Firms Back Change in Executive Pay Practices
Tuesday, September 22, 2009
A coalition of blue-chip companies on Monday endorsed the idea of voluntarily overhauling executive compensation practices in an effort to restore public confidence in corporate America and to get out ahead of potentially more burdensome rules that could emerge from Washington.
Pay practices such as huge severance payments, personal use of corporate jets and incentives not tied to long-term performance should vanish unless a specific justification exists, according to a task force convened by the business organization the Conference Board.
"The current economic crisis, precipitated by the meltdown in the financial services industry, has led to a loss of public trust in corporations and other institutions. Executive compensation has become a flashpoint for this frustration and anger," the task force says in a report released Monday. "In order to restore trust in the ability of boards of directors to oversee executive compensation, immediate and credible action must be taken."
Early supporters of the overhaul initiative include AT&T, Hewlett-Packard, Tyco and Cisco, as well as investors such as the California State Teachers' Retirement System.
The report takes particular aim at the most controversial executive pay practices, including multi-year employment agreements that provide for generous severance payments; "golden coffins," which refer to payouts that continue after an executive's death; and other exclusive benefits not offered to other employees.
The report states that if companies plan to implement such practices, they should clearly disclose their intentions to shareholders and offer a valid justification. " 'Everyone else does it' or 'It is market practice' are not sufficient," the report states. It also suggests that a hefty portion of compensation be tied to performance of the company -- an effort to curb the excessive short-term risk taking that contributed to the current financial crisis.
Noticeably absent from the list of supporters are some of the large financial firms whose executive compensation practices helped to ignite public anger.
"We hope that as this report becomes widely available that the practices and recommendations will be followed across industries," Rajiv Gupta, a former chief executive of Rohm and Haas Co. and a co-chair of the task force that produced the report, said in an interview. "We hope it will gain momentum. These are good common sense principles."
In a speech on Wall Street last week, President Obama struck a similar note, telling the financial industry, "You don't have to wait for legislation to put the 2009 bonuses of your senior executives up for a shareholder vote. You don't have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains."
The full report is available at http:/