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Before AIG bonuses debacle, a shift toward lower executive pay

Many moves were already under way to change the compensation culture.

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The greatest pressure will be on the board of directors’ compensation committee, business experts say. “Each time a CEO’s pay comes out, it is seized upon,” says John Challenger of Challenger, Gray & Christmas, an outplacement firm based in Chicago. “Things are changing,” he says. “The question is how much and how fast things are changing.”

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There should be a regulation that requires at least one person on the compensation committee to be knowledgeable about stock options, retention bonuses, and other incentives used to reward executives, argues Bruce Ellig, former worldwide head of human resources at Pfizer.

“Under Sarbanes-Oxley [a financial reform bill passed after the Enron scandal], there has to be at least one person on the audit committee who can read a financial statement,” he says. “There should be something similar for the compensation committee.”

AIG bonuses

One of the biggest issues for the corporate boards is dealing with employment contracts. In the case of AIG, the company had decided to give at least $165 million in “retention bonuses,” which AIG’s lawyers said were a legal obligation. (On Wednesday, Edward Liddy, AIG’s CEO, told Congress that he had asked employees to voluntarily return half of the bonus money and some had already said they would return 100 percent.)

“Technically, [AIG is] probably right. But what boards need to be asking is, ‘Do we really need to give an employment contract?’ ’’ says Mr. Ellig, author of the book “The Complete Guide to Executive Compensation.” “Not many companies are hiring executives making $1 million dollars. They are pruning them.”

Companies will be watching closely to see what happens with Congress and the AIG contracts.
On Thursday, the House was scheduled to vote on legislation that places a 90 percent tax on any bonuses paid to employees on or after Jan. 1, 2009, by companies receiving TARP funding. Much or all of the remaining 10 percent would be recovered by regular state and local taxes, according to Rep. Gary Peters (D) of Michigan, a cosponsor.

“Million-dollar bonuses for the very people who drove our economy into the ditch are simply unacceptable,” said Representative Peters in a statement.

Yet some business leaders wonder if the same standards should be used for members of Congress who were supposed to be providing oversight of the Securities and Exchange Commission and other federal agencies.

“If they are really outraged, I’d like to see them take a voluntary pay cut of 10 percent this year,” says J. Andre Weisbrod, CEO of Staar Financial Advisors Inc. in Pittsburgh.

“We are looking for a grand gesture that says, ‘We’re in this with you,” says Mr. Weisbrod, who is taking a lower salary and planning to sell his Toyota MR2 Spyder sports car to put the money back into his business.