ABCs of compensation still complicated

Is that appropriate? As the compounder and distributor points out in its proxy statement, it exceeded the short-term performance targets set for the management team of $66 million in operating profit and $25 million in company-controlled cash flow.

Also, the $1.48 million includes a cash payout of $799,095 for reaching goals in 2006 and 2007. The payment was part of the employment agreement PolyOne negotiated when recruiting Newlin, said company spokesman David Honeycutt. Without that payout, Honeycutt said, Newlin's one-year incentive payout for 2007 was $682,971, or 28.8 percent lower than in 2006.

Still, Newlin's lower payout did not match the 92.7 percent decline in the company's net profit.

Ronald Mitchell, who retired as president of CPI Plastics Group Ltd. at the end of June, received a bonus for 2007 of $13,999. Yet, that company lost $8.8 million in 2007 and had a one-year total shareholder return (TSR) of negative 77 percent, the second-worst among firms in the ranking.

Mississauga, Ontario-based CPI did not respond to questions about its pay packages.

Dennis Gros, president of PlasticJobs by Gros Executive Recruiters in Brentwood, Tenn., said this about an apparent disconnect between pay and performance: ``When you have negative numbers on growth and profit, and positive numbers on compensation, things are wrong.''

Gros suggested that sometimes targets are too low, measures are incorrect or blame lies with the initial employment contract.

``The candidate says, `I need to be guaranteed X or I won't take the job,' '' said Gros. ``That is how some payments get out of whack.''

But determining if a company used the right measures or set the right targets is difficult.

The reason? Companies have pulled back on specifics, making performance measures more formulaic, moving to team-based incentives for executives with limited differences in performance requirements among its executives, and adding contingencies so that executives are not hurt by unanticipated events, according to a study by New York-based Pearl Meyer and Partners.

Despite rather lengthy discussions of executive compensation in proxies — in many cases, 12 pages or more, plus charts, tables and further explanations — there is not necessarily more insight.

``The new proxy statements do a good job of capturing an executive's compensation opportunities and the challenges of making his or her targets on an annual basis,'' said Joe Mallin, managing partner in Pearl Meyer's Atlanta office. ``But it doesn't capture a full-balanced picture of compensation'' that includes the changing value of long-term incentive and stock options, or explain why the targets are appropriate.

Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware and an advisory board member of the National Association of Corporate Directors, questioned whether companies are setting the right standards for determining executive pay.

``When pay seems inappropriate to performance, you have to ask whether the goals are appropriate. If you give someone a financial award for performance, you have to `punish' him and not pay him'' when the performance isn't there, Elson said.

Ico Inc. and AEP Industries Inc. are two examples where financial measures and targets seem to be working.

Ico, a Houston-based manufacturer of custom polymer coatings and plastic film concentrates, had the highest one-year-return, 113 percent, of any firm on Plastics News' pay list. That earned the different members of its executive team, pay increases ranging from 8.7 percent, to 131.6 percent — for CEO and President A. John Knapp.

In a lengthy, but easy-to-read discussion, Ico disclosed the performance levels achieved and the specific targets that Knapp had to reach in operating profit, investment turnover, return on equity and how each was weighted. It also detailed the specific targets.

Last year, Chairman, President and CEO J. Brendan Barba of flexible packaging film manufacturer AEP was ninth on Plastics News' pay list. Barba's compensation seems equitable for his performance, which turned combined losses of more than $69 million in 2004 and 2005 into a net profit of almost $63 million in 2006, boosting shareholder equity and having the fourth-highest three-year TSR, at 91.5 percent, on the 2006 list.

But, when AEP's fortunes shifted in 2007 and the one-year TSR was a negative 24 percent, the five-person executive team took a hit to their one-year cash pay total, each of them declining between 22.2 and 24.4 percent.