The Advisors' Blog

– Paul Hodgson, The Corporate Library

To follow up on my blog posting about my “provoking” presence on a panel at the ICGN conference which has just wound up in Toronto, I thought it might be an idea to summarize what I said.

If you remember, we were tasked with coming up with good examples of compensation.

Now, my problem is that I can come up with good examples, but they always have so little in common that moving from knowing what the problems are elsewhere to knowing “what the answers are” as the panel description said is a bit of a problem.

Never mind.

My first example was UK company WPP, which we had written about for AdWeek’s latest issue on executive compensation. This is a classic example of “skin in the game” CEO comp, where execs must invest their own money – that’s right, folks, their own money – in shares which will then be matched or not to the extent that a relative TSR target is met or not. And the TSR must equal or exceed the median for any match. That’s right folks, they have to be better than their peers. Are you listening Corporate America!?

For contrast I described Morgan Stanley’s “Leveraged Coinvestment Program” in which execs were “allowed” to defer shares they had just “been given for free” as part of the annual bonus plan into some kind of “fund of funds”. The company gives a two for one match (regardless of performance) and the participant receives all the investment returns on the whole amount though, at the end of the day, will only receive their own deferred shares when the plan is cashed out. But note, the fund of funds invests in everyone else’s shares, not the company’s.

See the difference?

Then I contrasted the US banks’ reaction to the worldwide economic crisis with the European banks.

US banks – defer more pay, stringent clawbacks, no fundamental change.

European banks – major pay makeover with introduction of plans that deliver the majority of compensation and are based on long-term performance. That’s right! Long-term performance. What? Long-term? Yes, long-term. Wow!

Then I brought in the shining knight from the US – Nucor, the steel company that has made a profit every year since Rubber Soul came out and is star of no less than three reports about wonderful compensation policies. Check them out.

Conclusions? They have little in common except that they have little in common. That, and simplicity and moderation. Possible real conclusion? Stop copying everyone else and figure out the right compensation policy for YOUR executives, YOUR company, YOUR point in the economic cycle, YOUR industry, YOUR company’s maturity level.