The outrage over executive compensation isn't going away any time soon, even with the additional information companies disclosed this year because of the new Securities and Exchange Commission rules.
For starters, the new information seems to have whetted the appetite of shareholders for more. In addition, shareholders, executive compensation firms and government officials are decrying the new information's lack of explanations, as well as inconsistencies in reports across firms.
``Corporations have given us a lot of information, but I don't think the SEC achieved its objectives,'' said Pearl Meyer, co-founder and senior managing director of the New York-based executive compensation firm Steven Hall & Partners LLC. She spoke at the National Association of Corporate Directors meeting, held Oct. 14-16 in Washington.
``The information in the proxy statements has provided us with an extraordinary amount of information, but there is a huge amount of disparity'' in what individual companies disclosed, Meyer said.
``It is a pretty widespread feeling that you have a half a loaf and don't have everything you need to understand how long-term and short-term incentive plans operate,'' said Michael McCauley, senior corporate governance officer for the Florida State Board of Administration. The agency monitors the state's investments and deals with corporate governance.
``Companies need to disclose more information about how plans work and how incentives work related to performance,'' McCauley said.
Five days before the meeting, the SEC stirred the waters by issuing a 10-page report that discussed deficiencies it found in an initial review of 350 compensation and disclosure analysis documents submitted under the new rules.
``The Compensation Discussion and Analysis needs to be focused on how and why a company arrives at specific executive compensation decisions and policies,'' the report said.
Too much of the information companies disclosed was ``clear and understandable, yet not meaningful or responsive to disclosure requirements,'' according to SEC's report
One example: The report said the agency ``found it difficult to understand how companies used performance targets or considered qualitative individual performance to set compensation policies and make compensation decisions.''
In a speech in San Francisco after the report was issued, John White, director of SEC's corporate finance division, said: ``Far too often, meaningful analysis is missing.
``Stated simply - where's the analysis?'' White asked.
How to address those informational gaps could be problematic, though, as companies argue that disclosure of specific performance targets could provide their competitors with strategic information.
``If you disclose targets that executives must meet, you can deduce what percentage of a market that a company is going after,'' said Marie Oh Huber, vice president and deputy general counsel at Agilent Technologies Inc., an electronic measurement business in Santa Clara, Calif.
``You also are basically publicly dissecting someone's performance review,'' Huber said at the corporate directors meeting in Washington.
While the SEC allows companies to not disclose performance targets if the disclosure could cause competitive harm, its report chastised firms for failing to demonstrate that.
``Where a target is properly omitted ... the company must discuss, in a meaningful way, how difficult it will be for the executive or how likely it will be for the company to achieve that target,'' White said.
``The SEC wants to know how the sausage was made in the kitchen, so to speak,'' said Jannice Koors, a managing director at Pearl Meyer & Partners in New York. The compensation consulting firm also was founded by Meyer of Steven Hall. ``That is what the SEC wants. They seem pretty dug in on that. But no one wants to let someone in the kitchen to see how the sausage is made because it colors the outcome.''
As a result, she said, ``companies are only shining half a light'' on how executive compensation works when they say they can't disclose performance targets for competitive reasons.
While Koors isn't sure how to manage the dilemma, she and others are convinced companies need to tie more and more pay to performance and incentives.
``The more pay we put into performance, the more we will keep criticisms at bay,'' she said.
Nell Minow, co-founder of Corporate Library, a research firm that provides data about corporate governance and executive compensation, agreed.
``Pay packages insensitive to performance are always going to raise a red flag,'' she said. ``You have to look at every dollar allocated to executive compensation in terms of its return on investment. You want a [chief executive officer] who is going to bet on himself.''
``Boards of directors need to remember that the core of executive compensation has to be incentive-based,'' said Meyer. ``Let the peripherals - country club memberships, cars and other perks - go. Invest those same dollars in performance elements.''
Koors seconded that. ``Contingency pay is what the marketplace views as most broken. The anger isn't against what a CEO makes as a CEO, but what he makes when he or she is not the CEO,'' she said.
Koors said the notion has been that when you recruit from another company, ``you need to make an executive whole for what he or she is leaving behind.''
But firms will do less and less of that now that they must disclose ``back-end compensation number,'' she said.
``Companies have to have real teeth behind what they do in compensation,'' Koors said. That also extends to examining the peer groups that firms use to benchmark pay - an area where the SEC report said companies need to provide better rationale and explanations as to why those companies have been selected.
``You have to understand the pay practices of the peer group companies,'' or it can undermine you, Koors said.
Peter Clapman, a retired TIAA-Cref executive who is now a partner in Governance for Owners LLP, a London-based investment firm, also sees peer group selection as a potential minefield that can sabotage executive compensation.
``Where we have found overcompensation is when a company picks a peer group with companies where a CEO is higher than theirs and where the peer group companies have far more complex operational issues,'' Clapman said. ``When they do that, they are making a huge mistake and it will surface in excess compensation.''
The end result? Pressure continues to mount on boards to alter the compensation practices at the companies they serve.
``We need boards willing to push back on CEOs about strategy, compensation and risk review,'' said Francis Byrd, vice president of the corporate governance specialist team for Moody's Investors Service in New York. ``The SEC has expanded the window to see more and more of the compensation window, and they will continue to want to see how and why you are doing this.''
That was reflected in the more than 140 say-on-pay proposals to give shareholders a nonbinding vote on executive compensation that surfaced in 2007. Many were withdrawn, but the average support for the 40 where votes occurred was more than 40 percent, with seven of them passing.
In addition, Rep. Barney Frank, D-Mass., and chairman of the House Financial Services Committee and presidential candidate Sen. Barack Obama, D-Ill., have proposed bills that would give shareholders a nonbinding vote on executive pay.
``Say-on-pay is one of the two flash point issues that will make up the debate on corporate governance over the next three to five to 10 years, because there is no consensus and total disagreement,'' said Patrick McGurn, special counsel to proxy adviser ISS Governance Services, the Rockville, Md., business unit of RiskMetrics Group Inc.
The reason? Eighty-five percent of investors are in favor of say-on-pay and 95 percent of directors are opposed.
``The clock is now ticking and there is a limited time to reach a consensus on that or Congress will step in,'' McGurn said. The other confrontational issue - proxy access to allow shareholders to nominate their own board candidates.
``Shareholders want a constructive dialogue with the boards on compensation - that is what say-on-pay is all about,'' Clapman said.
``Unless company management sees this period of time as a time to move off of confrontation and to constructive dialogue, there will be problems,'' he said. ``This issue is not going to go away; it will only exacerbate.''
Clapman urged boards to actively seek that dialogue, based on his experience in the United Kingdom, where say-on-pay has been part of corporate governance for three years.
``Practically no vote has gone against the committee report on compensation because companies have entered into a dialogue with major investors prior to the proxy vote,'' he said.