James Reda is founder and managing director of James F. Reda & Associates LLC, a compensation and corporate governance firm in New York. For more than 20 years, he has advised the top management and boards of major corporations worldwide.
A recognized authority in his field, Reda is retained by compensation committees as an independent adviser on executive compensation matters, particularly concerning chief executive officers. He has written many articles about executive compensation, including ones on stock award programs, new economy compensation, merger and acquisition issues, and compensation committees. He is the author of two books on the subject: Pay to Win: How America's Successful Companies Pay Their Executives and The Compensation Committee Handbook.
In an interview, Reda said new disclosure rules for executive compensation that went into effect this year provide more information and underscore that traditional change-in-control packages don't make sense anymore. But, he said, most company proxies fail to clarify the targets executives must meet to achieve performance payouts. Firms also need to rethink how they allocate shareholder assets, he said.
In the end, Reda questioned how much money executives really need and whether high compensation packages are hurting the U.S. economy.
Q: How did the new required Compensation Discussion and Analysis compare with previous compensation committee reports?
Reda: There was some improvement, but I would characterize them as weak and, in most cases, not much different. They were supposed to be principles-based, but no one could figure out the rationale behind the plans. The information was pretty homogenized and lacking in explanations of the corporate philosophy behind compensation, as well as the specific targets companies used.
Q: Where did companies not provide enough clarity?
Reda: Companies were supposed to disclose their performance goals and the plan they had for achieving them. But somewhere between here and the ranch, many companies decided they had a ``discretionary'' plan that was not based on achieving specific goals - even when they previously had espoused them as such. Or they just said their goals were confidential, making them exempt from discussion. Only about one-third of the companies discussed their goals.
Q: What else didn't work?
Reda: The rules revision in December that changed the earlier revised reporting method for option and stock awards. The data in the summary compensation table doesn't track the awards given to an executive in the most recent year, but only the change in value of awards that were vested or exercised. It is silly to think that has anything to do with compensation, as it can actually have a negative value. Three percent of all CEOs showed negative compensation. That is really dumb. The Securities and Exchange Commission needs to change it back to the value at the date of the grant, not the amortized value.
Q: Why wasn't there more clarity with the new rules?
Reda: Here is the problem - you have a lot of smart people. And, if you wade your way through the rules, the best and brightest people will try to figure ways around it. Companies, for example, were supposed to indicate the difficulty in achieving goals, but didn't. Investors and shareholders need to know the performance goals. Period. I think companies were too concerned about letting investors know all at once or about being embarrassed that people would see that the goals that they set were too low or easy to hit. So a lot of companies just punted on that.
Q: What did the new disclosure rules reveal about change-in-control and severance packages?
Reda: Some companies are now saying that what they have done in the past doesn't make sense. Thirty years ago, CEOs would only accumulate wealth of $3 [million] to $5 million while they ran the company. But today, some accumulate as much as $100 million or more in wealth and people are asking why he or she needs that additional $15 [million] to $20 million.
Q: What effect will shareholder resolutions for a nonbinding vote have on executive compensation?
Reda: Shareholder activism is getting stronger, as seen in the termination of some CEOs after stockholder pressure and the say-on-pay proposals. You have got to deal with them; you have to meet with them. If you ignore them, you could have a big mess.
Q: Is it OK if executive compensation continues to rise, as long as it is tied to performance?
Reda: I think we are putting too much money in the pockets of a handful of people. I really don't think the CEO position is as precious as people make it out to be. A lot of people would do it for a more reasonable price. It was the superstar CEO in the '90s that started the spiraling trend that now exists.
Q: Are pay levels that high harmful - and to whom?
Reda: The most overriding question is whether it is an appropriate allocation of shareholder assets and is it a fair allocation of shareholder assets? If it gets really out of whack, it will be hurting the country and making U.S. companies less competitive with companies in other countries.