When it comes to the public outcry over executive compensation, the sounds of protest may have faded but the fury lives on. Bands of placard-carrying citizens have disappeared from lower Manhattan, but efforts to rein in what many perceive as outrageous paydays are, if anything, intensifying. From Capitol Hill to boardrooms across the country, efforts are under way to restrict the compensation of executives of all publicly traded companies, even those far removed from any form of bailout.
“People have been excoriating executive-pay practices for decades, and this is their ‘pitchfork’ moment, with mobs literally taking to the streets to protest the bonuses at AIG, Merrill Lynch, and other firms,” says Ira Kay, director of executive compensation consulting at Watson Wyatt.
Already the repercussions are being felt far and wide, from Silicon Valley, where Apple shareholders pushed through a “say-on-pay” proposal despite board members advocating for its rejection, to The Netherlands, where the CEO of ING made a “moral appeal” to executives to return their recent bonuses. A Watson Wyatt survey found that nearly two-thirds of board members believe companies need to change their executive compensation plans in response to current political and market pressures.
A Volatile Mix
It is political pressure in particular that has many observers, not to mention CFOs, seeing red. Soon Congress is expected to unveil a slate of executive pay legislation that could extend the government’s recent rules for companies receiving federal dollars from the Troubled Asset Relief Program to other publicly traded companies. “The sad thing about AIG and the TARP regulations on executive pay is that successful, careful companies will be painted with the same broad brush, affecting their ability to compete in the global marketplace,” says Jeffrey A. Burchill, senior vice president and CFO of FM Global, a large business-property insurer.
If the remarks coming from the two primary movers in Congress — House Financial Services Committee chairman Barney Frank (D–Mass.) and Senate Banking, Housing, and Urban Affairs Committee chairman Christopher Dodd (D–Conn.) — are any indication, companies can expect substantive changes, although the full scope is anyone’s guess. “Specific caps on compensation are not very likely,” says Alexander Cwirko-Godycki, research manager at compensation benchmarking firm Equilar Inc., “but there is definite momentum behind say-on-pay provisions, mandates for wider clawback policies, and increased compensation disclosure requirements, among others.” It remains to be seen which of these, if any, will become law, but in Cwirko-Godycki’s view, “there has certainly never been a stronger case for these proposals to become reality.”
“Situations of excessive pay are not rampant,” says Brent Longnecker, chairman and CEO of Longnecker & Associates, a Houston-based compensation consultancy. “Only about 2% of companies have rewarded failure, but the government is keen to do something to appease the public’s outrage.” He is not alone in this view. “Nobody knows what the rules will be or how the Treasury Department will write the regulations, but they’re coming,” says Patrick McGurn, special counsel to the institutional shareholders services unit of RiskMetrics.