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Conference Panelists Review Trends in Executive Compensation

At the Practising Law Institute's recent conference on executive compensation, Jeffrey Kanter, the managing director for Frederic W. Cook & Co. Inc., described trends in executive compensation over the past year. Compensation committees are very active, he reported. Pay level growth has moderated and the disparities in pay are narrowing. Stock option use is in decline but is not disappearing. Mr. Kanter said that stock options continue to have a strong place in the executive compensation arena.

Mr. Kanter urged companies to be mindful of Institute of Shareholder Services and other shareholder voting requirements. If companies have not compiled a so-called tally sheet of total executive compensation, Mr. Kanter urged them to do so. Many companies have already begun to prepare their 2007 proxy statements, he said, including the new compensation disclosure and analysis section under the new disclosure rules.

Mr. Kanter said he sees little abatement in recruiting premiums for star talent and continues to see high supplemental executive retirement plans and severance packages. Compensation overall is up about 3 to 4.5 percent, he said, with equity concentrated among a smaller group of people. Mr. Kanter said that payments are going to be strategic rather than competitively driven. He predicted that stock ownership guidelines will become the norm.

In the past, compensation committees frequently had no idea what the costs of executive's change in control compensation were, according to Mr. Kanter. That will change, he said. Companies are reviewing their change in control and severance packages. The key is the multiple, according to Mr. Kanter. It once was standard operating procedures for big companies to use three times executive pay without any discussion about severance packages, he said. That multiple is becoming a huge issue of concern. Mr. Kanter said the United Kingdom has brought the number down to one times executive pay.

Institutional investors are pushing for clawback provisions, Mr. Kanter added, in which a company can take back any performance-based pay if the payout is based on numbers that subsequently prove to be incorrect or fraudulently obtained. Scott Spector, with Fenwick & West LLP, cited a recent California court decision which held that a clawback provision was unenforceable. Mr. Spector said the decision was significant since many companies were beginning to employ these provisions. He predicted that the case will go to the U.S. Supreme Court. Mr. Kanter added that clawbacks for non-compete agreements are different from those for miscalculations.

Paula Todd with Towers Perrin agreed that many companies are starting early on the drafting of their CD&A Shareholder issues have become very important, she said, where they once were an afterthought. Shareholders are gaining in power with respect to compensation package designs, she added, partly due to their concerns about too much dilution of their voting rights. They are less concerned about cash compensation, Ms. Todd said.

The "hot button" issues for shareholders, in addition to too much dilution and too much pay, include "payment for failure," poor transparency, lack of shareholder approval and lack of pay equality. Ms. Todd said certain enhanced disclosure requirements may create new controversial issues such as tax gross-ups, single-trigger vesting accelerations, perquisites, pensions, deferred compensation, dividend and dividend equivalents on restricted stock and restricted stock units, granting practices and performance measures reported in the CD&A. Ms. Todd said that companies are already beginning to take actions in areas such as perks, deferred compensation, retirement programs, employment contracts and severance agreements.