. “You’re going to see much more accountability in severance,” Poerio says.

Don’t-Get-Rich-Quick Scheme

Executives who get larger-than-normal golden parachutes may have to give up some of the cash.

Under IRS rules, a payout greater than three times annual salary is hit with an additional 20 percent tax on top of ordinary income taxes. Many employment contracts include “gross-ups” — an agreement that the company will pay that penalty.

Now, though, a movement is afoot to do away with gross-ups — not only for newly hired executives, but also when existing executives’ contracts are up for renewal, notes Paul Hastings partner Eric Keller.

An Open Book

A year ago, there was a lot of talk about how some companies were still being slow to expand the analysis of executive compensation in their proxy statements, as the Securities and Exchange Commission required in 2006. By this year, though, most will have begun to give the SEC at least some of what it wants.

In fact, because of the financial crisis and the consequent effects on executive pay programs, many proxies will reflect changes made after the close of their fiscal year. As with the Management Discussion and Analysis section, the Compensation Discussion and Analysis section is required to be up to date as of the document’s filing.

One item that likely will receive more attention in CD&As is risk assessment — the relative riskiness that the executive compensation structure will create. Short-term, profit-based incentives typically carry greater risk than longer-term, growth-based incentives, for example.

Pay-Saying

Hewlett-Packard recently gave a jolt to activist shareholders’ efforts to push Say on Pay measures by announcing that it was voluntarily adopting the measure. While only a handful of companies have approved the advisory vote on executive compensation packages, this year more than 100 resolutions calling on companies to do so have been filed for 2009 proxy consideration.

But according to the Paul Hastings attorneys, these efforts are likely to become moot this year. That’s because legislation introduced by Rep. Barney Frank in the House and co-sponsored in the Senate by then-Senator Barack Obama, which would mandate Say on Pay for public companies, stands a good chance of passing.

“We’re hearing from our Washington sources that it has a lot of traction and is very likely to pass,” says Poerio. HP, meanwhile, has thrown its weight behind the bill.

But in some cases, meanwhile, institutional shareholders are using the threat of Say on Pay as leverage. Keller tells of a client that was approached by TIAA-CREF, a major institutional shareholder, which said it planned to propose a Say on Pay initiative — unless the company agreed to proactively address a list of 10 other issues.

Unrelated to Say on Pay, Poerio tells of another client that had a compensation policy that denied incentive awards to the top five executives in the event of a financial restatement. An institutional shareholder pressed the company to apply it to the top 100 executives. “They wanted greater protection against what they perceived as their No. 1 threat,” he says.

This Shall Not Pass

Is there anything that won’t happen on the executive comp from this year? Yes, according to Paul Hastings banking partner John Douglas: Barney Frank’s aggressive legislation that, among other things, would prohibit any incentive compensation for the top 25 officers of companies that accepted government-bailout funds.

“That is an amazing thing, when you think about it,” says Douglas, who was general counsel for the Federal Deposit Insurance Corp. 20 years ago during the savings-and-loan crisis. “My sense of Congress is that there’s almost no idea that’s a bad idea. Whether you need your airplane or not, sell it. No bonuses for your top 25 officers? Sure. But then how do you compensate the next 25 officers? Banks already have a hard time competing for talent, and this would just exacerbate the difficulty.”

But he adds that for those reasons, the bill stands little chance of passing. “I just think [Frank] wanted to make a statement,” Douglas surmises.

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