The Advisors' Blog

– Fred Whittlesey, Hay Group

We continue to be inundated with daily media coverage, articles, and blogs about the shifting landscape for executive pay in the banking sector. Many are asking if these changes will spread to other industries. A while back, a WSJ story talked about a “range of firms” altering their executive pay policies cited six non-banking companies (yes, six) which have changed some aspect of their executive pay for a variety of reasons. These six companies range from $4 billion to $39 billion in market cap and are in six industry sectors as diverse as apparel, mining, and pharmaceuticals. That certainly is a range of firms, both a wide and a narrow one.

The article stated “Among the changes: more stock-based compensation, with longer waiting periods before it can be sold; higher performance hurdles for bonuses; and limits on perks, severance and supplemental pensions.” Yet the article goes on to say “The shifts are far from universal. Some experts say bank-pay limits are having little impact elsewhere in corporate America.” One consultant cited in the article agrees by saying “I don’t see any trend in that direction.” Like Seinfeld, is this a story about nothing?

If you don’t want to read the entire article, you have the crux of it. Huge changes in banking dominate the headlines, but I think many, perhaps most, companies in the US are reading those headlines and stories, and shrugging. Smaller and mid-sized companies, particularly those in the technology and life sciences sectors, reaction range from yawns to smirks. Supplemental pension? They don’t even have a pension to supplement. More stock-based compensation? Given the overhang and run rate constraints and the all-employee equity compensation philosophies of these companies that is not likely to happen. Perks, you mean like the company-subsidized (or company-paid) cafeteria for all employees? You get my point.

So what about the looming question? What if they (the government) extend similar rules to all companies? In some ways they did, and are, via regulation, legislation, and the ripple effect on proxy advisors and institutional shareholders’ policies. It is unfortunate that successful innovative firms who apparently have had the “right” pay model for many decades are subject to increasing disclosure requirements and the associated media scrutiny triggered by those with the “wrong” pay model. The challenge for executive pay advisors is to help clients who are doing it right not get caught up in the frenzy about those doing it wrong, particularly since the “right” and “wrong” columns keep changing. The answer to “what are other companies doing?” is about more than just peer group construction at a time like this.

Remember when restricted stock was wrong – then after Enron and the Breeden Report, it was right? Then after the spread of RSUs without performance contingencies it became wrong again, and now right once again thanks to TARP. Many of us are having trouble understanding how large increases in fixed compensation and restricted stock are reconciled with the “pay for performance” mantra of the past few decades. These high-fixed low-variable models almost look like something a governmental organization would use to pay their employees, and probably do not represent a nascent trend for thousands of US companies.

I think it’s time for the business media to return to reporting news rather than concocting theories and then seeking a few data points that support a headline about nothing.