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Rolling Back Compensation

  1. Why You Need to Consider Rolling Back Compensation
  2. Practice Pointers
  3. Media Articles
  4. Internal Pay Equity Methodologies Practice Area
  5. Clawback Provisions Practice Area
  6. Hold Until Retirement Provisions Practice Area
  7. Caps on Pay Elements & Total Compensation Practice Area
  8. Examples of Companies Rolling Back Pay
  1. Why You Need to Consider Rolling Back Compensation

    The reality remains that compensation consultants, lawyers and other advisors are still paid by the company and can ill afford to alienate the CEO. Even where an advisor is retained separately by the board or compensation committee, the reality is that boards and committees include CEOs of other companies that don’t want to hear that their compensation also has to be rolled back. And even newly retained consultants often are reluctant to (or can’t afford to) jeopardize their relationships right off the bat with, e.g., company counsel and other esteemed advisors that have been present while all this has been going on.

    But the buck must stop somewhere. And it is becoming increasingly clear that all eyes are now fixed on the directors who comprise the compensation committee. As a result, it will no longer be sufficient for directors to blindly accept survey numbers. Instead, each board has an obligation to analyze its CEO compensation going all the way back to when divergences with the rest of the workforce began — which for many companies will mean having to analyze the CEO’s total compensation going back to the early 1980s. Several surveys have demonstrated the divergences. An excellent article that explains how we got to where we are now — which should be basic reading for every director and every advisor — is the Fortune magazine piece by Geoffrey Colvin entitled "The Great CEO Pay Heist". For more thought provoking suggestions for compensation committees assessing CEO pay, see the articles just posted on CompensationStandards.com entitled "Excessive Executive Compensation: A New Test For Director Liability" and "How Much Pay For How Much Performance?"

    As one major consulting firm points out, one reason why boards may not have realized just how far CEO compensation has skyrocketed is that decisions on various compensation components are made at different meetings, thus making it more challenging to tie all the components together and comprehend them. The result has been loading up on all the available components of compensation, instead of being selective.

    As directors start to conduct the hard analysis, it will come out at a number of companies that not only has the cash compensation and the stock compensation gotten way out of line internally from the company’s starting point back in the 1980s, but that the heretofore inadequately understood and undisclosed components — when now added to the cash and stock compensation — take the true numbers farther out of line, leading to the inescapable conclusion that rollbacks may be the only corrective solution.

    Fortunately, there should be ample opportunity for compensation committees to change and renegotiate a past practice. These opportunities exist each time any aspect or component of a CEO’s compensation is considered. For example, to be awarded a new option or restricted stock grant, the CEO could agree to fixes to past and outstanding awards. This could be accomplished by rollbacks or new retention provisions that require the executive to hold the stock until retirement or caps.

    After tallying up the compensation components, if a compensation committee finds it has been paying a lot more than it realized, hopefully that fact alone will be enough to motivate a CEO to agree to changes — rather than face the embarrassment of public disclosure of the excesses in the compensation committee report in the next proxy statement and a disclosure that the CEO refused to agree to meaningful adjustments.

    One challenge with rollbacks is that many CEO contracts provide for a severance payment for termination without cause or if the CEO walks for "good reason." Good reason typically is defined to include any diminution of salary or other benefits. As a result, a CEO could easily say, "I won’t agree to a rollback and you can’t make me or I walk and receive a big payout."

    Here is one respected colleague’s response: "But the court in Disney made it pointedly clear [at pgs 29-32 of the opinion] that the executive has a fiduciary duty here as well. Query whether a committee could bootstrap that into some leverage: ‘We think you, Mr. Executive, have a fiduciary duty to the company and its shareholders to be sure that the package was fair and appropriately authorized and if you don’t cooperate with our re-examination under a review that applies the proper process and asks the right questions, we think you are breaching your fiduciary duty, and therefore providing a basis for us to terminate you, Mr. Executive.’ In other words, the executive may have a self-interest in having the committee re-evaluate the existing compensation arrangements and defending the pay by being able to show that the committee had thoroughly considered it."

  2. Practice Pointers

  3. Media Articles
     
    1. Rolling Back Compensation
    2. Reviewing Outstanding Pay Packages
    3. Mega-Grants
  4. Internal Pay Equity Methodologies Practice Area
     
  5. Clawback Provisions Practice Area
     
  6. Hold Until Retirement Provisions Practice Area
     
  7. Caps on Pay Elements & Total Compensation Practice Area
     
  8. Examples of Companies Rolling Back Pay
 

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