VideoAnother provision, which would require board nominating committees to consist solely of independent members, seems sure to strip some comp committees of pro-management bias. Under the proposed rule, nominating committees would be less beholden to chief executives when they pick comp committee members or ax them, the reasoning goes.
Under such a setup, management's influence on a compensation committee would most certainly wane. Says Elson: "You don't have the fear of replacement that, in the old days, would be engendered by conflicting with the CEO over comp."
In fact, Elson, who is chair of the compensation committee at Nuevo Energy Company, sees comp committees increasingly populated by crusty retired CEOs with scant sympathy for today's jaw-dropping pay packages.
Moreover, the proposed NYSE changes may be injecting oomph into committee deliberations. "I definitely am already seeing that the [NYSE] guidelines are making a difference," notes Richard Harris, a senior executive compensation consultant for Mercer Human Resource Consulting. "It's almost like what we saw back in the early nineties, when the SEC changed the proxy reporting rules."
Ship Jumping
Adopted by the commission in 1992, the rules, among other things, required companies to include in their proxies a table breaking out the compensation of each of their top five executives. Before that, "you could just report a blended base salary and bonus amount," Harris recalls. "It was much, much more difficult to understand how executives got paid."
When the change happened, the effect on comp committees was dramatic. Recalls Harris: "We saw the immediate impact that comp committees took much more responsibility for thinking about how executives got paid."
While this effect petered out during the lengthy economic boom, Harris believes, "there's more energy in comp committees today." One sure sign of rejuvenation: Employers are offering top executives fewer perks, he says.
Of course, some compensation experts say newly empowered compensation committees need to tread lightly when nixing perquisites.
During the furor surrounding Jack Welch's retirement package, for instance, the former GE CEO said he was able to wring such a great compensation package from the conglomerate because he had done a good job running the company. He also pointed out -- and rightly so -- that there was no shortage of suitors lining up to lure him away from GE.
The dilemma for compensation committee members is obvious. Cut back too much on compensation and a highly prized CEO or CFO might jump ship. Cut back too little, and shareholders might jump down the chairman's throat.
"Compensation committees have been and will continue to be faced with the tension of trying to do -- and not overdo -- the right thing," asserts Robert Agate, a retired CFO of Colgate-Palmolive and a director at The Timberland Company, Allied Waste Industries, and eXcelon Corp.
But, Agate adds, they still must ensure "that compensation is competitive to attract and retain the best talent."
The Tough Don't Get Going
In fact, it's not terribly likely that boards will gut the compensation packages of top-notch CEOs and CFOs.
Barry Bregman, the partner in charge of Heidrick & Struggles' CFO practice, grants that comp committees will be "challenging more, doing more due diligence, and making more external comparisons with what other companies are doing." But all that scrutiny will actually help boost total compensation levels for finance chiefs, the headhunter predicts.
How's that? When they comparison-shop, Bregman argues, comp committees will see that "the level of pressure these guys are under merits higher comp structures."
Maybe. But if the overall compensation of some executives doesn't suffer at the hands of aggressive comp committees, the incentive component of pay packages will be increasingly linked to performance. And that could put a dent in some executives' net worth.
For instance, if employers start granting restricted stock to executives rather than stock options, they will saddle those managers with a new downside risk. When options expire out of the money, all an executive loses is "the expectancy of wealth, Elson explains. "With stock you actually can have wealth diminishment, and that's a different [incentive]."
One compromise comp committees may think about is building company performance targets into stock option awards. Fast-food chain Wendy's, in fact, has been basing the number of options it grants to its top executives on how well the company does compared to the S&P 500 in total shareholder return. According to Kerrii Anderson, the company's CFO, each executive's basic stock option award is adjusted up or down based on whether the company performs better or worse than the index.
Although the possibility of offering restricted stock is on Wendy's radar screen, Anderson says, the company isn't prepared to stop dispensing options just yet. "That's a high area of sensitivity," she says. "If you take something away you will have to give something in return -- or you will not be able to attract or retain very highly qualified people."
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