Before AIG bonuses debacle, a shift toward lower executive pay

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

Jim Young/Reuters
President Obama on Wednesday assailed AIG’s hefty executive bonuses as ‘outrageous,’ while defending his economic team.

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.

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.

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.”

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.

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