A number of companies—including General Electric, Delta Air Lines, and Verizon Communications—have started removing pension effects from executive-compensation formulas. The reason? To ensure that executive bonuses don’t suffer because of a decline in plan returns, according to an article in the Wall Street Journal.
During the past decade, as the stock market soared—and with it, the value of corporate pension plans—retirement plans helped boost the bottom line at many companies. And as overall profitability swelled, so too did executive bonuses and incentive compensation.
But even with the recent run-up in the Dow Jones Industrial Average and S&P 500, sagging stock prices have turned pension plans into a drag on corporate profits. In turn, some corporate management teams have decided to leave the plans out of compensation calculations, cloaking the move under the guise of good corporate governance, according to the Journal. Indeed, companies that have begun excluding pension effects on exec comp have done so under pressure from shareholders and unions.
Some shareholder-rights advocates say the move to strip pension losses from exec comp formulas highlights an entrenched belief among many managers that large bonuses are an entitlement—rather than a reward for achieving outstanding performance.
“This pattern where pension surpluses are included for bonuses but pension expenses are excluded just underscores how these incentive programs can be manipulated in order to maximize payouts,” Carol Bowie, director of governance research at the Investor Responsibility Research Center, told the Journal.
This year Delta’s compensation committee decided to exclude pension results from bonus calculations. For senior executives, the move was well timed. While Delta recorded pension income of $73 million in 2001, the airline recorded a pension expense of $155 million last year.
A company spokesman told the Journal that neither pension income nor expense had a substantial effect on company performance or bonus payments in recent years.
But critics say senior executives are too often keen to take pension effects out of compensation calculations when things are going sour, but only too happy to include them when the stock market picks up.
Calpers: Abusive Comp Must End
In a related story, the California Public Employees’ Retirement System is stepping up its pressure on companies with excessive executive-compensation policies.
Under a new plan—expected to be introduced later this year—Calpers will rate compensation policies at 10 to 15 companies by comparing compensation and company performance to that of industry peers. Calpers will also include total compensation for chief executives, as well as base salaries, incentive plans, and restricted stock and options. The information will be published on Calpers’s Website.
“Poorly designed compensation packages are having a disastrous impact on companies and share owners by emphasizing short-term or self-interested behavior,” said Sean Harrigan, president of the Calpers board.
In addition to rolling out the rating system, Calpers managers threatened to continue voting against “abusive” compensation policies in the 2004 proxy season. In particular, officials at Calpers said they would vote against any plan that did not prohibit repricing of options or did not include a significant portion of performance-based components and long enough vesting periods. (For Calpers, that’s at least four years.)
Managers at the giant pension fund also said they would vote against plans that contain evergreen provisions—riders that automatically increase the shares available for grants on an annual basis. In addition, managers at Calpers are asking companies to improve disclosure of severance packages and other forms of compensation.
Calpers holds approximately $138 billion in assets.
Outsource This, Say Finance Managers
The majority of businesses that outsource finance and accounting say such a move pays off, according to a survey conducted by Accenture and the Economist Intelligence Unit.
Of the 236 businesses polled, 66 percent cited lower costs as the primary benefit of outsourcing finance and accounting. Fifty-five percent said outsourcing financial duties allows them to focus more time and resources on core competencies.
The biggest drawback cited: the risk of valuable data falling into competitors’ hands. Respondents also said they worry that the costs of outsourcing will exceed expectations, and that outsourcing could lead to an erosion of in-house knowledge. Surprisingly, 82 percent of respondents conceded that they have no formal metrics in place to measure the success of an outsourcing project.
About 30 percent of executives surveyed said they outsource at least some finance and accounting work. At most companies, payroll is the most commonly outsourced function.
Study: Faster Info Begets Higher P/E Ratio
Companies that disclose financial information quickly are more likely to garner higher price-to-earnings (P/E) ratios, according to a study by Parson Consulting. In fact, companies that release financial information quickly can achieve an average 11.2 percent premium in their P/E ratio, a Parsons study found.
“During this time of widespread shareholder distrust, the market provides evidence that many investors perceive earlier release times to indicate well-run financial operations,” said Rick Fumo, senior vice president, practices, at Parson.
Despite the Securities and Exchange Commission’s push to make material financial information available to investors sooner, companies are still taking a long time to file their 10-Ks. Indeed, almost half of the U.S. companies listed on the S&P 500 don’t meet the SEC’s shorter 10-K filing deadline of 75 days for 2003. Eighty-six percent don’t meet the 2004 cutoff date of 60 days.
IT companies and financial institutions tend to release annual earnings most quickly, in about 25 days on average. Companies in the consumer staples and materials industries average 33 days to disclose earnings publicly; they are the slowest to report.
The survey found that finance budgets at most companies have gone up by as much as 20 percent. Thanks to the Sarbanes-Oxley Act of 2002, senior finance executives are adding an average of three extra hours to their workweeks to comply with the legislation, according to Parson.
(Editor’s note: To see how some finance executives are coping with the added risks arising from Sarbanes-Oxley, read CFOs: Risk Magnets.)
- The House of Representatives has approved a law that allows the SEC to hire as many as 800 new workers—including economists, accountants, and examiners—more quickly. The bill would allow the SEC to make the hires under faster “excepted service” rules, instead of slower “competitive service” rules, which can prolong the hiring process.
Under the new law, new employees would have competitive service job protections once hired, under a compromise reached by the SEC and the National Treasury Employees Union, according to Reuters. Employees hired this way have more job security than excepted service employees, such as lawyers, who can be hired and fired more easily. The SEC, which employs about 3,200 workers, is preparing to rev up hiring under a major budget increase amid a flood of corporate scandals.
- Economists still can’t seem to reach a consensus about whether the recession has ended. On Wednesday the National Bureau of Economic Research (NBER), considered one of the more authoritative voices on business cycles, said it needed “additional time…before interpreting the movements of the economy over the past two years,” according to a CBS Marketwatch report.
While some economists maintain the recession ended in the third quarter of 2001—when gross domestic product began growing again after declining for the previous three quarters—others claim a more-complex analysis is required to render a verdict.
“According to the most recent data, the U.S. economy continues to experience growth in income and output but employment continues to decline,” according to the business-cycle timing committee of the NBER. The committee said it would proclaim the recession’s end “when it concludes that a subsequent downturn would be a separate recession, not a continuation of the recession that began in March 2001.” Gee, that’ll be good news for the unemployed.