The Advisors' Blog

– Broc Romanek, CompensationStandards.com

I recently spoke with an audience of in-house lawyers and HR staff and got into a spirited debate over the need to pay excessive CEO packages in order to recruit and retain top talent. The old argument of “everyone else is doing it.”

I’m not going to rehash all of the arguments against such thinking – just leave you with my bottom line. I’ve worked in-house and seen how some managers get elevated to the top position and just simply aren’t as good as others in the CEO job. It’s just a fact of life – not every CEO is best suited for that job. Some are better than others. And some are definitely replaceable. It’s now a party line that “not everyone can be paid in the top quartile” – but when it comes to actually putting together a pay package, people forget the party line.

I leave you with the following excerpt from a recent article in “Corporate Board Member”:

For years boards were held hostage by star CEOs who were in such demand that they could write their own employment contracts. Not anymore. With unemployment at nosebleed rates, your boy or girl is most likely staying put. The employment potential of CEOs is directly proportional to how well their companies’ shares performed during their tenures. David Yermack puts it bluntly: “When you run your own stock down 80%, where are you going to go?”

It has taken a little time for boards to realize they have the upper hand. According to Equilar research, at least 40 companies announced that they were paying cash retention bonuses to their top executives between July and December 2008, but fewer than a third included the CEO. Equilar noted that “some special awards, particularly those for chief executives, contain unique performance-based vesting requirements focused on overcoming current challenges.”

For example, JCPenney disclosed in a December 8-K filing that it was granting its CEO, Myron E. Ullman III, as many as 500,000 shares “to provide an incentive for performance during the current economic environment and to recognize Mr. Ullman’s willingness to continue his services to the company.” The award caps out at $25 million, and Ullman, who has no employment contract or severance agreement other than one covering a change in control of the company, could get all of that if he sticks around until December 2011–but only if Penney’s annual total stockholder return grows to 29.1% or more by the end of the period. And he’ll get nothing, even if he hangs in there for three years, unless the return is at least 11.3%.

A common worry that the CEO may have wanderlust could be baseless. When Watson Wyatt surveyed 85 outside directors of large U.S. companies in March and April, 68% of them said that their boards or compensation committees were not concerned or were only slightly to moderately concerned about retaining high-performing executives. In fact, there is so much managerial talent around that this might be an opportunity for companies to upgrade. “Dump the dead wood,” suggests J. Richard, who runs his own J. Richard & Co. compensation consulting firm in Half Moon Bay, California. “That’s where boards should be extremely proactive.”