Executive Compensation Will Continue To Be a Hot Button Topic in 2007

Executive compensation has certainly been a hot topic in 2006, with options backdating clearly at the forefront. The larger question of income inequality also shed a great deal of light on the income of corporate executives and financial types like hedge fund and private equity managers.

On the last business day of the year we guess it is appropriate that two leading sources of financial news chose to publish stories on executive compensation. Julie Creswell in the New York Times reported on the way new executive hire pay packages have been structured so as to minimize the risk to the new executive.

Such golden hello payments are intended to make the executive “whole” — in essence to treat the executive as if his career were one smooth ascent with no costly interruptions. And these multimillion-dollar payments and perks are used to draw in not only chief executives, but virtually every member of the executive suite. If “golden parachutes” — rich exit packages of extra cash, stock or retirement benefits — are needed at times to kick out chief executives, golden hellos are increasingly needed to get them in the door.

These pay packages have a number of implications including the fact that these benefits are clearly not available to lesser workers, but in addition they may work at cross-purposes to other common incentive pay systems.

The existence of the golden hello undermines the very reason stock options and executive pensions are offered in the first place — to encourage executives to hit performance targets and then to stick around to receive the full value of their compensation package.

We found it interesting that on the same day a high-profile executive at J.C. Penney (JCP) was shown the door in the most public fashion. Joann S. Lublin and Cheryl Lu-Lien Tan in the Wall Street Journal reported that:

Ms. West’s severance package will total close to $10 million, including accelerated vesting of stock options and restricted-stock units that she was granted to compensate her for forfeiting benefits at Capital One, according to spokeswoman Darcie Brossart.

Stay tuned. We have not heard the end of the end of the executive compensation story. A new Congress will be incline to at least (rhetorically) explore the widening income gap. Executive compensation will in all likelihood not be spared a good going over.

Comments

[Amit Chokshi_:]

It's a hot button topic that nobody does anything about. As can be expected, our government will grandstand and talk and debate about it and nothing will be done or they will do the exact opposite. Just like Bush talking about simplifying the tax code but in reality expanding it by 30%, our government officials can be bought, and/or just don't have the intellectual horsepower to do anything of true value, and/or they use their intelligence to fatten their purses at shareholders expense.

Your article omits perhaps the biggest gaffe by the SEC this past week with their rule change in regards to reporting compensation through option packages. They didn't even bother to seek public comment before implementing this new rule which takes place immediately. So as investors we can expect more problems with transparency as executives that are granted the same value of option compensation will be able to manipulate the reporting of it based on the vesting schedule.

So in 2007 we'll see reduced compensation figures since the expense will be deferred over time with no need for real disclosure. The useless board of directors will have their backs covered to continue pouring money into the pockets of their brethren and of course in about 2-3 years some scandal will occur when someone realizes that several hundred million in option expense was put in some cookie jar through and wasn't properly recognized and when shareholders thought some CEO was just getting $10-$50mm in option comp it was really 5-10x that figure.

2006 Dec 31 01:47 PM