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The pay-for-performance deal the New York Yankees offered to Joe Torre lines up with executive-compensation trends in Corporate America.
Marie Leone, CFO.com | US
October 19, 2007
The New York Yankees struck out with Joe Torre, the manager who led the baseball club for the past 12 years until Thursday, when he nixed a new contract offer. There is a raging debate about Torre's fate in New York, but whichever side fans and critics come down on, one thing is clear: the pay package offered by the Yankees is in line with those being offered by many American corporations.
The Yankees offered Torre a one-year contract comprising a base salary of $5 million and $1 million bonuses for each level of postseason play the team reached in 2008, according to reports from MLB.com, the Website of major league baseball.
The incentive component of the deal promised that if the Yankees win it all next year, capturing the World Series crown, Torre could take home $8 million in total compensation. But that won't happen — and it has nothing to do with the Boston Red Sox.
Torre balked at the deal and called it quits. Essentially, the Yankees skipper was being asked to cut 30 percent off his current $7.5 million salary and replace the missing cash with performance-based pay. At a press conference Friday, Torre said he was "insulted" by the offer and "I had been there for 12 years and I felt the motivation wasn't needed."
Not only do the Yankees disagree, though, much of Corporate America does as well. "The Yankees's offer is entirely appropriate and consistent with current executive-compensation trends in which more money is being put at risk," chief financial officer Michael Mardy tells CFO.com. Mardy is CFO of privately held Tumi Luggage and sits on the compensation committee of two publicly held companies.
The Yankees offer, which Mardy describes as "$5 million and a lot of upside," is a package that "heads exactly in the right direction." He contends that if performance parameters are clearly defined and developed with rigor to reflect the proper business goals, then top executives should expect to be paid less if they don't perform. Conversely, the board should not hesitate to pay out more money if performance objectives are met.
"It's likely that a new Securities and Exchange Commission direction is pushing boards to develop more shareholder-friendly, performance-based packages," adds Mardy. That push from the SEC is spelled out in a new rule issued one year ago that requires public-company proxy statements to include a compensation discussion and analysis report. The report must disclose how much a company's highest-earning executives are paid and explain how the package is calculated.
Opening the kimono on executive compensation has the SEC, investors, and board members paying closer attention to the link between performance and pay. "Compensation-committee issues are probably a bigger exposure than audit-committee issues these days," opines Mardy. "The SEC has honed in like a laser on compensation issues."
To be sure, the SEC wants more analysis of how and why companies pay their top executives what they do, but it also wants the information presented in a tighter, more concise way, according to a 10-page evaluation the regulator released earlier this month. The document was released after SEC staffers reviewed 350 company CD&A disclosures they collected during the past year.
Even a cursory look at corporate proxy filings illustrates the rise in incentive-based pay arrangements, says Greg Adams, CFO of Edgar Online Inc. He attributes that rise to the new CD&A filings, and says incentive-based pay arrangements have spread beyond the CEO level and are permeating the entire C-suite.
According to Adams, the Yankees's deal is typical, and he suggests that if Torre has not delivered a world championship — clearly a corporate goal coveted by principal owner George Steinbrenner — he needs to be held accountable to the board, investors, and fans. "I also think the players should receive the same pay-for-performance [arrangements], but free agency appears to be their incentive program," adds Adams.
The idea that a portion of Torre's pay would be forfeited in lieu of performance bonuses is not at odds with current trends, either. Witness Ford Motor's Bill Ford, who reduced his salary to $1 a year and tied the rest of his compensation to the prospects that he could help turn around the financially distressed carmaker. A recent report in BusinessWeek listed other "$1 CEOs," including Steve Jobs of Apple, Google's Eric Schmidt, and Richard Kinder of energy transportation company Kinder Morgan. These chief executives also own stock and stock options in their respective companies, but Torre may also own a piece of the privately held Yankees.
Money is not the prime motivator with many senior executives at top companies, notes I.H. "Chip" Clothier, managing partner at HFC Executive Search. "Facing business challenges is an intellectual issue for top executives. These managers are emotionally invested in the company — if they aren't, they shouldn't be in their position," adds Clothier.
Still, "you have to have a pretty healthy ego" to accept a deal that replaces all or some of your salary with performance pay, emphasizes Clothier. Embracing such a package depends on the executive's personal risk profile — whether the manager is comfortable with putting that much skin in the game — and whether the executive's ego is driven by the performance challenge.
Interestingly, a new survey seems to indicate that top executives would welcome more performance-based pay. The survey, which polled 791 board members, including 70 CEOs or presidents, revealed that two-thirds of the respondents believe CEOs are being paid too much relative to their performance. The study, conducted by the National Association of Corporate Directors, noted that only 2.2 percent of the respondents think compensation is too low, while a third claims CEO pay is "just right."