January 23, 2009
Executive Compensation: The Swinging Pendulum
– Mark Poerio, Paul Hastings Law (with assistance from Michael Steele)
The financial downturn continues to swing the pendulum of public opinion further and further away from incentive-based compensation for executives. Consider, for example, an absolute prohibition on any incentives for the top-25 executives of bailed-out companies. That prohibition occurs within a TARP-governance bill (H.R. 384) passed this week by the House (and sponsored by Financial Services Chair Barney Frank (D-MA)). Although those who are bailed-out should expect greater regulation, the question for shareholders and the incoming Obama administration is nevertheless whether, at some point, the pendulum has swung too far away from motivation through proper incentives.
The reality is that well-drawn executive incentives are generally desirable, with a good litmus test being how well they promote key corporate interests, discourage excessive risk and disloyalty, and reward long-term performance. This is largely the point we make in our article entitled “Executive Insecurity—No Better Time for Employer Attention.”
Our article singles out the following general questions for employers to consider in view of the anxiety we currently face:
1. What are your most critical workforce challenges –e.g., retention, relocation, growth, reduction, or restructuring?
2. Who do you need to retain and motivate?
3. Are there opportunities to better deploy under-utilized personnel? If not, when and how will you contemplate layoffs, exit incentives, furloughs, forced vacations, reduced hours, or other temporary or permanent work force reductions?
4. Is your company perceived as being at risk of being sold, taken over, or going bankrupt?
5. Do your incentive bonuses or stock-based awards need recalibration?
6. Do you want to better discourage employees from pursuing competitive employment or improper behavior (such as unduly aggressive financial statement accounting practices that ultimately may require a financial restatement)?
7. How will you effectively communicate the actions taken to advance your workforce goals?
If you would like to see our answers and commentary on the above questions, see this article.