At this point I should not be surprised when I inadvertently discover that a blog that I wrote long ago was referenced last month in an online article about CEO pay. I also should not be surprised that the article appeared in "Calcutta Online" which is published by the India Institute of Management though I don’t know anyone there and have never spoken to them. Least surprising of all is that it would appear in the "Diatribe" section of the site. Of the alternative definitions of "diatribe" I prefer of course Merriam-Webster's third one.
The article, authored by Sidarth Mohan, is titled "CEO Compensation Debate" and the excerpt he quoted from me is:
“Most CEOs I've dealt with are highly intelligent, have advanced degrees--often from one of the top universities in this country or elsewhere in the world--and have worked 70 or more hours per week for most of their career. Even if they weren't CEO of a public company, people with a background like that get paid much more than the average person.”
This is from an opinion piece I authored for Cnet's News.com site 18 months ago. What's most interesting is that while 18-month old news can be quite outdated, when I re-read this piece I thought it could have been written yesterday, and likely could be republished 18 months from now and seem just as fresh. This is because the CEO pay debate is not dying down; it is still escalating and will continue to do so, particularly as we head into a presidential election year in the US.
Compensation Committees must be aware that the SEC's scrutiny of proxy disclosures will continue next year, the media will piggy-back on those disclosures as never before, and Committees will be under increasing pressure to have a diligent, data-based decision process that is thoroughly and clearly disclosed in the proxy statement.
Compensation Committees also need to be aware that in a global economy with investments crossing international boundaries compensation practices are subject to scrutiny of those beyond America’s borders. An article in Calcutta Online might have a similar impact to an article in the San Jose Mercury News (not to suggest that they are of similar journalistic status – I don’t know if they are or not) and could influence a shareholder or shareholders to view differently the executive compensation arrangements at a company. We all know where that can lead.
I also don’t know how Sidarth Mohan’s influence compares to that of Gretchen Morgenson or how Calcutta Online stacks up against the New York Times, but I do know that people easily find information online, don’t always know much about the source, and are often influenced by what they read.
For those Compensation Committee members that remember the uproar over “Oh, Calcutta!” – which debuted off-Broadway in 1969, was revived on Broadway in 1976 and ran for 13 years briefly becoming the longest-running play in Broadway history, with a total of 5,959 performances - they will remember how events thought to be innovative are easily re-defined as "scandals" and capture the public’s attention, and executive compensation has become ensconced in the scandal category. As we wind down 2007, have Compensation Committee meetings planning for 2008, and anticipate the continued evolution of the regulatory, disclosure, political, and media environment in the new year we should all remember that things said and done long ago (in Internet time) can have quite a lifespan.
(The worst thing about an 18-month old web page is that my affiliation is incorrect. I am now, in addition to my role as Principal Consultant of Compensation Venture Group, Inc., a Fellow with Salary.com (NASDAQ: SLRY), advising them on executive and equity compensation matters in connection with their CompAnalyst Executive data service.)
Monday, November 19, 2007
Wednesday, February 07, 2007
Did You Hear the One About the Compensation Committee Member…
Fred Whittlesey
Compensation Venture Group, Inc.
…who worked 300 hours on Compensation Committee matters last year? Neither did I. But I expect that this time next year we will be hearing those kinds of tales. The Business Week article “Board of Hard Knocks” (22 January 2007) cites the “new rules for directors” including that Audit Committee members should be prepared to spend 300 hours per year on committee responsibilities. (Disclosure: I am quoted in the article.)
But that’s the Audit Committee; the Compensation Committee can’t require that level of time commitment, can it?
Business Week’s cover teaser was “Board Seat, Anyone?” I’d ask “Compensation Committee Membership, Anyone?” Let’s look at the numbers.
In small and midcap technology companies, the typical Compensation Committee met six times last year. I’ll assume that these typical Committees were diligent Committees and spent four hours in each meeting. I’ll further assume that the individual Committee members always received the materials well in advance of the meeting and spent four hours reviewing and considering the materials. Let’s give them credit and assume they spent another 2 full days before each meeting in talking to one another, talking to management, and so forth. That’s still only 144 hours. And that’s the problem. Let’s add, say, 3 days at training courses. That takes it to 168 hours which is 8% of a year of 40-hour weeks. We’re still 16-and-a-half days short.
Audit Committees experienced trial by fire with the advent of Sarbanes-Oxley. Compensation Committees experienced the Sarbox zeitgeist, but didn’t have the numerous and onerous new requirements to contend with. Instead, Compensation Committees have experienced a slow water torture of changes in accounting rules (FAS123R), tax rules (409A), corporate governance expectations, proxy advisor and institutional shareholder policies, and SEC rules (disclosure requirements). All of these took time but were driven by technical specialists who presented the issues and solutions, went away and crunched numbers and drafted documents, and then ran it by the Committee for approval. That is, until the new SEC disclosure requirements came along. And, that is, until the media and shareholder noise level resulting from the new disclosures creates the need for earplugs like a front row seat at a Metallica concert. And creates hours and days and weeks of work. 300 hours is roughly two full-time months of the work year.
We have seen a pay hierarchy emerge in director pay. Of course, committee members earn extra pay for the committee work, and committee chairs earn even more pay for their role. But the differences in workload have already been reflected in director pay programs: Audit Committee members typically receive about a third more than Compensation Committee members, who typically receive a third more than members of other committees such as the nomination and governance committee. Further, the Chair of the Audit Committee is typically paid much more than the Chair of the Compensation Committee in additional retainer and/or meeting fees.
Over the past year, I have heard many people say “the comp committee is the new audit committee” or “compensation 2007 is audit 2003-2005.” If so, Compensation Committee members may need to discuss whether their compensation deserves a similar level of attention to those of the executives they are monitoring.
The other challenge facing compensation committee members, also cited in the Business Week article and the subject of a recent article in McKinsey Quarterly, is the need to refocus on strategy in a time of compliance.
That is the topic of our next issue of The Compensation Committee Adviser.
Compensation Venture Group, Inc.
…who worked 300 hours on Compensation Committee matters last year? Neither did I. But I expect that this time next year we will be hearing those kinds of tales. The Business Week article “Board of Hard Knocks” (22 January 2007) cites the “new rules for directors” including that Audit Committee members should be prepared to spend 300 hours per year on committee responsibilities. (Disclosure: I am quoted in the article.)
But that’s the Audit Committee; the Compensation Committee can’t require that level of time commitment, can it?
Business Week’s cover teaser was “Board Seat, Anyone?” I’d ask “Compensation Committee Membership, Anyone?” Let’s look at the numbers.
In small and midcap technology companies, the typical Compensation Committee met six times last year. I’ll assume that these typical Committees were diligent Committees and spent four hours in each meeting. I’ll further assume that the individual Committee members always received the materials well in advance of the meeting and spent four hours reviewing and considering the materials. Let’s give them credit and assume they spent another 2 full days before each meeting in talking to one another, talking to management, and so forth. That’s still only 144 hours. And that’s the problem. Let’s add, say, 3 days at training courses. That takes it to 168 hours which is 8% of a year of 40-hour weeks. We’re still 16-and-a-half days short.
Audit Committees experienced trial by fire with the advent of Sarbanes-Oxley. Compensation Committees experienced the Sarbox zeitgeist, but didn’t have the numerous and onerous new requirements to contend with. Instead, Compensation Committees have experienced a slow water torture of changes in accounting rules (FAS123R), tax rules (409A), corporate governance expectations, proxy advisor and institutional shareholder policies, and SEC rules (disclosure requirements). All of these took time but were driven by technical specialists who presented the issues and solutions, went away and crunched numbers and drafted documents, and then ran it by the Committee for approval. That is, until the new SEC disclosure requirements came along. And, that is, until the media and shareholder noise level resulting from the new disclosures creates the need for earplugs like a front row seat at a Metallica concert. And creates hours and days and weeks of work. 300 hours is roughly two full-time months of the work year.
We have seen a pay hierarchy emerge in director pay. Of course, committee members earn extra pay for the committee work, and committee chairs earn even more pay for their role. But the differences in workload have already been reflected in director pay programs: Audit Committee members typically receive about a third more than Compensation Committee members, who typically receive a third more than members of other committees such as the nomination and governance committee. Further, the Chair of the Audit Committee is typically paid much more than the Chair of the Compensation Committee in additional retainer and/or meeting fees.
Over the past year, I have heard many people say “the comp committee is the new audit committee” or “compensation 2007 is audit 2003-2005.” If so, Compensation Committee members may need to discuss whether their compensation deserves a similar level of attention to those of the executives they are monitoring.
The other challenge facing compensation committee members, also cited in the Business Week article and the subject of a recent article in McKinsey Quarterly, is the need to refocus on strategy in a time of compliance.
That is the topic of our next issue of The Compensation Committee Adviser.
Subscribe to:
Posts (Atom)
