To follow the news, it’s tempting to think that a good chunk of the country’s financial woes can be blamed on high executive compensation.
The latest incarnation of that resentment is the Occupy movement, as well as the “say-on-pay” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. But public anger over the compensation of those at the top of the economic ladder is nothing new. Just ask Louis XVI and Czar Nicholas II. In fact, there are probably cave drawings on the topic.
Perhaps the difference now is that it affects a broader group of executives, not just the ones making seven (or eight) figures a year. And it just doesn’t affect the “bad boys,” the ones making large sums of money without providing any benefit to the company.
According to a March 26 article in the Wall Street Journal (subscription required), CEO pay increases have slowed dramatically recently. The Journal’s study of compensation for 65 CEOs found that, despite fairly significant gains in their companies’ profit and revenue, the CEO’s total direct compensation rose just 1.4 percent in 2011, as opposed to rising 11 percent in 2010. The study included salary, all bonuses, and the value of stock and stock-option grants at the time of the grant. So now in addition to legal restrictions designed to protect against the worst practices, such as providing obscenely large bonuses based upon profits realized from mark-to-market accounting that never actually materialize, we now see that boards of directors overall are limiting executive compensation.
Given this backdrop, executives who are in the midst of negotiating their own compensation packages should be mindful of the public’s concern. That shouldn’t, however, prevent them from seeking pay that fairly and competitively compensates them for their contributions to their company’s success.
In the past (defined broadly as “Pre-Enron”), boards of directors didn’t scrutinize executive compensation as much as they do today. For better or worse, many executives got a pass when it came to justifying their generous compensation. Nowadays, however, executive compensation is increasingly tied to executive success, as measured by metrics such as stock price, gross sales, net revenues, market growth, and customer loyalty.
It’s wise, then, for executives to seek at least a portion of their pay in instruments aligned with shareholder interests, like stock and stock options. That way, when shareholders do well, executives do well, and there may be fewer complaints.
It’s also wise to bring in an independent executive compensation consultant, who can provide independent opinion justifying the requested compensation and provide the back-up documentation to show that the compensation is in line with other executives in a similar position, and that it’s related to company performance and shareholder value.
Having such a third party on hand can go a long way toward addressing concerns that compensation decisions aren’t just being made between the executive and the executive committee of the board of directors—a relationship that many consider to be too cozy.
You should consider suggesting or agreeing to protections for the company such as covenants not to compete (as long as the duration is not long and the scope of activity restrained is not onerous), nonsolicitation agreements, and confidentiality agreements. It shows that loyalty is a two-way street.
Another tip: it helps if the people around you are strong advocates and supporters of yours. And that’s more likely to happen if they are also compensated fairly. So, if you have a say in their compensation (and chances are, you do), make sure they are as fairly and competitively compensated as you yourself would like to be. If your colleagues and subordinates are bitter about their compensation, that can reflect negatively on you and your compensation. If, on the other hand, you have the support of your team, that can only help you during compensation negotiations.
Finally, it’s worthwhile to have an attorney review any executive compensation package. An executive may look at a pay package and think it provides certain benefits, but from a legal perspective it may be interpreted differently. It’s always helpful to have a lawyer weigh in on all the possible loopholes.
To be sure, executive compensation is controversial these days. And it’s doubtful that public scrutiny will abate anytime soon. That can be good thing in preventing some of the wrongdoings that have happened in the past.
But it also means more thought and preparation has to go into presenting your case for compensation. In summary, make sure that 1) you seek compensation that’s allied with the interest of shareholders, 2) your board is provided the ammunition it needs to justify your compensation, and 3) you present to the company protections – in form of covenants not to compete and confidentiality agreements – so that you and the company are always viewed as operating to protect the company, and not loot it.