The report released today urges companies to avoid paying for personal travel, hefty severance packages or above-market returns on deferred compensation. The recommendations were endorsed by AT&T Inc., Tyco International Ltd., the California State Teachers Retirement System and others.
“Public corporations and directors are at a crossroads with respect to executive compensation,” said the report from the New York-based research group that comes days before leaders of the Group of 20 meet in Pittsburgh to discuss ways to restrain bankers’ pay. “In order to restore trust in the ability of boards of directors to oversee executive compensation, immediate and credible action must be taken.”
Treasury Secretary Timothy Geithner has blamed pay standards tied to short-term profit for contributing to the financial crisis. The Obama administration proposed pay measures in June, aiming to reduce incentives that led executives to take excessive risks and to quell a political outcry over bonuses paid at American International Group Inc.
Shareholders should be consulted on pay decisions, and firms need to find ways to measure performance and align payouts with success over several years, the report said.
“Companies should be paying for the right things, paying for the right level of risk and paying for performance when the performance is delivered, not based on plans,” said Rajiv L. Gupta, former chief executive of Rohm and Haas Co. and co- chairman of the task force that wrote the report. “Three years is a reasonable period of time.”
‘Clawbacks’
The report, which is similar to U.S. government proposals to curb executive pay, stops short of the mandatory caps favored by European leaders. The paper endorses the U.S. push for shareholders to have more oversight of pay decisions and for executives to face “clawbacks” if circumstances change quickly after a big payout.
Earlier this month, finance ministers from the Group of 20 nations united on a plan to curb bank executives’ bonuses to help restore confidence in the financial system. The plan calls for enabling clawbacks and limiting banks’ total bonus pools, and it is expected to be a central agenda item when President Barack Obama meets with his G-20 counterparts this week on Sept. 24-25 in Pittsburgh.
Banks’ Risk
Banks and other financial companies may need to pay particular attention to the report’s findings because their pay decisions may be more closely tied to overall corporate risks than would be the case at a manufacturing company, said Robert Denham, the report’s other co-chairman and the former chief executive of Salomon Inc.
“A badly designed compensation program at a financial company can more easily do harm” by encouraging executives in “the wrong kind of risk-taking,” said Denham, a partner at Munger, Tolles & Olson and a director at companies including Chevron Corp. and The New York Times Co. “A well-designed program can more clearly do good.”
The report doesn’t offer any advice to regulators as they weigh how to change pay practices in the aftermath of the worst financial crisis since the Great Depression.
Financial executives recognize the need for incentive- based compensation, said Ken Bentsen, executive vice president for public policy and advocacy at the Securities Industry and Financial Markets Association, which endorsed the report. “Our guiding principle must be to better align pay, long-term performance and shareholder interests,” he said.
Feinberg’s Report
The findings come as investors await the results of a government report from Kenneth Feinberg, a Washington lawyer known for mediating disputes over compensation for damages from the Sept. 11 attacks who Obama named “special master” of executive-pay policy.
Feinberg’s mandate is to set pay guidelines for top managers at seven companies bailed out by the U.S., including Bank of America Corp. Chief Executive Officer Kenneth Lewis, and may be a template for Wall Street compensation.
Citigroup Inc., AIG, Chrysler LLC, Chrysler Financial Corp., Bank of America, GMAC Inc. and General Motors Corp. last month submitted compensation proposals to Feinberg for their 25 top-earning employees. Feinberg will rule on the plans within 60 days of judging the submissions to be complete.