Administration seeks to change pay incentives at major firms
Thursday, April 1, 2010
When the Obama administration imposed restrictions on executive pay last year at some of the largest companies the government had bailed out, officials said they were aiming to set a new standard for compensation across corporate America that would discourage risky business practices.
But as firms begin to disclose last year's bonuses ahead of annual shareholder meetings, it is becoming clear that companies across a wide range of industries are paying executives in ways that officials worry will not discourage the kind of excessive short-term risk-taking that led to the financial crisis.
The Treasury Department said it is not looking to limit the total pay executives receive. Kenneth R. Feinberg, President Obama's special master for compensation, wants to change pay incentives, giving executives a greater stake in the long-term performance of their firms. That would mean, for example, smaller up-front cash salaries and fewer perks, more compensation in the form of company stock and a longer wait to receive it.
"I see no indication whatsoever that the business community is paying any attention to the administration's suggestions," said Nell Minow, co-founder of the Corporate Library, an independent corporate governance research firm. "On the contrary, I think pay is worse this year than it's ever been."
American Express, for example, shifted much of chief executive Kenneth I. Chenault's compensation to cash. Even though his overall pay for 2009 dropped from the year before, Chenault received $11 million, or two-thirds of it, in cash. By contrast, more than two-thirds of his compensation in 2008 was in stock and stock options. His cash payout was $7 million.
At Wells Fargo, the company more than tripled the cash salary this year of chief executive John Stumpf, and Corning, a glass and ceramics maker, restructured its long-term incentive pay program -- previously centered on stocks and stock options -- to focus more heavily on cash.
Some firms are also rewarding executives with more perks. In the most recent fiscal year, more U.S. chief executives received club memberships than in the previous year, and companies paid more to cover their use of corporate jets for personal travel, according to studies released last week by the Corporate Library.
Congress and the Treasury Department also required last year that shareholders at the hundreds of firms receiving taxpayer bailouts be able to take an annual advisory vote on how executives are compensated. "Say on pay" is also included in the financial oversight legislation passed by the House last year and in the bill now awaiting action by the full Senate.
But beyond those firms that received bailouts, a multitude of companies -- McDonald's, Johnson & Johnson, General Electric and IBM, to name a few -- are fighting shareholder proposals that would give stock owners a say on executive pay packages.
Waddell & Reed financial advisers, for one, has mailed letters to investors urging them to oppose the resolution. A company spokesman did not return phone calls seeking comment, but the firm said in securities filings that allowing shareholders to vote on pay packages could put it at a competitive disadvantage and erode investor value.
It was almost a year ago that the administration set its sights on stamping out compensation practices that encouraged excessive risk-taking for short-term results. It named Feinberg, who restructured compensation practices at seven firms receiving exceptional federal assistance and set the amount paid to top executives at those companies. The administration also issued detailed rules for hundreds of other firms receiving taxpayer help and invited scholars, shareholders and corporate governance experts to offer their input. Treasury Secretary Timothy F. Geithner said at the time that the process of establishing better pay practices had begun.
But the initial results show that companies have been slow to follow the administration's lead, investors and governance experts say.