Before AIG bonuses debacle, a shift toward lower executive pay
Many moves were already under way to change the compensation culture.
New York
Insurance company AIG is under fire for the hefty bonuses it handed out, but the trend in the corporate suite appears to be a tightening of belts.
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As a result of the recession, some CEOs are already working for $1 a year, and entire floors of executives are taking 10 percent pay cuts. A few are selling their luxury items – sports cars for example – to plow the profits back into the business. Boards of directors, which used to rubber-stamp CEO rewards, are beginning to take a closer look as they try to avoid antagonizing the public.
“The times have changed,” says Brian Tobin, a Chicago-based executive compensation expert at Hay Group, a consulting firm. “The last few weeks have significantly increased the public focus on executive pay.”
President Obama has also chimed in, criticizing the AIG bonuses and, since the start of his presidency, demanding more accountability from corporative executives.
“People are rightly outraged about these particular bonuses,” Mr. Obama said Wednesday. “But just as outrageous is the culture that these bonuses are a symptom of, [which] has existed for far too long.”
Changes afoot
Already, systemic changes are being implemented or considered. Among them:
•Both the Troubled Asset Relief Program (TARP) and the economic stimulus package include attempts to enact compensation limits for companies that need a government bailout.
•New legislation is pending in Congress that would limit the amount a company can deduct as an expense for executive compensation. Another piece of legislation would give special preference in government contracts to companies that don't pay their executives more than 100 times the lowest paid worker. [Editor's note: This sentence was changed to clarify that the bill wouldn't deny contracts to any companies outright.]
•More corporate boards of directors, according to recent survey data, are including “clawback” provisions that force executives to refund pay or bonuses if earnings plunge because of bad decisions. At the same time, some companies are allowing nonbinding shareholder resolutions to express approval or disapproval on executive pay.
Since many of these changes are taking place right now, they won’t necessarily show up in the 2009 proxy statements, now being mailed out to shareholders. Hay Group did an analysis for The Wall Street Journal of 50 proxy statements recently filed by major US corporations.
“There was not that much of a change in 2008 compensation levels over 2007,” Mr. Tobin says. “But the economy didn’t fall off the edge of the cliff until the fourth quarter of 2008. So from a proxy point of view, the changes we’re seeing implemented right now won’t show up until the 2010 proxies.”
Perks under scrutiny
Tobin’s firm is now surveying companies to see what has changed, and he anticipates a major shift. He expects an increase in clawback provisions and tougher incentives for executives to earn their pay. He also foresees that corporate perks, such as rides on the corporate jet to vacation getaways, will be frowned on. In addition, many companies will require boards of directors to stand for election every year, instead of every three years. “This will make them think differently about their fiduciary responsibility,” Tobin says.
