Presidio Pay Blog Providing Thoughtful, Strategic Advice for Critical Compensation Issues

Week of January 12th

What's News is a regularly updated summary of news stories, typically related to compensation, that we are following, find interesting, or find baffling.

Week of January 12th…

• Robert Frank, a Cornell economist, discusses the possible unintended consequences of limiting executive compensation, something that is receiving increasing attention from shareholder activists and politicians.  Limiting fixed executive compensation costs (i.e. base salaries) to a multiple of the broader employee population's base salaries has shown merit.  However, the components of pay that link to performance should not be capped.  We strongly believe all employees should be rewarded for creating shareholder value through meeting their performance objectives.  And conversely, should not be rewarded when performance criteria are not met.

• The Treasury Department is now requiring CEOs of financial institutions participating in TARP to certify that they are in compliance with the restrictions TARP places on executive compensation.  While this is a step in the right direction,  one of the key points of TARP's executive compensation restrictions is that compensation plans don't "encourage unnecessary and excessive risks that threaten the value of the financial institution".  It is not clear how a chief executive might be able to certify compliance in this manner, but it will be interesting to see the reaction to this new requirement during this year's filing season.

• Phred Dvorak and Joann Lublin have an interesting article on how companies are dealing with stock options grants to employees that are now considerably underwater.  One of the interesting quotes from the article came from James Hagedorn, CEO at Scotts Miracle-Gro:  "We built a performance-based system and there was a lot of risk in there, which I don't think we'd fully recognized because we'd never seen markets like this".   This statement captures much of what is argued in The Trouble With Options.  Options encourage a tremendous amount of risk taking by executive management with little financial repercussion and are not in the best interest of shareholders.  In the case of Scotts Miracle, executives may not have realized the extent of the risks associated with their option holdings, something shareholders have known for quite some time.