Whom Do Consultants On Pay Work For?
Saturday, March 8, 2008
As a consulting firm that has helped corporations craft pay packages for top executives, Towers Perrin has answered criticism by saying it works for companies, not for individual executives.
But a report released this week by a House committee suggests that insiders at Countrywide Financial, the troubled mortgage lender, had a different view of the consultant's role when Countrywide renegotiated chief executive Angelo R. Mozilo's contract in 2006.
Mozilo regarded John D. England, the head of Towers Perrin's executive-compensation practice, "as his personal representative, even though he was being paid by Countrywide," the Democratic staff of the House Committee on Oversight and Government Reform wrote.
When Countrywide's board outlined compensation terms for Mozilo, England expressed regret that they were not more favorable to the chief executive.
"My primary unhappiness with what the Board has put forth is that it lowers your maximum opportunity significantly," England wrote in an October 2006 e-mail to Mozilo.
The House committee put a spotlight on Mozilo's pay yesterday at a hearing on financial executives who received millions of dollars in compensation while leading their companies to billions of dollars of losses in the subprime mortgage debacle.
"Any reasonable relation between their compensation and the interests of their shareholders appears to have broken down," Committee Chairman Henry A. Waxman (D-Calif.) said in a written statement.
Mozilo testified that the value of his stock-based compensation increased over the years as the company's share price rose. He said Countrywide's compensation philosophy "aligns the interests of top executives with shareholders by making compensation largely performance-based."
Mozilo collected almost $150 million from selling shares in late 2006 and 2007 while the company was borrowing money to buy back millions of its shares, the committee report said.
In January, after the committee notified Mozilo that he would be called to testify, he announced that he would give up $37.5 million in severance pay and benefits to which he was entitled when he retires.
The committee's investigation explored the role of compensation consultants, whose behind-the-scenes advice has helped shape many of the compensation packages that sparked a public backlash against executive pay. A running question has been whether the consultants are looking out for the shareholders or the executives.
In written testimony to the committee in December, Donald L. Lowman, a managing director at Towers Perrin, said the firm does not accept "engagements from individual executives to further their personal interests (even where the company would be paying our fee)." He said Towers Perrin has turned down potentially lucrative business opportunities "that might engender a risk of our becoming too closely aligned with individual executives' financial interests."
In its report released this week, the committee staff said Countrywide's board hired consultant Ross Zimmerman from management-advisory firm Exequity when it was renegotiating Mozilo's pay in 2006. Based on Zimmerman's advice, the board's compensation committee proposed cutting Mozilo's pay. In part, Zimmerman recommended that Countrywide exclude investment banks from the group of companies it was using to set a benchmark for Mozilo's pay.
At that point, Countrywide management hired Towers Perrin.
In an October 2006 e-mail, Mozilo wrote that he and the chairman of the board's compensation committee "agreed that it would be best if I obtained a compensation consultant. Since that time, I bought [sic] in John England (consultant-Towers Perrin) . . . ."
In an e-mail introducing himself to Zimmerman, England said Towers Perrin was "retained by Countrywide, not by any individual at Countrywide."
"To Towers Perrin, it is irrelevant who hires us -- our role is to provide appropriate counsel for decision-making, independent of influence," England wrote.
England went on to make a case for compensation terms more favorable to Mozilo, including a $15 million signing award, according to the report by the House committee staff.
At the end of the process, England expressed disappointment for Mozilo but also said in an e-mail to Mozilo that the resulting compromise was "a significant enhancement from what Zimmerman had the first time around."
England counseled Mozilo against making a particular demand, saying he should not try to collect pension payments while still working for Countrywide.
Countrywide's lead director, Harley W. Snyder, told the House committee yesterday that the company "engaged Mr. England for the purposes of advising Mr. Mozilo."
Towers Perrin spokesman Joseph P. Conway said England was not available to comment.
"Countrywide Financial engaged Towers Perrin and Towers Perrin neither represented nor acted as a personal advocate for Mr. Mozilo," Conway said in a written statement.