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Disclosing Executive-Pay Goals

More U.S. companies are disclosing the specific goals used in their executive-compensation plans, but roughly one-third still don't provide enough information in their proxies. HR executives should be watching developments -- and taking a leading role -- in this area.

Wednesday, April 23, 2008
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A new analysis of 2008 proxy statements by Watson Wyatt Worldwide has found that two-thirds (68 percent) of 75 large, publicly traded companies disclosed the specific goals used in their executive compensation plans. That figure is up from 54 percent last year, according to the Washington-based consulting firm.

"Showing how executive pay varies with performance and compares to the competition would go a long way in addressing the concerns of shareholders and critics of the U.S. executive pay model," says Watson Wyatt's global director of compensation consulting Ira Kay.

"I'm not surprised the percentage of companies disclosing this information has increased," adds Steve Van Putten, a senior executive pay consultant in Watson Wyatt's Boston office. "The SEC has been putting pressure on that issue in particular."

In addition to growing pressure by the SEC to compel companies to show how executive compensation is calcuated, executives themselves also are backing the move toward greater transparency.

According to the recently released International Executive Quiz by Los Angeles-based Korn/Ferry, eight in 10 executives surveyed say shareholders should have at least some say on pay for company executives.

Steven E. Hall, principal of Steven Hall & Partners, a New York-based executive compensation consulting firm, says the Watson Wyatt findings show that HR executives need to be more aware of their own company's executive-comp practices.

"In the role that [HR executives] have in working with compensation committees and top management, they have to make sure they are ready to step up to the plate and see to what degree the company is complying" with the new SEC rules, he says.

"That often gets clouded over by general counsel and CEO, but more and more, the HR role is taking on a more important role in making the big decisions that are made" regarding executive compensation, he says.

Hall's firm recently released its own study of CEO bonuses at 522 public companies, which found that most companies are committed to holding more CEOs accountable for their performance.

The study found that, at top-performing companies -- where net income rose 77 percent last year -- CEO bonuses were 25 percent higher than the previous year. In contrast, median CEO bonuses fell by 73 percent at companies with bottom quartile performance, where the median net income dropped by 56 percent. One-third (32 percent) of the low-performing companies paid no annual incentive at all to their CEOs.

"It is heartening that these boards are holding executives' feet to the fire," he says. "We have come a long way from the old days of 'pay for pulse.' "

Hall says the Watson Wyatt analysis shows that executive compensation is becoming much more transparent.

"We've spent years and years dealing with these things under a big fog," he says.

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"There's still been a general hesitancy to show everything," he adds, "because once you release this data, you're really locked into it big time. Once you tell the world about it, you've got less wiggle room."

Analyzing proxies filed in the second year of the SEC's push to create greater executive-comp transparency for investors and stockholders, Watson Wyatt also found that 57 percent of the companies studied included goals for long-term incentive plans, compared to 45 percent the prior year.

SEC rules require such information, unless providing it would result in competitive harm to the company. Of the companies that did not disclose actual goals, only 19 percent stated affirmatively that disclosing them would result in competitive harm, according to the analysis.

Van Putten says it is difficult for companies to make the argument that disclosing such information will create competitive harm -- especially because the disclosure relates to the prior year's goals and not the current ones.

Unless the industry is "very consolidated or where pricing is very important," such as government contracting work, "the [SEC] has set a very high threshold for establishing competitive harm," he says. "The trend [towards greater transparency] will continue, even though some companies are reluctant to do it."

He says the number of companies disclosing their models for executive compensation will continue to rise within the next few years.

"Most companies are reluctant to be either leaders in the pack or trail the pack" when it comes to disclosure, he says. "It takes some time to move in that direction [of increased disclosure.] The trend will be toward that, but I don't think you'll ever see it get to 100 percent."

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