Fray on Pay

The battle over executive compensation and what it means for you.

In a worst-case scenario, some or all of the compensation provisions in TARP would be extended to all public companies (see “Laying Out the TARP” at the end of this article). While that’s a long shot, even the possibility has many people raising a battle cry. “If companies don’t get out in front of this issue now, with their compensation committees leading the charge, the government will get in and make things worse,” says Ben W. Heineman Jr., former General Electric senior vice president and general counsel and currently a senior fellow at Harvard University’s schools of law and public policy. “This is not the time to go into the bunkers.”

“The question is how far Congress will go,” says Claudia Allen, chair of the corporate-governance practice at Chicago-based law firm Neal, Gerber & Eisenberg. “You have politics and the law getting stirred in the same pot, and it is a volatile mix.”

Many observers fear the law of unintended consequences, and point to the 1993 creation of Section 162(m) of the Internal Revenue Code as Exhibit A. The regulation forbade corporate tax deductions for salaries exceeding $1 million, but made an exception for performance-based incentive compensation, such as stock options vesting at a particular date. Not surprisingly, or so it seems now, companies shifted from high salaries to high stock options and bonuses, while also lifting the salaries of many seemingly underpaid CEOs and other senior executives to $1 million. Now the Obama Administration is considering revising 162(m) downward, disallowing tax deductions above $500,000 and closing the loophole for stock options. “As we’ve seen happen in the past with respect to executive pay, the government has a way of making things worse,” Longnecker says.

CFOs React
CFOs certainly seem disinclined to burrow into the bunkers. “This country was built on capitalism, on people wanting to better themselves, working long hours to achieve cherished dreams of success,” says Marc Rosenblum, CFO of cosmetics company Clarins USA. “Unlike socialist societies, people could become rich if their companies became successful. We have to be very careful not to make this country a place where dreams can no longer be realized.”

“If the government begins setting bright-line tests limiting compensation and enacts one-size-fits-all regulations,” says Holly Koeppel, CFO at Midwest utility American Electric Power (AEP), “it may change the perception and motivations of managers, ultimately rendering the organization less competitive.”

Rosenblum, however, concedes that some reforms are needed. “You cannot reward someone for sales volume without regard for whether or not it’s good for the business,” he says, taking a swipe at AIG. “I don’t blame traders there for getting bonuses — they should be compensated for bringing in volume. But it’s the CFO’s job to make sure that what they’re selling is not too risky.” He suggests, in fact, that CFOs should play a key role in bringing sanity to bear on compensation. “Abolishing bonuses isn’t the answer: managing risk is. As long as finance has a say, everybody wins.”

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