According to Carol Bowie, who heads RiskMetrics Group Inc.'s Governance Institute in Rockford, Md., there is a disconnect in 2009 between executive pay levels and results.
Executives have too much influence over pay, and competitive forces and perceptions unnecessarily ratchet up compensation levels, she said.
Bowie previously headed the Governance Research Service unit at Institutional Shareholder Services, where she was responsible for proxy-based research for more than 10,000 U.S. and global companies.
Bowie also was governance research director at the Investor Responsibility Research Center, where she worked with institutional investors to develop and implement their proxy voting policies.
She recently spoke with Plastics News' Washington bureau chief Mike Verespej about executive compensation trends in 2009.
Q: How would you assess what happened with executive compensation [over the past year]?
Bowie: Compensation is down, but certainly not to the extent of the magnitude of losses that investors suffered, or as much as total shareholder return is down. So there clearly is a disconnect.
Q: Why do executive compensation levels, for the most part, continue to increase?
Bowie: Pay for executives is very highly influenced by what boards of directors think they need to do to attract and retain the best executives. Boards don't want to lose an executive over a pay practice, so you end up with constantly increasing pay levels, and pay levels that just continue to ratchet up. That is costly for shareholders and it dilutes the value of the holdings of other shareholders.
Q: How can that be changed?
Bowie: We need independent-minded compensation committee members and pay consultants willing to challenge management and ask whether they have the proper peer groups and performance targets.
Q: What is the optimal grant size to motivate an executive to take steps to push up stock prices and to conserve cash?
Bowie: That is always a difficult task. You have to determine the optimum level to achieve that without overloading executives with so much stock that they just benefit from market trends not from improved performance.
Q: What's your view on giving executives more shares in long-term incentives because of depressed stock prices?
Bowie: When stock prices are low, it is very tempting to load executives up with stock. Some people got caught up with that this year. We will have to see how that plays out when the 2009 numbers come out: Did companies bail out executives in ways not benefiting shareholders?
Q: Didn't a lot of boards pay executives what they thought they deserved, arguing that many were caught in situations beyond their control?
Bowie: In true pay-for-performance, when plans don't pay out, that is the breaks. You can't cry 'It is not my fault.' So there is no way that amended pay is in line with what it should be.
Executives have too much influence over pay and often are the ones who deliver information to the board on the strategy needed for pay-for-performance to work, and on what went wrong.
Q: What about the use of discretionary bonuses?
Bowie: We did see companies pay discretionary bonuses for the purpose of retention or because they felt their executives had done extraordinarily well under the circumstances. But there is a lot of murkiness on the adjustments they made in the compensation discussion and analysis section of the proxy statements.
Q: Do you think boards act to protect the interests of shareholders when developing executive compensation plans?
Bowie: Are compensation committees paying what they need to pay to create shareholder value or are they overpaying? And, are they alternately subject to conflicts of interest in making decisions about pay for executives with whom they have developed personal relationships?
Most investors would like to trust compensation committees to do what is right. However, experience has shown that ... committees cannot always be trusted to make the right decision.
Q: Will say-on-pay [shareholders having input on how much executives are paid] help?
Bowie: If investors buy into the concept that they have a greater voice, it will put compensation committees on notice that they have to make more thoughtful and, ultimately, more accountable decisions. So it could be effective in increasing compensation committee accountability and behavior. It also should encourage companies to do a better job of explaining and justifying what they are doing with regard to compensation.
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