The Advisors' Blog

– Broc Romanek, CompensationStandards.com

As this Reuters article pointed out, many companies have voluntarily implemented some form of clawback policies ahead of possible new laws that may mandate them. The article notes “Overall, 64.2 percent of the largest 95 publicly held companies in the Fortune 100 had disclosed clawback policies as of this year, up from 42.1 percent in 2007 and 17.6 percent in 2006, according to the study from pay research firm Equilar.”

Recently, I attended a clawbacks seminar hosted by the Institutional Investor Educational Foundation and took in a panel of of Nell Minow of The Corporate Library; Bill Patterson of CtW Investments; Jay Eisenhofer of Grant & Eisenhofer; and Steven Caponi of Blank Rome.

In addition to notes in this report, here are some worthy gems from the panel:

– Nell: “Pay is not just both a symptom of bad corporate governance and bad economic judgment, it’s also the disease. Pay that is out of whack with performance is the single most important indicator of a bad board – and my company rates boards of directors – but it’s also the single biggest risk factor that you can have in a company.”

– Bill: “Last week, Target had their annual meeting in Minneapolis and you all are aware that they were under attack by Bill Ackman of Pershing Square. The board of directors rallied to their own defense before the meeting and they visited CALPers and ISS – but once it became clear Ackman wasn’t going to win, they didn’t bother to show up – so they introduced the board with a slide show. And this is a shameful statement.”

– Jay: “Look, I think it’s very important that we keep in mind that there is a direct connection between some of the compensation abuses that we’ve seen in compensation systems as we’ve seen them and the financial problems that we have had recently. And I think it’s extremely important we draw that line clearly because it’s not just a question of companies with lax compensation policies – somehow or other are at risk of having problems because it indicates a lax attitude on the part of boards or officers. It’s much more fundamental than that.

There is study after study – by people who have absolutely no axe to grind on these issues – that have demonstrated that the way in which compensation systems are designed has a direct influence on the behavior of the officers of a corporation in terms of whether or not they are going to be more prone to manipulation of financial results, whether or not they are going to be more prone to enter into speculative transactions, whether or not they are going to enter into transactions and foster corporate behavior that encourages short-term results at the expense of long-term gains, short-term inflated results at the expense of long-term gains and that’s the academic research.”

– Steve: “There’s a big distinction between what seems like a good, reasonable compensation system at the time you set it. Most people are given their salary when they are hired, not when they quit or when they are fired versus what you do after the fact. And I think that’s really where the issue lies. You should look at these companies and say in 2004 and 2005 when individuals were making insane amounts of money for the companies, for the stockholders, for the people in this room, were they entitled to be compensated? Everyone at the time said, ‘yes.’ What they didn’t anticipate were the unanticipated consequences.

We’re all suffering from that. So, you now go back and say, ‘well, gee, like us, you didn’t understand so, therefore, you’ve got to give the money back.’ My back intuitively stiffens when someone talks about boardrooms and compensation and injustice out there somehow doesn’t seem to sit right with me. I’m not sure why. It’s not supposed to be a squishy thing. It is supposed to be more metric.”

Needless to say, I disagreed with what Steve said here. Most compensation arrangements for senior managers today are fluid or squishy – meaning that the ultimate amounts paid are not known until well after certain barriers are cleared. For the payouts related to options, it may be as long as ten years from the date of grant that the ultimate value is known. So the idea that there might be adjustments to pay later on is not a foreign concept.

And even if that concept wasn’t already mainstream, I didn’t find his arguments against adjustments persuasive. If a company allegedly hits certain performance targets that trigger a payout – but then it’s found that the company really didn’t hit those targets, I never heard a valid justification for why an executive should get to keep the money. It certainly doesn’t seem right from a fairness perspective. And allowing executives to keep money under these circumstances would certainly seem to incentivize them to ensure they “met” targets – even when they didn’t…